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Indonesia cabotage law a threat to investment

Legislation to ensure vessels operating in Indonesian waters are domestically owned or flagged, has led to a dip in investment interest

NEW CABOTAGE regulations, if enforced, look set to dent Indonesian oil and gas production and dampen further offshore investment. Plans to extend cabotage to Category B vessels from May 2011 have sparked concern across the industry.

The legislation, which aims to ensure vessels operating in Indonesian waters are Indonesian owned or flagged, has led to a decline in investment interest, says Evita Herawati Legowo, director general for oil and gas at the energy ministry. Upstream regulator BPMigas claims cabotage will disrupt offshore production, predicting oil volumes will fall by 260,000 b/d and gas output will slide by 20% from an average of 7.6bn cf/d.

The problem is a clear shortage of Indonesian-flagged units for certain types of Category B ships, such as dive-support vessels, sophisticated anchor handlers, as well as platform-supply ships, says George Horsington, general manager southeast Asia, Swire Pacific Offshore, which provides support vessels to the upstream industry.

Uncertainty surrounding the availability of compliant ships in January, the original date for enforcement of Category B rules, and now further doubts over the May implementation of the cabotage law have already delayed some drilling programmes. And, in the longer term, if the shortage of Indonesian flagged ships results in higher day rates, or projects are delayed, Indonesian offshore projects will become more expensive.

"The cost impact of cabotage, rather than the implementation of the law itself, may deter investment in exploration and development," says Horsington.

Category C vessels, which include rigs, drillships, pipelaying ships and 3D seismic vessels, are exempt from cabotage and no deadline has been established to bring them under the regime. But there are rumours they may also be subject to the cabotage provisions, possibly within three years.

BPMigas is urging the government to exempt these high-end units from the law. Indonesian companies are not in a position to provide such expensive, high-technology offshore units in the numbers required to support the expansion of the country's deep-water development, the regulator argues.

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