JAKARTA (TheInsiderStories) – The recent introduction of gross split scheme in oil and gas sector has drawn mixed reaction in the business community. The government, however, believes that the gross split scheme, which ends decades of production sharing contract (PSC) cost recovery scheme, will bring about more positives than downsides.
Some oil and gas industry players have said that the gross split scheme is only resolving part of the problems being encountered by the country’s oil and gas industry, not the whole of the problems. Nevertheless they appreciated the government’s move to implement the gross split scheme, much earlier than they have expected.
“The gross split concept will not resolve the whole problem. It (gross split) will resolve small part of many problems being encountered by our oil and gas industry,” said Budi Basuki, commissioner of Medco Energi International said at a seminar Energy Roadmap held by the Insider Network on yesterday (Jan. 25).
“We (industry players) have been raising this gross split scheme issue to the government in the last few years with no concrete steps being undertaken. However, the current government has made a quick decision. So, we certainly appreciate the government’s move,” said Lukman Mahfoedz, former president director of Medco Energi Internasional said.
The Indonesian Energy and Mineral Resources Ministry on Wednesday (Jan. 18) issued Ministerial Decree (Permen ESDM No. 8/2017) on oil and gas contracts based on gross split scheme, replacing the existing cost recovery scheme. The ruling was effective since Jan. 16, 2017.
The Energy and Mineral Resources Minister Ignasius Jonan said when opening the seminar said that with the gross split scheme, the government’s state budget will no longer be burdened with paying out recoverable costs to the oil and gas contractors. The operational costs to explore and exploit oil and gas are now a responsibility of the oil and gas contractors.
Minister Jonan said the government sometimes was surprised by the excess recovery costs of oil and gas industry each year. Last year, he said, the government set cost recovery at US$8.5 billion, however, it turned out the cost recovery was at US$11.5 billion, so there is excess of recovery of US$3 billion. “It is around Rp40 trillion. It is huge amount of funds, more than annual expenditure of the Transportation Ministry,” he said.
He believes that the implementation of gross split scheme will encourage PSC holders to improve cost efficiency and make business process to be more effective, in particular on procurement process.
“The procurement process under cost recovery scheme takes a long time to complete. However, the procurement process under gross split scheme can be done faster and more effective as it depends on the internal mechanism of the company,” he said.
In addition, the gross split scheme will reduce time gap between oil discovery or exploitation and production as everything can be done much faster and flexible
In addition, the gross split scheme will encourage oil and gas companies to use more local content as the regulation provides incentives for certain level of local content usages. “Logicaly, companies will try to be more efficient. As long as local components are available, they would try to use more local components,” he said.
Minister Jonan said that the gross split scheme is implemented for new oil and gas production sharing (PSC) contracts as well as contract extensions. The first gross split scheme was the contract extension of ONWJ block, operated by Pertamina Hulu Energy (PHE ONWJ), a subsidiary of Pertamina.
Gigih Prakoso, senior VP Corporate and Strategic Growth of Pertamina, said the gross split scheme will make the upstream oil and gas business operations to be more efficient as companies will be more aware about cost efficiency. “The less costs we spent, the larger split we receive,” he said.
Budiantono, director for program development at the Directorate General for Oil and Gas, said the other benefits of gross splits are; first, the PSC holder and the government will “share gain and share pain”; secondly, business risks will be mitigated via incentive split; third strengthening the role of SKK Migas and makes SKK Migas to be more focused on carrying out its role in supervising the industry; fourth, fast forward production; fifth, encourage larger use of local content; and sixth guarantee government revenues, regardless of the level of the production.(*)