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.
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)