New Split for Oil & Gas Revenues

Indonesia' Oil and Gas Deficit Predicted to Occur in 2025
Oil & Gas Block- Photo by Energy and Mineral Resources Ministry

JAKARTA (TheInsiderStories) – The Indonesian Energy and Mineral Resources Ministry has issued Ministerial Decree No. 52/2017 on oil and gas contracts, based on a ‘gross split’ scheme. This regulation becomes effective on 29 August 2017.

Under Energy and Mineral Resources Ministry Regulation No. 38/2015, the government will promote three types of cooperative contracts, namely, Production Sharing Contract (PSC), Sliding Scale PSC, and Gross Split Sliding Scale PSC.

Under the new revision, the government still takes a base split of 52 percent for gas and 57 percent for oil, but has raised other components of the split. The revisions increase contractors’ share of output in the second and third stages of production, and where oil and gas has a higher sulphur content, or at the Minister’s discretion, among other changes.

Government also mandates State-owned energy company PT Pertamina to use the gross split scheme, which will allow more incentives for contractors when they enter further development (Plan of Development/POD) Phase II.

The Government claims that since they have been drafting the regulation since last July, they have already received and responded to input from contractors. Revised production-sharing contracts are said to be more appealing to investors, and are expected to spur more investment in the upstream oil and gas industry.

During H1, investment in the sector reached US$4.8 billion, still far from this year’s annual target, set at $22.2 billion. The energy industry contribution to state revenue has dropped from around 25 percent in 2006 to an anticipated 3.4 percent this year, according to data from consulting firm PriceWaterhouseCoopers.

This reflects lackluster oil and gas production over the last decade, as Indonesia’s crude oil output peaked at around 1.7 million barrels per day in the mid-1990s. But with few significant oil discoveries in Western Indonesia in the past 10 years, production has fallen to roughly half that, as old fields have matured and dried up.

Oil and Gas reserves continue to decline. During 2013-2016, oil stocks dropped from 3,692.5 million stock tank barrels to 3,602.5 thousan stock tank barrels.

Commenting on the new regulation, Marjolijn Majong, Executive Director of Indonesia Petroleum Association (IPA) expressed his appreciation of the increasing rate of several variable splits under the new regulation. It will improve the economics of the field, particularly in early production phases. Also, there is no limitation on incentives for additional splits, as needed for certain well developments. He also approved the flexibility of contracts.

“We appreciate how the government has opened options about contract scheme renewal, as there will always be special cases that need to be discussed between government and contractors when they want to renew their contract,” he said.

On August 13, the government introduced Ministerial Decree No. 8/2017 on gross split sliding scale, replacing cost recovery schemes. Gross Split Sliding Scale PSC involves the sharing of progressive gross production based on annual production, without any cost recovery mechanism.

In 2016, the actual cost recovery reached US$11.4 billion, higher than the planned $8.4 billion. On the other hand, oil and gas companies will be trying to intensify efforts to simplify and make costs effective as much as possible. In the past, it took time for the Special Task Force for Upstream Oil and Gas to approve the plan of development, as regulators had to look at the cost plan and structure. The gross split scheme has thus been applied to solve this issue.

Writing by Yosi Winosa