We assess the government's decision to exempt upstream activities from the land and building tax.
In an attempt to stimulate exploration in the country's upstream sector, Indonesia's Ministry of Finance has issued a new regulation exempting oil and gas exploration activities from the so-called 'land and building' tax.
Introduced in 2010, the tax required Production Sharing Contract (PSC) operators to pay tax on licensed acreage regardless of whether their exploration efforts were successful or not. For the 49 PSCs awarded since the introduction of the tax, liabilities for 2012 and 2013 totalled US$260 million.
This has adversely impacted exploration activity in Indonesia, which has long suffered from challenging fiscal terms, regulatory uncertainty and low material success. As a result, we estimate Indonesia has a replacement ratio of 41% for the past five years - one of the lowest in South-Eastern Asia.
Our research shows that only two discoveries over 100 mmboe have been made since 2009, while 2014's licence rounds have resulted in no new awards, illustrating both a lack of investor appetite for exploration in Indonesia and the need for new government initiatives.
It is hoped the move will help to attract new investment when coupled with government efforts to reduce uncertainty regarding expiring PSCs, streamline administrative processes and remove fuel subsidies.
However, with global exploration budgets being cut across the board thanks to falling oil prices, we believe these improvements are unlikely to revitalise the country's upstream environment. The land and building tax exemption is a good start but more dramatic measures are required if Indonesia is to remain attractive to upstream investment.
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