Singapore (Platts)--25Mar2011/655 am EDT/1055 GMT

Indonesia may only exempt a category of oil and gas vessels that includes drilling rigs, drill ships and seismic surveyors from its cabotage shipping law, a senior government official said late Thursday.

The cabotage law that has been proposed by the Transportation Ministry would mean most vessels operated in Indonesian waters would have to be registered in the country and use the Indonesian flag.

However, officials with the Energy and Mines Ministry and industry regulator BPMigas have said that such a law applied to the oil and gas industry could result in drastic cuts in production.

"The government is still discussing about it. So far we are still trying to exempt only category C vessels from the cabotage rule, as domestic vessels are unavailable for that category," oil and gas director general at the Energy and Mines Ministry Evita Legowo told Platts. "All we want is allowing foreign-flagged for oil and gas operations to be used in Indonesian territory as long as domestic vessel are unavailable."

Category C covers jack-up rigs, semi-submersible rigs, drill ships, pipe/cable-laying ships and 3D seismic vessel.

Legowo has said that, without the exemption for the oil and gas industry, the cabotage law could result in the loss of 156,020 b/d of crude and condensate output, as well as 2.549 billion cubic feet/day of gas. That would cost Indonesia $7.3 billion in lost oil and gas revenues annually, she said.

The regulation without the exemptions would also delay $188 million of seismic surveying activity commitments and another $2.8 billion in exploration and development spending, she has said.

The threat of the cabotage law to Indonesia's offshore oil and gas development is particularly worrisome to the industry because the country's crude and condensate output has been steadily declining for at least the last decade because of natural decline at aging fields.

LNG SHIPPING

The cabotage law is of less concern to the downstream sector of the oil and gas industry, as the country's requirements for crude oil tankers, fuel tankers, LPG tankers and floating storage and offloading have been met by domestic players.

It is less clear what will happen with LNG shipping, though, since there are no Indonesian-flagged liquefied gas carriers.

The specialized tankers are not included in the exemption, according to oil and gas director general Legowo. However, she said "there are many foreign-flagged vessels which have expressed interest to register as Indonesian flagged."

The government notified operators of foreign-flagged LNG vessels as early as 2009 of the coming cabotage regulation, she said, "so they have prepared themselves to meet it."

However, when BP was asked about its plans to cope with any requirement to use only Indonesia-flagged vessels for LNG exports from the country, BP's head of country said the oil major was still waiting to see the final form of the law.

"At the moment we are waiting for further development from the government, which we believe have made good progress on understanding that the law would be difficult to implement on special vessels for oil and gas activities," said Nico Kanter, BP Indonesia's head of country.

BP is the operator of the Tangguh LNG project in Bintuni Bay of Indonesia's far eastern Papua province. The project includes two liquefaction trains producing at least 7.6 million mt/year of LNG, and BP has plans to build a third train with a capacity of 3.8 million mt/year, for which it has recently started looking for buyers.

BP also owns four LNG vessels associated with the project that carry LNG from Indonesia to buyers in north Asia.

The Transport Ministry first proposed the cabotage law in 2008, but a January 2011 implementation date was delayed to May after the Energy and Mines Ministry said the regulation would severely hamper efforts to increase Indonesia's oil and gas output.

For categories A and B--currently not considered for an exemption--more than 95% of 606 vessels in use in 2011 are Indonesian-flagged, according to BPMigas. These categories encompass tug boats, mooring boats, utility vessels, security boats, barges, landing craft, crew boats, crane boats, pilot boats, anchor boats, accommodation barges, platform supply vessels, and floating storage and production vessels.

Indonesia's government and parliament finally agreed on March 10, to exempt at least category C vessels used in oil and gas activities from the shipping regulation.

The government will issue a special decree by April 7 on an exemption allowing foreign-flagged vessels to be used in Indonesian territorial waters for oil and gas operations. The exemption will apply when no Indonesian-flagged vessels exist for a particular offshore function or when none is available, Legowo said earlier this month.

Indonesia's Energy and Mines Ministry has been trying to reverse the decline of the country's oil and gas output, setting a target to produce 970,000 b/d of crude and condensate and 7.769 Bcf/d of gas this year. However, it isn't likely to hit those output levels.

In 2010, Indonesia missed a its crude and condensate production target of 965,000 b/d, managing production of around 950,000 b/d.

--Anita Nugraha, newsdesk@platts.com

--Jonty Rushforth, jonty_rushforth@platts.com

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