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Upstream oil and gas regulator BPMigas has urged energy contractors to reduce exploration and production costs next year after reaching a preliminary agreement with the House of Representatives last week to cut cost-recovery assumptions by $1 billion in the 2010 draft budget.

“We will review [contractors’] working programs and budgets and we may determine whether such cost-cutting will affect production,” said Raden Priyono, the regulator’s chief, adding that despite pressure to cut costs, the regulator did not want to see contractors reduce their exploration and production activities.

A House working committee — which sets macroeconomic assumptions, including state revenues and deficits — last week agreed to fund cost recovery of $12 billion, down from $13 billion in an earlier draft. The current budget also calls for raising the oil output target to 965,000 barrels per day from 960,000 bpd this year, and lifting gas production to 7,758 million British thermal units per day from 7,526 mmbtu.

But the agreement is subject to further discussion in the House’s Commission XI, which oversees the financial sector, and the House Budgetary Commission.

The government’s estimate for oil and gas cost recovery in 2009 was originally $11.05 billion, but lawmakers managed to push the government to reduce that figure to $10.05 billion. Cost recovery in 2010 was initially set at a higher rate because new fields, such as Cepu, were expected to go online.

The House approved a smaller amount for cost recovery for 2010 to push down the budget deficit. Cost recovery is a process by which oil and gas companies can claim back expenses incurred in developing and operating assets, and is central to the government’s production-sharing contract system.

The House has put constant pressure on the government to lower cost-recovery claims to reduce what it sees as “gold-plating” for contractors. Lawmaker fear contractors are inflating spending to increase recovery claims and maximize oil and gas revenues.

The reduction follows an audit last year by the State Audit Agency (BPK), which found oil and gas companies were claiming cost recovery for non-core activities, like education for expatriate employees’ children and corporate social responsibility programs.