Indonesia grants oil and gas companies flexibility over production sharing contracts

Aug - 14

Indonesia grants oil and gas companies flexibility over production sharing contracts

Indonesia grants oil and gas companies flexibility over production sharing contracts
An offshore oil and gas rig in the Mahakam Block in East Kalimantan. (Pertamina/Pertamina)

Oil and gas companies in Indonesia may now choose to either use a cost recovery or gross split-based production sharing contract (PSC) thanks to a recently issued regulation.

Energy and Mineral Resources (ESDM) Ministerial Regulation No. 12/2020, signed on July 15, revokes a rule that had made use of a gross split scheme mandatory for new or renewed PSCs over the past three years.

In a cost recovery-based PSC, the government reimburses companies for upstream-related costs in exchange for a higher share – up to 85 percent – for each company’s earnings from exploiting domestic oil and gas blocks.

Meanwhile, in the so-called gross split scheme, companies bear upstream costs themselves, but the government receives a smaller cut of the revenue – up to 57 percent – determined in advance.

“These changes are to intended to provide legal certainty and improve investment in the oil and gas industry,” the ministry statement released on Saturday reads.

The energy ministry made gross split schemes compulsory under regulation No. 8/2017 to cut reimbursement spending, which reached into the billions of US dollars. However, the decision received a lukewarm response from investors.

However, while gross split schemes are no longer mandatory, the ministry still reserves the right to make the final decision under Article 2 (1) of the law, the ministry’s said in a statement.

The ministry added that existing contracts would remain valid but companies using a cost recovery scheme may request a switch to a gross split scheme.

The energy minister will also get to pick the scheme for oil and gas blocks assigned directly to state-owned oil giant Pertamina.

Acting energy minister Arifin Tasrif first mentioned a plan to make contracts more flexible at a meeting with the House of Representatives in November last year, citing requests by companies to allow them to operate under different schemes that took into consideration the geographical conditions of each oil and gas field.

“If the field is riskier and more remote, they will choose a cost recovery scheme,” he said. “If it’s gross split, they’ll be happier to use it for existing fields because the potential is clear and thus, the risks are lower.”

The Indonesian Petroleum Association (IPA), whose members comprise oil and gas multinationals operating in the country, said the regulatory change gave companies more flexibility to maximize project economics.

“Every oil and gas project has different characteristics. Whether we use gross split or cost recovery [schemes] very much depends on each project’s characteristics,” said IPA executive director Marjolijn Wajong in a statement on Monday.

Meanwhile, the Oil and Gas Companies Association (Asper Migas), whose members are exclusively Indonesian businesses, said that investors were more deterred by Plan of Developments (POD) approval delays and hidden costs than by the limited choice of PSC schemes types.

“Cost recovery and gross split [schemes] are essentially the same thing,” said Asper Migas chairman John Karamoy, also on Monday. “Investors want it such that their margins do not change no matter how regulations change. That’s legal certainty from an investor’s perspective.”

Norman Harsono | The Jakarta Post