Indonesian PSCM81GED

Petroleum Economics

Indonesian PSC TermsFTP: First Tranche Petroleum

Investment Credits

Domestic Market Obligation

First Tranche Petroleum: FTP is basically having the same concept as royalty but it is split based on the government shares and contractor shares. (20% of Gross Prod)

Investment Credit: cost recoverable but it is subject to tax (17%-20% of gross production. IC applies only to production facilities such as

platforms, pipelines and processing equipment.

Domestic Market Obligation: Obligation to sell the oil for domestic needs. (25% of Contractor share)

Cost RecoveryThe amount of expenditures such as costs of explorations,

developments, and operations could be recouped by the contractor out of the Gross Revenue.

The History of PSC in IndonesiaConcessionary (prior 1960)

Working Contract Era (1960-1965)

 PSC 1st Generation 1965

Constitution No.44/1960

• All the oil and gas reserves in Indonesia belongs to the Government

• The petroleum activities is only done by the Gov.Institution

• Mining Minister may appoint contractor to conduct the activities that could not be done by the Government Institution.

The basic constitution is the 1945 Constitution “all the resources under the states belongs to the states and shall be used to the greatest benefits of the people

• All foreign oil & gas companies contractor• Risk and management the contractor• Operating activities funded by the contractor• Term of the contract is 20 years• Shares was based on the net income

60%/40%• DMO 25% of their shares with $0.2/bbl as a

fee

• Shares was based on the gross production (volume oil/gas)

Indonesian PSC Evolution- First Generation (1967-1978)

- Second Generation (1978-1990)

- Third Generation (1990-current)

• There was unclear taxation system in Indonesia. The tax paid by the IOC was not considered by the USA as tax deductible (the first PSC was IIAPCO Independence Indonesian American Oil Company)

• The significant decrease in oil price (because of the economic recession in 1980’s) drove the government to change the PSC terms

Indonesian PSC EvolutionDescription

PSC 1st Generation (1965-1976)

PSC 2nd Generation (1976-1988)

PSC 3rd Generation (1988-current)

FTP None None 10% - 20%

Cost Recovery Ceiling

40% 100% (no ceiling) 80% (due to FTP)

Investment Credit

None 20% 17% - 20%

DMO DMO was defined as 25% of equity oil at $0.2/barel

25% of equity oil, full price for the first 60 months and $0.20/barrel there after

25% of equity oil, full price for the first 60 months and

10% of export price there after

Equity to be Split

     

Government / Contractor

     

Oil 65%/35% 85%/15% 85%/15%

Gas 70%/30% or 65%/35% 70%/30% or 65%/35%

PSC 2nd to 3rd Generation : The significant decrease in oil price (because of the economic recession in 1980’s) drove the government to change the PSC terms.

PSC shares: Shares was based on the gross production (volume oil/gas)

Indonesian PSC ConceptGross Production

FTPInvestment CreditCost Recovery

Equity Oil to be Split

(-) (-)

(-)

(+)

Gov. Share Contractor Share

DMO

DMO Fee

Income Tax

Taxable Income

Government Take

Contractor Take

(+) (-)

(+)(-)

(-)

(+)

(+) (+)

First Tranche Petroleum: FTP is

basically having the same concept as

royalty but it is split based on the

government shares and contractor shares.

(10%-20% of Gross Prod)

Investment Credit: cost recoverable

but it is subject to tax (17%-20% of

gross production. IC applies only

to production facilities such as platforms, pipelines and

processing equipment.

Domestic Market Obligation: Obligation

to sell the oil for domestic needs. (25% of Contractor share)

FTP prior to 201010%15% depends on the Contract20%

The more remote area, the more difficult to be developed, the smaller FTP will be applied.FTP is split based on the % of the shares but for some contracts they don’t split the FTP.The current PSC now only 20% FTP.

First Tranche Petroleum

Cost Recovery Mechanism

Ring Fencing Policy in Indonesia

Contract A vs Contract B

Capital & Non Capital Cost

Will be calculated beginning the Calendar Year, asset is PIS with monthly depreciation for the Initial Calendar Year

The method used is Declining balance method

Based on individual asset Full depreciation at the end of the individual

asset’s useful life

Depreciation Expenses

2 Group of Assets (based on Taxation system in Indonesia)

a. Group 1 50% : useful life 5 years such as automobile, truck, buses, aircraft, construction equipment, Furniture & Office equipment

b. Group 2 25% : useful life 10 years such as construction utilities and auxiliaries, platform and storage plant, construction housing and welfare, Production facilities, Vessels, Barges,tug and similar water transportation equipment, drilling and production tools, equipment and instruments.

Depreciation Factor

Indonesian PSC FrameworkSections Descriptions

I Scope and Definitions

II Term: Term of Commerciality of Contract Area

III Exclusion of Area: Relinquishment of Area

IV Work Program and Budget Expenditures

V Rights and Obligations of the Parties

VI Recovery of Operating Costs and Handling Production

VII Valuation of Crude Oil and Natural Gas

VIII Compensation, Assistance, and Production Bonus

IX Payments

X Title of Equipment

XI Consultation and Arbitration

XII Employment and Training of Indonesian Personnel

XIII Termination

XIV Books and Accounts and Audits

XV Other Provisions

XVI Participation

XVII Effectiveness

At least 3 months prior to the beginning of each calendar year, or at such other times as otherwise mutually agreed by the Parties, Contractor shall prepare and submit for approval BPMigas (now SKK Migas) a Work Program and Budget of Operating Cost for the Contract Area setting forth the Petroleum Operations which Contractor purposes to carry out during the ensuing Calendar Year.

Work Program and Budget

Every 3 months the Contractor should establish this FQR to show the progress of the operation.

FQR: Financial Quarterly Report

Conducted by Government To ensure that the Recoverable Cost

recorded by the Contractor is recorded and reported correctly.

Audit is conducted for Contractor that is classified in the production phase.

Audit on Recoverable Cost

The goal of Petroleum Fiscal System is to attract investments.◦ Instability in the fiscal system in Indonesia affect the

investment climates◦ Tough PSC terms in Indonesia leads the moral hazard of

the company (such as Cost Recovery)◦ This leads Indonesia create many new regulations come

from other regulators which are not consistent with PSC signed raises the disillusions among the companies.

Petroleum Fiscal System VS Investment Climate in Indonesia

Executive Agency for Upstream Oil and Gas Business Activities: SKKMigas (before BPMigas) is responsible for monitoring implementation and compliance with existing PSCs

BPMigas revised the Work Procedure Manual Supply Chain Management in 2009 for PSCs (current issue: suspense account)

Indonesian Taxation Government Institution gets involved in upstream industries (such as changing in Land Tax regulation)

Government of Indonesia’s Financial and Development Supervisory Board (BPKP), Indonesian Government Audit Institution (BPK) (related to Sunk Cost Audit)

Bank of Indonesia (export sales from this industry , must deposited in Bank of Indonesia)

Upstream industries regulator in Indonesia VS Investment Climate in Indonesia

Indonesia Oil Production VS Investment

Thank you P.S: I am a student as you are.. it means I’m still learning like you are Fasting month is coming, I am sorry for the mistakes I’ve done , and happy fasting month for you guys who’ll celebrate Ramadhan!