Essentially, the PSC framework allows the government to let contractors bear all the risks of the exploration phase. The exploration phase is the phase where the risk of failure is highest. The failure rate in this phase is given up to 50%. Dedicated entrepreneurs must finance all exploration expenses without guarantee of success to find viable economic reserves. The framework will also allow the government to maintain the capacity to manage the fields in partnership with contractors, as well as the ownership of minerals up to the ”point of delivery”. The other contentious issue with respect to this framework is the concept of ”cost recovery,” which the government will compensate contractors once a viable economic reserve is discovered. Another key feature of the cost recovery program is that the costs of past exploration activities, as well as production costs incurred by contractors, are offset by the sale of oil and gas production over the years. The table above shows that when the world price of oil halved from the previous $60, the share of government and contractors in production decreased by 3.24% and 4.65%, respectively, and operating costs increased significantly by 100%. This will trigger a thorough review by the government when contractors submit their next work, program and budget (WP&B), and potentially require a significant adjustment to their plans. Table 3, which is presented below, explains how changes in the world oil price affect the overall operating result. In this example, we assume that other variables, such as total annual production and operating costs, remain constant, amounting to 300,000 barrels per year, or $600,000. This example examines the evolution of production costs and assumes that the world price of oil and total production will remain constant at USD 60/barrel and 300,000 barrels per year, respectively. Regardless of the political and strategic interests of the Indonesian government or the National Oil Company, the results of this study can hopefully be useful for professionals, educational institutions and the government to learn and learn from.
How the term tax can affect the government, take contractors, cost recovery as well as the production target related to the replacement of reserves. On 13 January 2017, the Ministry of Energy and Mineral Resources of the Republic of Indonesia issued Decree No. 13. 18 of 2017, which introduces a new form of gross production sharing agreement and abolishes the cost recovery system that has characterized Indonesian production sharing contracts since its inception in 1966. The adoption of Regulation No 8 is an attempt to stimulate the upstream oil and gas industry by moving away from the traditional cost recovery system in favour of the gross fractionation regime. The first crude CHPs were completed in January 2017 between the Working Group on Upstream Oil and Gas Regulation (SKKMigas) and PT Pertamina Hulu Energi for the production of the Offshore North West Jave block, demonstrating the country`s zeal in implementing the new system. Finally, Regulation MEMR 38/2015 on the acceleration of unconventional oil and gas activities has been partially repealed. MRMR Regulation (EC) No 38/2015 provided for three types of CSPs for unconventional oil and gas operations: (i) a traditional form of PESCO; (ii) a form of staggered distribution of gross production similar to that introduced by Regulation (EU) No 8/2017; and (iii) a sliding-scale MFP that included a cost recovery mechanism prior to the allocation of production and when the contractor`s share of production was reduced over time, as prescribed, cumulative production levels were achieved.
In accordance with Regulation (EU) No 38/2015, the Directorate-General for Oil and Gas would determine the form of contract to be applied. As total production fell by a third this year, from 300,000 to 200,000 barrels, the share of production between the government and the entrepreneur dropped significantly by 34% and 35%, respectively. If operating costs remain at their initial level, this situation is likely to be unfavourable for both parties if the world price of oil remains constant. However, if production volumes double this year, both sides will see an increase in the share of production of more than 50%, if the world oil price and operating costs remain at their initial levels. One way to overcome this misconception among citizens is to fully understand the concept of the PSC framework to which most contracting companies are linked. Once the PSC`s framework is well understood, the concept of ”natural resource sovereignty” must also be redefined for those who have not yet agreed on the available definition. However, this interesting issue of natural resource sovereignty is not being discussed at this time. The letter will focus more on how the PSC framework serves as a tool for the government to fulfill the mandate of section 33(3) of the 1945 Constitution.
Recently, Indonesia is experiencing various revisions and improvements in regulations related to the activity of the oil and gas industry, this type of situation will certainly affect the investment atmosphere in the Indonesian oil and gas foreland. The International Oil Company and the government have different views regarding PSC contracts. Several analyses or studies have been carried out by institutions and individuals through articles or documents on the comparison of the terms of a contract with different countries. But few people have particularly discussed the overall transformation of the PSC in Indonesia. The gross division system was established by the adoption of Regulation No 8 nr. 8 of the Indonesian Minister of Energy and Mineral Resources (MEMR) of 2017 on gross production sharing contracts (Regulation 8). Unlike existing CFPs, fractional gross CSPs will not include a mechanism for MFF contractors to recover sunk costs before production is shared with the state. The capital required for the operation shall be fully financed by the PSC contractor and the risk of the operation shall be borne in full.
There are about a hundred upstream oil and gas companies currently operating in Indonesia. These companies are considered ”entrepreneurs” because their job is to work with the Indonesian government to discover and exploit developed and untapped oil and gas reserves within their borders. There is confusion about how the profit-sharing contract, or PFC, works between entrepreneurs and the government. A good size of the uninformed population would, in most cases, draw misleading conclusions about how the country`s precious natural resources are managed. The feeling of nationalism begins to manifest itself as soon as the issue is discussed. Many will say that the country may have gained independence from the Dutch in 1945, but energy resources are still controlled by foreigners through their multinational corporations. .