Indonesia’s Elimination of Tax May Increase Oil and Gas Exploration

Although consumers are rejoicing at the recent fall in oil prices, governments as well as oil and gas industry players have watched closely and anticipated the impact lower prices will have on oil and gas exploration activities. In January 2015, the Pacific island country Indonesia has eliminated a land tax that was previously imposed on companies while exploring for oil and gas. The repealed tax will likely be welcomed news to companies like Sentry Energy Production, which provides oil and gas exploration services to its partners. These companies search for potential oil reserves around the world in the interest of helping their clients expand their portfolios in the oil and gas industry.

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Ministry Cites Incorrect Interpretation

According to a spokesperson for the tax office of Indonesia’s Finance Ministry, the .5 percent land and building tax was incorrectly interpreted to apply to the area in which companies are exploring for oil. Therefore, the ministry amended the regulation to exclude oil and gas exploration. The ministry clarified that the tax was intended to be levied against companies that actually use Indonesian land; therefore, the regulation should only be applied to oil and gas companies during the production stage.

Field of Opportunity

Indonesian government data indicates that there are 60 hydrocarbon fields in the country with only 16 in production. In addition to the 16 that are in production, 22 fields are currently being explored, seven of which have been found to contain hydrocarbon reserves. In previous years, oil and gas exploration primarily took place in the country’s northwest region, and nearly all oil fields were located under land. However, most of the 22 frontier basins that remain unexplored are located off Indonesia’s eastern shore. Therefore, Indonesia presents numerous opportunities for oil and gas exploration. In an effort to tap into its potential domestic oil reserves, the country stepped up drilling activities in 2014. The increase in drilling marks a possible shift toward a more relaxed policy regarding exploration activities.

A Positive Step Forward

As Indonesia has shifted from having been completely self-sufficient in oil in the past to presently being an importer, the energy ministry has been calling for more tax incentives in the past several years to attract more investment. The American Chamber of Commerce describes the elimination of the land tax as a positive step as oil and gas companies have long called for less regulatory complexity for exploration activities in Indonesia.

Overall, oil and gas exploration companies are expected to respond favorably to the elimination of the land tax in Indonesia. The current state of decreased gas prices has created an environment that is favorable for governments lowering their restrictions on oil and gas exploration to attract investment. Fewer restrictions mean companies may find unexplored basins more attractive and will, therefore, be more willing to explore these areas. Analysts predict other governments in other heavily regulated countries will follow Indonesia’s lead and also lower taxes and remove other potential barriers to oil and gas exploration.

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