Indonesia issues ruling on gross split scheme for new oil and gas contracts

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JAKARTA (RambuEnergy.com) – The Indonesian Energy and Mineral Resources Ministry on Wednesday (Jan. 18) issued Ministerial Decree (Permen ESDM No. 8/2017) on oil and gas contracts based on gross split scheme, replacing the existing cost recovery scheme. The ruling was effective since Jan. 16, 2017.

The Energy and Mineral Resources Minister Ignasius Jonan said with the gross split scheme, the government’s state budget will no longer be burdened with paying out recoverable costs to the oil and gas contractors. The operational costs to explore and exploit oil and gas are now a responsibility of the oil and gas contractors.

Under Energy and Mineral Resources Ministry Regulation No. 38/2015, there are three types of cooperation contracts, namely Production Sharing Contract (PSC), Sliding Scale Production Sharing Contract (Sliding Scale PSC), and Gross Split Sliding Scale Production Sharing Contract (Gross Split Sliding Scale PSC).

The base split is as follow:

• As for oil, 57% for the State and 43% for oil and gas contractors;
• For gas, 52% for the State and 48% for oil and gas contractors

Under the current profit sharing system, the government and contractors’ revenue share is split after subtracting recoverable costs.

A Sliding Scale PSC is a form of contract with progressive production sharing based on annual cumulative production with an operational cost recovery mechanism, while a Gross Split Sliding Scale PSC involves the sharing of progressive gross production based on annual production without a cost recovery mechanism.

In 2016, the actual cost recovery reached USD11.4 billion, higher than the planned US$8.4 billion. On the other hand, the oil and gas companies will be trying to intensify efforts in simplifying and making costs effective as much as possible. In the past, it takes time for the Special Task Force for Upstream Oil and Gas (SKK Migas) to approve the plan of developments as the regulator has to look at the costs plan and structure.

In addition, the public in recent years have been critical on the energy ministry as they accused that some of the costs should have not been recovered through the recovery cost scheme.

Jonan said the other benefit of the gross split is that the investment planning approval can be accelerated, not one to two years, as the government do not need to look at the cost structures.

Based on the gross split sliding scale, said Jonan, if the oil price increase, investors will be stimulated to increase their investment and vice versa.

The gross split scheme has been applied on the contract extension of the ONWJ block, operated by Pertamina Hulu Energy (PHE), which was signed on Jan. 18.

According to Deputy Minister for Energy and Mineral Resources Arcandra Tahar, the gross split scheme has been applied on 10 oil and gas contracts. (*)

Edited by Roffie Kurniawan (email: roffie.kurniawan@gmail.com)