Local Content Policy in Indonesia Oil and Gas Industry

Abstract

As a net oil importer, the Government of Indonesia (GoI) put a lot of effort into attracting new investment for oil and gas exploration and exploitation. The gross split scheme was introduced in 2017 as an alternative to cost recovery. Meanwhile, the GoI has been setting up various regulations and a road map to increase local content to stimulate local manufacturers in the oil and gas supporting industries. How this significant policy change affects the local content requirement and implementation becomes the central focus of this chapter. In the cost recovery scheme, local content requirement was enforced through various regulations with close supervision from the government’s executive task force in upstream oil and gas business activities; meanwhile, the gross split scheme uses an incentive approach by incorporating local content as a part of variable split. The impact of new policy started to emerge in the form of new investments in the gross split scheme as well as the corresponding local content procurement. Challenges in the local content implementation include concerns over the quality and price of locally produced goods. Some cases suggested that locally procured goods are not yet up to the standard and specifications required by the contractors of cooperation contract, and yet, the price is higher than imported ones. As these challenges could hinder the target of local content realization, government, local manufacturers of oil and gas supporting industries and the contractors need to work together to overcome those.