Cost recovery refers to the scheme of reimbursing contractors for expenses incurred in the development and operation of energy assets. Indonesia, Southeast Asia's biggest oil producer, had recently adopted the practice of capping, or putting a ceiling on, the cost recovery.

Oil and gas account for about 30 percent of Indonesia's state revenues. But the sector missed production and investment targets last year.

Upstream energy regulator BPMigas reported last week Indonesia's oil output for 2009 was 948,580 barrels per day, lower than the target of 960,000 barrels per day. BPMigas attributed the production drop to unscheduled shutdowns at projects and maintenance issues, as well as theft of equipment.

The country's oil and gas investment in 2009 had fallen 10 percent to $10.87 billion, BPMigas said. That's 72 percent of the 2009 target of $15.11 billion. The 2008 goal had been $14.9 billion.

"The policy of capping cost recovery is not appropriate. This is not supposed to be capped. We will fix this matter," Indonesia's coordinating economic minister, Hatta Rajasa, told reporters Monday.

"We as the player in this business fully support the government's decision," said Budi Basuki, president director of oil and gas company Medco E&P Indonesia, The Jakarta Post reports. "Oil and gas investment is high risk and capital intensive, therefore, it requires certainty. Including the cost recovery payment as a parameter in the short-term law budget is an extremely nice fit with the long-term nature of oil and gas investment."

While Jakarta's decision to scrap the cost recovery cap may appeal to oil and gas contractors, analysts say the decision does little to help Indonesia's oil and gas blocks to attract new investors.

"Despite the claims about cost recovery capping, the government actually has never truly capped cost recovery spending," said Pri Agung Rakhmanto, an energy analyst with the Reforminer Institute. "The payment is only carried over to the following year, but is never capped," he told the newspaper.

Pri said Indonesia's failure to find investors for most of its oil and gas blocks last year goes beyond cost recovery capping. "The main problem is the poor exploration data," he said.

"The government only offers the basins without initial geology and physical surveys. If things stay like this, the next tender will still have poor results even though the capping has been scrapped," he said.

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