Jakarta. Energy and Mineral Resources Minister Bahlil Lahadalia has criticized Indonesia’s imposition of value-added tax (VAT) on oil and gas exploration activities, arguing that the policy is a major obstacle to the country’s push for energy independence.

In a recent interview with BTV, Bahlil noted that investors are required to pay VAT upfront during the exploration phase, even before any resources are discovered.

“In other countries, investors are given incentives, but here in Indonesia, they must pay taxes first. Why should they pay VAT during the exploration stage when there are no guarantees of success?” Bahlil questioned.

The minister warned that such aggressive tax policies discourage investors, many of whom have chosen to leave Indonesia for more favorable markets.

“I’m currently negotiating with the finance minister to find a solution. VAT shouldn’t be imposed during exploration because it’s essentially the gambling phase,” Bahlil said.

He explained that exploring a single oil well could cost an investor up to $100 million, with the current VAT rules requiring an additional $12 million in tax payments --despite the lack of any assurance of returns.

“I propose that VAT be paid only after exploration yields results. That’s a fair approach,” he added, emphasizing that the current tax regime hampers Indonesia’s efforts to boost domestic oil production.

“We need to foster a friendlier investment climate because many countries are competing for investors in the upstream oil and gas sector,” Bahlil concluded.

Indonesia, once a member of OPEC, has seen its oil production decline steadily over the years. The country currently produces around 616,000 barrels of oil per day (bpd), well below its target of 1 million bpd by 2030. On the gas side, production stands at approximately 5,586 million standard cubic feet per day (mmscfd), also trailing behind the government’s ambitious targets.

Several factors contribute to the declining production, including aging oil fields, a lack of significant new discoveries, and regulatory challenges. The imposition of VAT on exploration activities has been a contentious issue, with industry players arguing that it increases the financial burden on companies during the high-risk exploration phase.

Indonesia has also faced stiff competition from neighboring countries like Malaysia and Vietnam, which offer more attractive fiscal terms for upstream oil and gas investors. To address these challenges, the government has introduced various measures, such as the gross-split production sharing contract (PSC), but concerns over taxation and bureaucratic red tape continue to deter investors.

Efforts to attract more investment in exploration are crucial as Indonesia increasingly relies on oil imports to meet its domestic demand. In 2023, the country’s oil import bill exceeded $18 billion, underscoring the urgency of boosting domestic production to achieve energy security.