Indonesian oil reserves and production are greatly influenced by investment. The focus of the study is to evaluate governance options to boost investment through appropriate fiscal regime and non-fiscal policies. The main aspect of the fiscal regime to increase investment is cost recovery. When cost recovery is still interpreted as a burden on state finances and there is still a stigma that contractors commit fraud in cost recovery, it is then a big challenge for oil and gas contractors to maximize investment and for regulator in giving approval on budget. Flexible Split and First Trance Petroleum (FTP) are the 2nd highest priority to improve to accommodate dynamic situation on the oil industry such as oil price fluctuation and size of reserves. Incentives and windfall profit treatment are the other key issues on fiscal. Sufficient geological surveys and researches are crucial things to attract investment. The duration of a contract that is only 30 years is too short to maximize the contractors return because of lengthy period for exploration, construction and drillings prior production. Combination of NOC dominated and Separation of Power model seems to be the best governance model. Partnership between Pertamina and multi-national company will facilitate investment funding.
Indonesia has been an oil exporting country since 1965. Indonesia is currently in a period of declining in production but an increase in consumption has caused a trade deficit that continues to increase over time. Continuous production decline reflects limited discovery as a result of declining investment. The focus of the study is to evaluate variables affecting lifting, reserves and investment in oil and gas sector.聽 Several VAR or VECM panel models are built to provide empirical evidence. The results of the empirical study give a recommendation for both fiscal and monetary policies. The impact of interest rate on investment is less significant, but the exchange rate and inflation are higher on investment. Therefore, monetary policy should be directed toward controlling inflation and moderate intervention from Central Bank to retard depreciation of Rupiah. The success rate of exploration activities to increase reserves is proven empirically relatively low. The Application of more advanced technology supported by R&D is an important component of fiscal policy so incentives need to be added to these two things to increase the success rate of exploration activities. Misinterpretation that cost recovery does not increase lifting can be corrected because the response of lifting due to cost recovery is positive. Government should reconsider the policy of eliminating the PSC Cost Recovery system by considering empirical evidence from the results of this study which proves misconceptions about cost recovery. The PSC Cost Recovery system is recommended to be reinstated in the future with improvements.
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