Fiscal Incentives to Stimulate Investments in Indonesia's Oil and Gas Exploration

The new policy will only be awarded to companies that are in the exploration stage of the nation's oil and gas sector. These companies will be exempted from paying value-added tax (VAT) on imported goods (such as machinery and equipment) needed for exploration. It applies to both the renting and buying of these goods. Previously, the amount of VAT was charged on the value of the equipment, not on the value of the rent, and as most oil and gas companies rent equipment to conduct exploration, it increased exploration costs significantly and thus disturbing investments.

The government also intends to lower its property tax (which is calculated per square meter) for companies that are in the exploration stage. Moreover, the tax will only be charged on the area where exploration takes place, and not on the complete area that is concessioned to the company.

Starting in the 1990s, Indonesia's crude oil production has experienced a steady downward trend, turning the country into a net oil importer from 2004 onwards. Oil production targets, set by the government at the start of each year, have not been met for a number of years in a row because most oil production stems from mature oil fields. It is often cited that the lack of exploration and other investments in this sector are due to weak government management, bureaucracy, an unclear regulatory framework and legal uncertainty regarding contracts.

Gas production has  risen steadily in Indonesia, reaching record highs in recent years. However, domestic gas production does not meet domestic gas demand. In fact, there is a shortage of gas for domestic industries, despite the country's abundant gas reserves. Similarly to oil, Indonesia needs large-scale investments in both exploration and (distributional) infrastructure to increase its gas output.

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