Nickel producer PT International Nickel Indonesia (PT Inco) reported Tuesday a 17.1 percent drop in its net profit for the first half of 2006, partly due to lost output and partly due to higher oil prices that pushed up production costs.

Inco first-half net profit fell to US$123.3 million from $148.7 million in the corresponding period last year, president and chief executive Arief Siregar said.

Production of nickel in matte in the first half declined by 7.8 percent to 33,200 tons (73.3 million pounds) from 36,000 tons (79.4 million pounds) in the same period of 2005 due to a fire at one of the company's furnaces in Soroako, South Sulawesi.

The transformer at Furnace No.2 caught fire in late May causing the company to delay production, Arief said.

"We had to postpone the heat-up process for three weeks in order to complete a risk analysis of certain peripheral electrical components," he said.

As a result of the damage, he added, Inco was forced to reduce its 2006 production target from 167 million pounds of nickel in matte to approximately 159 million pounds.

Arief said that rising world oil prices had also contributed to the decline in net earnings. Unlike oil-based fuels for public consumption, which are heavily subsidized, the price of industrial oil-based fuels are adjusted every month and move directly in line with oil-price fluctuations on the global markets.

During the first semester, world oil prices stood at between $60 and $68 per barrel, far higher than the average of $40 in 2005.

Arief said that in order to reduce production costs, the company planned to minimize the use of diesel and increase the use of coal in its operations.

"Forty-five percent of our production costs are due to energy. With the (planned) diversification, we can reduce our costs by about 10 to 15 U.S. cents per pound," Arief explained.

He said the company would be able to further reduce production costs after the completion in 2009 of the Karebe dam on the Larona River, which would power a 90-megawatt (mw) hydro plant.

Currently, Inco operates two dams: the Larona dam which powers a 165 mw hydro plant and the Balambano dam, which powers a 110 mw plant.