New scheme touted as speeding up output

The government expects the newly introduced gross-split sliding scale on upstream oil and gas projects to reduce the waiting period between discovery and first production, allowing both the government and operators to enjoy faster revenues. The new scheme is regulated by Energy and Mineral Resources Ministry Decree No. 8 of 2017 on the gross-split sliding scale. Unlike with the previously applied cost recovery scheme, the government will no longer reimburse companies for exploration and exploitation activities, hence the Upstream Oil and Gas Regulatory Special Task Force (SKK Migas) no longer needs to review investors’ annual budgets for upstream activities.

The ministry expects this to be a boon for contractors, as they will face less red tape and have more control over their activities and finances. “When we put the new regulation in force, we have high hopes that it can shorten the time frame by two to three years,” Deputy Energy and Mineral Resources Minister Arcandra Tahar said.

According to data from the ministry an average 15 years pass from the discovery of new oil and gas reserves to first production. This compares to an average five years during the heyday of Indonesia’s upstream business in the 1970s. Much of the lag between discovery and production is due to back-and-forth negotiations between contractors and SKK Migas.

Under that mechanism, contractors could spend between six months and a year just to prepare documents and negotiate with SKK Migas during the engineering, procurement, construction and installation (EPCI) phase, while the front end engineering design (FEED) could take an additional two years. If production started earlier, Arcandra said, then both the government and contractors could start raking in profits. “The sooner you start production the better value for money" he said.

Despite the governments enthusiasm about what it expects to be a shorter time to production, investors seem less concerned about the time span and more worried about whether the gross-split scheme will make complex projects more enticing, as the country’s current reserves face rapid depletion. “As a means for continuous improvement, we ask the government to conduct a comprehensive review in relation to the gross-split scheme for the development of deepwater, frontier, enhanced oil recovery and exploration projects, as that is where we are headed. How will these projects remain economically feasible while we have to shoulder the costs prior to production?” Indonesian Petroleum Association (IPA) executive director Marjolijn Wajong said.

Under the new scheme, the profit split between the government and contractors will “slide” up and down depending on several factors, including the status of the field, the location, depth and type of the reservoir, the amount of carbon dioxide, the use of local industrial content and the stage of production.

These variables will affect the base split, which the new regulation sets at a minimum 43 percent for companies in oil projects and 48 percent in gas projects. Meanwhile, under the cost recovery scheme, investors were only entitled to 15 percent of the profit of an oil project and 30 percent ofa gas project, with the rest going to the government.

Jakarta Post, Page-13, Saturday, Jan, 21, 2017