Intro4u2u

<!– /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:”"; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”; mso-fareast-font-family:”Times New Roman”;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} –> Indonesia’s oil and gas regulator BPMIGAS has announced that oil and gas companies will soon be required to use domestic banks to finance their operations, according to the Jakarta Post Newspaper. BPMIGAS chairman R. Priyono said that the regulation could be put in place as soon as next month and would be mandatory for both national and foreign companies otherwise their expenses would not be reimbursed under the cost recovery scheme. According to Priyono the regulation aims to increase the liquidity of domestic banks as well as improving their balance of payments.

Significance: The announcement suggests that BPMIGAS is heeding the recommendation of the National Development Planning Board which last month suggested that local banks should support energy projects because the low percentage of non-performing loans to the energy sector made the risk of credit default relatively low(see Indonesia: 27 October 2008: Indonesian Energy Firms Encouraged to Seek Domestic Funding to Avoid Credit Crunch).At the end of August 2008 the energy sector only accounted for around US$4.2 billion or 3.5% of total domestic bank credits disbursed. Given that oil and gas companies are expected to spend US$11.8 million next year, the regulation would significantly increase domestic lending for energy projects. The government may be hoping that the regulation will encourage inter-bank lending, after the lowering of statutory reserve requirements for banks by 4% last month had a limited impact. However at the same time the move is likely to increase anxiety among foreign investors already worried about revisions in cost recovery mechanisms and Pertamina’s moves to acquire farm-in rights in large development projects. They may also be concerned about corruption in Indonesia’s banking sector following the successful prosecution of the Indonesian Central Bank’s former governor Burhanuddin Abdullah on charges of graft. If passed the regulation could deter investor-interest in 31 new oil and gas blocks due to be awarded in spring 2009.