The implementation of a gross split sliding scale in future oil and gas production sharing contracts (PSC) is expected to lead to greater efficiency and more uses of domestic services and products. The Energy and Mineral Resources Ministry plans to replace the current reimbursement scheme for oil and gas companies’ exploration and exploitation activities dubbed cost recovery -in 2017. It considers the cost recovery scheme inefficient, with experts claiming that several companies have marked up costs due to the unattractive split ratios.
According to the current scheme, in an oil project, a company’s portion is set at 15 percent and the rest is dedicated for the government, while in a gas project, the company has 'the right for a 30 percent portion with the remaining 70 percent belonging to the government. On the other hand, a gross-split scheme will incorporate a “no-cost recovery” mechanism, forcing companies to become more efficient amid continuously sluggish global oil prices. Energy and Mineral Resources Minister Ignasius Jonan said recently that without the cost recovery scheme, companies would have to calculate in details their own operational costs as the government would no longer reimburse their upstream activities.
This may lead to higher uses of domestic upstream services and products due to its cheaper prices and due to incentives offered by the government. “If companies use a certain percentage of local industrial content, for example 30 percent, the split [for contractors] may increase by 4 percent. This is a more concrete action [toward realizing the local content requirement],” Jonan said, adding that companies currently resorted to using local content because ofthe imposed regulation.
In addition to the base split that will be decided by the government, the gross split scheme will also consist of variable and progressive splits, which will affect the amount of returns received by both the government and companies. “A base split, for example, could be something like 70:30 and will be agreed upon in the beginning. After that, we will have a variable split, which involves factors such as location,” said Energy and Mineral Resources deputy minister Arcandra Tahar. Location-wise, an onshore field will not lead to higher split portions for companies. However, a deep-water field may result in companies’ portions increasing to around 4 percent, he said.
Other factors will play a role as well in the variable split, including the types of technology used, the amount of carbon dioxide, the amount of hydrogen sulnde and also the amount of local content used in the Held’s development. Meanwhile, unlike the base and variable split, the progressive split will “slide” depending on the production volume and global oil prices. “When oil prices fall, we will give a larger incentive to the contractors. However, if oil prices rise, the contractors have to give the split back to the government based on thescale we have implemented,” Arcandra, a long-time oil and gas player, said.
The new scheme will be first implemented in the production-sharing contract (PSC) of the Offshore Northwest Java (ONWJ) block. However, data from the ministry show there will still be around 50 existing PSC, which will remain under the cost recovery scheme for the next 25 years. Energy and mining research group Wood Mackenzie stated that a gross-split scheme can help reduce some of the bureaucratic delays and overhead costs that many investors associate with such a bureaucracy “More details are required to do a thorough comparison with the current PSC model, but we could infer that projects that required high levels of investment per barrel for example oil fields, EOR [enhanced oil recovery] projects, deep-water or projects in remote areas , would require very high levels of contractor shares to make the economics work,” Wood Mackenzie upstream oil and gas analyst John Utama.
Jakarta Post, Page-15, Wednesday, Dec,20,2016
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