Indonesia ends oil exploration taxes in bid to revive investment

JAKARTA, Sept 22 (Reuters) - Indonesia said on Thursday it will eliminate taxes on oil and gas exploration this week in an effort to bolster investment in the country's flagging oil and gas sector.

Oil and gas director general Wiratmaja Puja said the government was aiming to remove all taxes on exploration, including a value-added tax on imported goods and a land tax that had been a deterrent to investment since it was introduced in 2010.

"Global exploration (companies) will return enthusiastically," Puja told reporters on Thursday. "Investment will increase."

The government has been trying to revive flagging oil and gas production but investors have been deterred by low global oil prices and regulatory and investment risks in Indonesia.



Indonesia's crude oil output peaked at around 1.7 million barrels per day in the mid-1990s. But with few significant oil discoveries in Western Indonesia in the past 10 years, production has fallen to roughly half that as old fields have matured and died.

Acting energy minister Luhut Pandjaitan had earlier told reporters the new regulation was due to be announced on Friday, and "will definitely be attractive."

"There needs to be compensation," he said, referring to the "high risk" in offshore and deep water exploration wells that could cost more than $100 million each to drill.

Under the new regulation, the government will provide oil and gas contractors an internal rate of return above 15 percent, Pandjaitan said.



<b>COST RECOVERY</b>

While the government is scrambling to prevent oil production from falling next year to its lowest level since 1969, it is also under pressure to keep a lid on how much the government is liable for on contractors' recoverable costs. Those are seen hitting $10.4 billion in 2017 above a targeted $8 billion this year.

"We are seeking an equilibrium (where) production climbs but costs can be low, so we are talking about efficiency," Pandjaitan said.

Cost recovery is the amount of money spent on exploration, development and operations that contractors can reclaim from the government after their oil and gas operations start producing.

The government has slashed cost recovery spending with efforts to improve efficiency since 2014, but this could also discourage oil well development and maintenance and constrain its ability to boost output, an official at the industry regulator said in June. Production costs are typically higher from mature wells.

The industry is a vital part of the Indonesian economy, but its contribution to state revenue has dropped from around 25 percent in 2006 to an expected 3.4 percent this year, according to data compiled by consulting firm PricewaterhouseCoopers(PwC).

"Interest in exploration in Indonesia nosedived in 2013 due to the Land and Building Tax issue and has yet to recover," the Indonesian Petroleum Association said in its 2015 annual report.

Most of Indonesia's oil and gas production is carried out by foreign contractors - including Chevron, ExxonMobil, BP, Total, and ConocoPhilips - who operate under production-sharing contract (PSC) arrangements.

Indonesia holds proven oil reserves of 3.7 billion barrels, and is ranked in the top 20 oil producers globally. (Writing by Fergus Jensen; Additional reporting by Hidayat Setiaji; Editing by Bill Tarrant)

Asia central bank doves flutter wings as Fed takes its time

SINGAPORE, Sept 22 (Reuters) - By dallying over raising interest rates the U.S. Federal Reserve made it easier this week for central banks in the Asia Pacific to stay dovish, with Indonesia lowering rates on Thursday and Australia and New Zealand saying they could cut later. Signalling slower and fewer rate increases at its policy meeting on Wednesday, the Fed left investors feeling that any tightening would be glacial at best. Nowhere has a more ultra-easy monetary policy than Japan, where the central bank said on Wednesday it would persist with its massive asset-buying and negative rates, while at the same time shifting its policy framework to one more suited to a long battle against deflation.

 The stances taken by the Fed and the BoJ have renewed global demand for longer-tenor bonds. "This is supportive of rates in core emerging markets, and lowers the hurdle for emerging market central banks to ease policy," Citi analysts said in a note. Bank Indonesia made its fifth rate cut this year, trimming its policy rate by 25 basis points to 5.00 percent to nudge economic growth higher, with inflation running below its 3-5 percent target. The rupiah's gain of more than 5 percent against the dollar this year was another good reason for BI to cut, economists say. ASIA'S ROOM TO EASE Most of Asia has room to maintain an easing bias. Growth rates are mostly on the low side of reasonable, official rates are above zero and inflation is running below targets. Moreover, heavy reliance on exports renders Asian nations' economies vulnerable to weak demand from China and Europe, even if the United States is buying more. And while none - except for Singapore - run monetary policies that actually target exchange rates, low interest rates do help them keep their currencies competitive. Earlier on Thursday, the Reserve Bank of New Zealand held steady, having already cut twice this year, lowering its policy rate to a record low of 2.0 percent. But a high New Zealand dollar and tepid inflation - running at just 0.4 percent versus a target of 1 percent to 3 percent - gave the RBNZ reason to predict more easing to come. "Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range," RBNZ Governor Graeme Wheeler said in a statement. "A decline in the exchange rate is needed," he said. In some ways, what is happening in New Zealand reflects trends elsewhere. "Activity in the labour market and the broader economy has been solid, but wages and inflation continue to undershoot their target and they are worried about it feeding into inflation expectations," Su-lin Ong, senior economist at RBC Capital Markets in Sydney.

 "That's very much a global theme right now." NOT A NUTTER Australia's new central bank governor, Philip Lowe, also held open the possibility of further cuts in rates, already at record lows, while adding that the lower rates get the less effective cuts become, in terms of boosting the economy. "Looking forward, we expect the economy to continue to be supported by low interest rates and the depreciation of the exchange rate since early 2013," Lowe told a parliamentary economics committee. An encouraging uptick in non-mining investment and better than expected economic growth of 3.3 percent in the year to June, however, could mean the Reserve Bank of Australia will be in no rush to lower rates as it adopts a flexible approach to attain its inflation target of 2 percent to 3 percent. "We have not seen our job as always keeping inflation tightly in a narrow range," Lowe said. "We have not been what some have called 'inflation nutters'." And while the Philippines central bank held its benchmark rate steady on Thursday, it is an odd man out in the region. The Philippines' next rate move, possibly early next year, is expected to be up, as inflation is seen rising into the central bank's target range of 2 percent to 4 percent. (Writing by Simon Cameron-Moore; Editing by Kim Coghill and Clarence Fernandez)