law-justice.co – The cost recovery mechanism has long been promoted as a backbone of national oil and gas exploration. The state guarantees operating and investment costs for oil and gas companies so they are willing to take the risk of searching for oil deposits, despite the possibility that no discovery will be made. In practice, however, this system of reimbursing expenses often turns into fertile ground for budget inflation. In 2025, new findings from the Supreme Audit Agency (BPK) ignited another serious alarm.
BPK uncovered an overcharged cost recovery amounting to USD 10,012,328.97 (around Rp160 billion) in 2022 for employee incentives. The figure is not only large—it reflects a repeated pattern. Some 15 oil and gas companies under SKK Migas charged internal employee incentives as part of their cost recovery. In short, employee bonuses were billed to the state.
It all began with BPK’s routine audit. At first glance, the 2022 cost recovery expenditure documents looked normal. But auditors spotted one odd line: “annual performance incentives.” This type of expense is not typically included in cost recovery because it pertains to corporate internal matters, not exploration or production activities. That anomaly pointed to something far greater than a mere technical error. Upon further review, the total employee incentive charges surpassed ten million dollars.
Energy observer Fahmy Radhi emphasised that such cost recovery irregularities at SKK Migas are not new. The modus operandi often involves cost recovery being used for purposes outside its intended scope. “This happens because of a malicious agreement between the oil companies and related parties who accommodate inflated cost recovery budgets,” Fahmy said on Friday (22/11/2025).
He added that aside from cost recovery, there is also the gross split scheme, in which all costs are borne by investors, who later receive a larger share of profits. In this scheme, the state spends nothing, only providing the natural resources to be explored and exploited. “There are irregularities in the cost recovery mechanism because investors prefer it. The opportunities for manipulation are easier,” he said.
He stressed that cost recovery is essentially reimbursement of all expenses incurred by private companies after they discover oil. “What cost recovery covers is already regulated, and requires approval involving officials at the Ministry of Energy and Mineral Resources (ESDM). This opens room for collusion between officials and companies to inflate cost recovery,” he explained.
When asked whether contractor employee incentives or bonuses count as cost recovery, Fahmy clarified the categories of investment expenditure and operational expenditure. These cover investment and operational costs. Employee incentives or bonuses should not fall under cost recovery. There was once even a case where golf fees were charged as cost recovery—clearly outside investment or operational expenditure,” he said.
BPK identified excess performance incentive charges by 15 KKKS amounting to USD 10,012,328.97 in 2022. These internal employee incentives, charged by companies working with SKK Migas, under the ESDM Ministry, were listed as cost recovery, even though the mechanism normally only covers contractor operational activities to find oil, not internal corporate affairs.
However, in the audit report 5/LHP/XX/01/2025 published in January 2025, BPK stated that for incentives to be charged as cost recovery, they must first be budgeted in the WP&B and agreed upon in terms of the multiplier coefficient used to calculate the incentives. Based on this, KKKS would pay annual performance incentives to each employee.
Two KKKS charged incentives as cost recovery in 2022, totalling USD 3,246,495.91, but without SKK Migas’ approval—namely PT Pertamina EP Cepu ADK (USD129,456.60) and PT PHE WMO (USD3,117,039.31). These charges were for 2022 employee incentive payments.
From confirmations with the payroll departments of each KKKS, BPK found that these incentive charges had not received SKK Migas approval. The charges were based solely on actual incentive payments made according to the wage multiplier coefficients agreed in the WP&B.
Further review revealed that Pertamina EP Cepu and PHE WMO had submitted requests for approval to SKK Migas, but no approval had been issued by the SKK Migas Human Resources and Organisation Division. Moreover, some incentive charges exceeded approved SKK Migas budgets by USD 6,432,183.01.
Additionally, several KKKS partnering with SKK Migas were found to have charged cost recovery amounts exceeding approved limits. These include BP Berau Ltd, Husky–CNOOC Madura Ltd, and Medco E&P. BP Berau Ltd had excess charges of USD 1,721,301.30. Medco, across seven entities, incurred overcharges totalling Rp112,137,744,295.00. Pertamina overcharged USD 2,343,388.34, and PT PHE overcharged Rp27,285,202,795.87.
Auditors also found additional special incentive charges not aligned with regulations, amounting to USD 333,650.05. According to SKK Migas Regulation PTK-018, KKKS may grant special performance incentives for certain targets beyond those used for annual incentives. “However, such special incentives can only be charged as cost recovery if tied to structured corporate policy and approved by SKK Migas,” BPK noted.
BPK found special incentive charges without SKK Migas approval or exceeding the WP&B cap at PT Seleraya Merangin Dua (USD28,319.13), PT Pertamina EP Cepu ADK (USD66,341.92), and BP Berau Ltd (USD238,989.00).
BPK emphasised that these excess charges violate Government Regulation No. 79/2010 on recoverable operating costs and income tax treatment in the upstream oil and gas sector, as amended by PP No. 27/2017—specifically Article 5(1), requiring contractors to prepare work plans and budgets based on sound business practices, engineering standards, and fairness.
The charges also violate Article 7(1), which states that contractors may recover operating costs only according to work plans and budgets approved by the head of the implementing body, after the work area reaches commercial production. “This resulted in overcharged cost recovery for performance incentives amounting to USD 10,012,328.97,” BPK wrote.
