The government has remained headstrong in endorsing its latest production-sharing contract (PSC) scheme for upstream oil and gas projects despite numerous complaints that it was economically unfeasible.
Through the introduction of the gross-split sliding scale, the government hopes that the scheme will eventually phase out the current plan, dubbed cost recovery which compels the government to reimburse contractors’ exploration and exploitation activities in oil and gas fields.
Unlike cost recovery, the new scheme relies on several variables to decide the profit split between the government and contractors. The Energy and Mineral Resources Ministry has repeatedly argued that the new scheme will be fairer and more transparent as oil and gas companies can calculate the potential profit split before pursuing a gross-split contract.
Even so, investors remain doubtful that anyone would bite since most calculations show that the new scheme is economically unfeasible. Some have even argued that the scheme would backfire if the government was ever faced with an oil and gas field that was only economically feasible if contractors received 99 percent of the profit split.
Energy and Mineral Resources Deputy Minister Arcandra Tahar fired back that it was impossible for such a profit split to ever result for the gross-split scheme based on the calculations the government made of 10 existing oil and gas fields.
“How would [contractors] ever get a 90 percent split? The regulation is clear. We have already simulated split calibrations based on the PSCs of 10 existing conventional fields, which represent the characteristics of fields across Indonesia,” he said on Monday on the sidelines of a workshop on the implementation of the new scheme.
The 10 fields that were used as a basis for the gross-split scheme were BP’s Tangguh, ExxonMobil Cepu Limited’s (EMCL) Banyu Urip, PT Pertamina EP Cepu’s (PEPC) Jambaran-Tiung Biru, Eni’s Jangkrik, Chevron’s IDD Bangka, Joint Operating Body (JOB) Pertamina-Medco E&P Tomori’s Senoro, PT Medco Energy Internasional’s Block A, Petronas’ Kepodang, and PT Pertamina EP’s (PEP) Donggi and Matindok.
Moreover, Arcandra said that many investors complaining about the scheme had forgotten about other factors that made the gross-split scheme more appealing, including the potential for a shorter duration between the pre-front-end engineering design (pre-FEED) and first production.
Official data from the ministry show that using the gross-split scheme would cut the process down to two to three years compared to the current scheme because contractors would no longer have to go through the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) for budgeting and procurement purposes.
For example, the data shows that while it took 152 months between pre-FEED and production for EMCL’s Banyu Urip field under the cost recovery scheme, the government estimated that it would have only taken the contractors 120 months.
“The minister can also add an additional 5 percent to the split [if contractors feel it is economically unfeasible], which can add up to US$500 million in some cases. If that still isn’t enough then I don’t know what kind of field you’re looking at,” Arcandra said.
The government needs to demonstrate that the new gross-split scheme has the potential to be beneficial for all parties if it hopes to increase the dwindling investments in the upstream oil and gas sector. SKKMigas data shows that investment only reached US$12.01 billion last year, dropping from $15.9 billion in 2015.
This year the government has set a year-end investment of $13.8 billion, with $1.9 billion already achieved at the end of this year’s first quarter. Investors still seem to find the new PSC scheme hard to swallow. Ronald Gunawan, chief operating officer of oil and gas firm PT Medco Energy Internasional, claims that initial calculations by the firm show that the gross-split scheme would only benefit those with small investment profiles.
“Furthermore, the gross-split is much less attractive than the current PSC because of the time value of money,” he said while acknowledging that the firm had not taken into account the potential shorter duration before production.
Meanwhile, Sammy Hamzah of Ephindo ‘Energy Pte Ltd. said that there seemed to be no wiggle room in the sector under the current administration as the government seemed less willing to compromise despite an urgent need to boost investment in the upstream sector.
“The authorities now say that if you don’t do it this way don’t do it, look somewhere else. That’s the government's attitude.
Jakarta Post Page-13, Tuesday, May, 9, 2017
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