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Oil and gas companies with existing contracts in Indonesia will be given three years to adapt to a new government regulation on cost recovery which is expected to be implemented this month, the country’s upstream oil and gas regulator said on Sunday.

Parulian Sihotang, head of the accounting division at BPMigas, said the new regulation was intended to clarify what expenses incurred by oil and gas contractors will be reimbursed by the government via the cost-recovery scheme. “For the existing contracts, there will be three years of transition, while for new contracts the regulation will be effective immediately,” he said.

Suyitno Padmosukismo, executive director of the Indonesia Petroleum Association, said contractors were against the government’s plan to include existing contracts in the new regulation.

“Although the regulation will provide three years of transition we oppose it,” he said. “According to Oil and Gas Law No 22/2001, the government should respect existing contracts.”

Due to the long time frames for investment in the oil and gas sector, often 30 years, any changes to contracts would affect contractors’ plans, Suyitno explained.

Parulian did not specify what expenses would be reimbursed by the government under the new regulation, which is awaiting approval from President Susilo Bambang Yudhoyono.

The new regulation comes after criticism that the government was spending too much on cost recovery and that oil and gas companies have been abusing the mechanism by including expenses such as entertainment.

There have also been suggestions that the regulation will cap the amount of costs that can be recovered.

Suyitno claimed the Indonesian Petroleum Association had obtained a draft of the regulation and that it did state that its intention was to cap recovery costs. “Despite our protests, the government is sticking with a cost-recovery capping plan,” he said. “We have warned them that the capping would result in a decline in production.”

However, Parulian said the regulation would not impose a limit on cost recovery. “We could not cap the cost recovery, because it will affect oil and gas output,” he said.

According to BPMigas, from 2006 to 2008, recovery costs per barrel of oil were $11.95 in Indonesia. This was lower than in other areas such as the United States ($41.03 per barrel), Africa ($41.83) and the Middle East ($20.97).

This year, it’s estimated $12.05 billion will be recovered in costs from the government. Last year, Chevron recovered the most from the government ($2.9 billion), followed by Total ($1.6 billion) and state-owned PT Pertamina ($1.5 billion).