The report also quoted KKKS’s responses. The CEOs of PT Pertamina EP Cepu, ADK and PT PHE WMO argued that, based on minutes of the 2022 HR WP&B meeting (No. 080/PD/RKA-SDM/2021, 28 December 2021), they had received budget approval for incentives and were coordinating with SKK Migas HR.
BP Berau Ltd stated that annual cash bonuses and “energise points” were part of personnel expenses, and since actual expenses were below budget, they believed the charges complied with WP&B approvals.
Medco E&P’s Senior Manager for Financial Excellence & Compliance said the company would conduct further verification. PT Seleraya Merangin Dua’s VP Finance said the charges reflected merit increases and promotions already approved in the 2022 WP&B.
Directors of PT PHE Siak and PT PHE Kampar said they had corrected some overcharges and would adjust the rest in Q4 2024. Pertamina EP’s Chief Audit Executive said 2022 performance incentives approved by SKK Migas had been converted using the average annual exchange rate.
SKK Migas stated it would request KKKS to reconcile actual incentive payments with approved incentive ceilings. Payments exceeding the ceiling would be treated as non-recoverable. The same applies to special incentives.
A System Ripe for Corruption
The cost recovery mechanism positions KKKS as the party that calculates its own operating costs, which the state reimburses once production begins. SKK Migas approval is supposed to provide oversight. But when budgeting becomes negotiable, manipulation becomes possible. Fahmy Radhi was unsurprised by BPK’s findings. “Cost recovery is prone to collusion. If budget approvals can be arranged, inflation becomes very easy,” he said.
He recalled past cases where corporate golf expenses almost became cost recovery items. “If employee bonuses can be billed to the state, the abuse has reached a chronic level,” he added.
He said BPK’s findings should prompt investigations by the Corruption Eradication Commission (KPK) or the Attorney General’s Office. “Corruption in the oil and gas sector always involves many parties—not only companies and ministries, but sometimes even parliament members,” he said.
Similarly, Publish What You Pay (PWYP) National Coordinator Aryanto said the cost recovery mechanism contains wide-open loopholes, especially because the system is not digitised, leaving room for abuse. “Digital procurement and payment processes alone still have gaps—let alone completely conventional systems,” he said on Friday (22/11).
Therefore, BPK’s findings must serve as a gateway for law enforcement to investigate how the abuse occurred—whether through collusion or administrative negligence. “But administrative error seems unlikely because the overcharged amounts are not in the hundreds of millions, but in the billions,” he said.
Reform or Enforcement?
House Commission XII Chair Bambang Pattijaya said BPK’s findings must be followed up by the corporations involved. He added that during Commission XII meetings and working visits, various issues in the oil and gas sector were reported. “If there are BPK findings, they must be acted upon,” Bambang said on Thursday (20/11/2025).
Bambang also urged the government to tighten supervision of oil and gas projects amid environmental and safety incidents involving several KKKS. Weak oversight and regulatory violations risk harming communities and damaging the image of the national oil and gas industry.
According to him, cross-agency oversight must be strengthened to ensure exploration and production activities comply with environmental and public safety standards. He urged ESDM, SKK Migas, and the Ministry of Environment to coordinate intensively. “Environmental monitoring must be tightened so pollution and violations no longer occur. This is a shared responsibility,” he said.
Bambang also asked the Directorate General of Oil and Gas and SKK Migas to coordinate with BPJN to evaluate a national road-crossing gas pipeline built by PT Jadestone Energy. This review is needed to ensure public safety. “Commission XII will continue safeguarding community rights so national energy development does not sacrifice local welfare,” he said.
The Golkar politician added that resolving oil and gas issues also requires accelerating energy infrastructure development—such as gas pipelines, regasification facilities, and distribution networks. Delays can threaten national energy security. “We’ve faced various obstacles in recent years. These must be resolved,” he said.
Meanwhile, Commission XII member Sartono Hutomo stated that reforms are needed in the oil and gas sector, which has experienced repeated problems. He argued that revising the Oil and Gas Law could be crucial.
According to Sartono, revising the Oil and Gas Law is needed to create more adaptive regulations and long-term investor certainty. “We need clear rules on oil and gas governance,” he said on Thursday (20/11/2025).
He explained that amending the Oil and Gas Law would boost investment and improve governance through a more competitive, stable, and transparent regulatory framework—such as simplifying bureaucracy with a one-stop service for business permits.
Sartono also proposed discussing attractive fiscal incentives and contract sanctity guarantees to attract investors. “I hope the problems in the oil and gas sector can be resolved,” he said.
Cost recovery is, in principle, meant to boost national oil and gas production. But a mechanism lacking transparency will always invite abuse. Today, the state may be offering incentives to oil company employees. Tomorrow, it could be dinner bills, annual bonuses, or something even larger—as long as they can be slipped into the production cost report. Will the system be fixed? Will the perpetrators be held accountable?
These loopholes enabling corruption must be closed immediately. While the scheme acts as a stimulus for investors, preserving avenues for abuse will ultimately harm state finances. The government must also show firmness toward regulators and operators from the outset. If leakages occur just within cost recovery, how can the public trust that operational activities are free from corruption?.
Source: Law Justicia