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OPINION — Will new gross split terms attract more investors?

By Yusak Setiawan, an Independent Consultant (previously worked at Sabbatical, Murphy Oil and Hess Corporation)

JAKARTA – There have been lots of discussion and debates to compare and contrast between Gross Split vs. the Current PSC, which one will give more benefit to the people of Indonesia or to the investor. The writer notes the subject has been surfacing and submerging for at least eight years. This article is not written to continue comparing between these two schemes, but to propose that neither schemes are the main root cause that drives the investor to come and invest in Indonesia.

Fairness, is the key word in conducting any business deal. Yet, fairness is relative. As a country that still heavily relies on foreign investors to explore its oil and gas resources, Indonesia needs to be smart enough in defining its fiscal term so investors are attracted to invest in exploring oil and gas in the country, yet the Indonesia people receive the most benefit from the industry.

An effort to attract more investors is recently shown when the Government of Indonesia (GOI) launched the first 2016 Conventional Licensing Round for hydrocarbon exploration, on July 18. The bidders are invited to bid on signature bonus and profit share splits in this 2016 license round, in contrast,those two factors were set to a certain value by the GOI in the past. Will it be successful? We shall see the result when the final award is announced.

Recently, the Energy Minister is preparing a new scheme of cooperation called the Gross Split PSC for the new contract to replace the current “conventional” PSC which has been in force since 1964. The decision to amend the PSC scheme is reported, by one media, in line with the government’s drive to boost investment in the sector and to make permitting more efficient and less complex.

Moreover, the Minister claims the Gross Split scheme will end the ongoing debate on the amount of cost recovery approved by the government every year, and the new scheme is expected to encourage more investors to conduct exploration activities in the country.

Having more than 20 years in oil and gas exploration experience, especially in the last six years in Indonesia, in my opinion, each and every effort shown by the government is good and well appreciated, but definitely doesn’t solve the root cause of the problem. The Government needs to concentrate on completely resolving the root cause of the problem which to be honest has been talked and discussed excessively in numerous forums and meetings among the oil and gas stake holders, yet not resolved completely.

The first and infamous example given here is the Land and Building Tax (LBT) implemented as a result of Government Regulation number 79/ 2010 (GR 79). This LBT issue represents a problem of lack of communication between government agencies. The Ministry of Energy and Mineral Resources was not informed when the Ministry of Finance proposed GR79.

Historically, LBT has been imposed on the upstream oil &gas sector for many years, but the tax cost was borne by the government (assume & discharge clauses). After GR 79 the Oil and Gas Contractor is required to pay indirect taxes including LBT. The amount of tax charged is astonishing, 2,622,743,926,198 rupiah (~ US $ 200 Million if 1$ = Rp 13,000) for 24 exploration blocks for tax years 2012 and 2013.

One thing that is really ridiculous is the LBT tax amount is often much higher that the work commitment dollar. This doesn’t make sense at all. How can we expect the investor paying more on tax than spending more money on the exploration work commitment?

After a long tiring process among various governments bodies such as SKKMIGAS, MIGAS, DGT, BAPPENAS, etc with industries for almost four years, finally the GOI via Finance Minister, issue PMK 267 /2014 to reduce 100% of the LBT effective in 2015. Unfortunately this regulation only resolves part of the problem, as the contractor still needs to pay for the surface tax, which actually has a higher rate compared to the subsurface tax rate and also the rule doesn’t apply retroactively which means the contractor still needs to settle the previous year obligation with the tax department.

In conclusion, in my opinion, the LBT issue has not been resolved completely and is still a nightmare for investors.

The second example is named the”never end” block relinquishment process. The long process of block relinquishment represents a problem of bureaucracy and can also be added as another problem of lack of communication amongst the government agencies.

When a block holder finally gives up in exploring its exploration block due to whatever reason, they go thru a process called Total Relinquishment. If they only conduct geological and geophysical studies and/or seismic survey, the relinquishment process can be a bit “faster” i.e. three to nine months. However, if they conducted drilling operation, the process can really take a long time since there are lots of material left out as a result of the activities.

The block holder, is trapped in the process. While the relinquishment process is ongoing, the block holder is still responsible for the leftover material, which in theory by PSC regulation, belong to the GOI. The responsibility includes to pay the rental cost until the process ends. The value of the leftover material from the drilling operation is quite significant. Example from a block in Papua, which started its relinquishment process in November 2014 and is still ongoing;the cost reaching to US$ five million. This is another subject of discussion how to manage this material in such an efficient way to support the exploration activities in the country.

Back to the second example subject, in my opinion, the Total Relinquishment process has been a nightmare for the investors. SKK Migas, representing the GOI, has endlessly tried to overcome the issue by conducting discussions with all stake holders in the government which relate to the subject, but it seems far from any success yet. One thing that puzzles the investor, logically, if the relinquishment process can be simplified and shorten, the GOI can benefit more by being able to offer the block sooner.

The third example is access to data. The access to data issue represents a problem with alack of law enforcement.

Data is a very important factor for conducting successful exploration. The current policy, indicating that data should be open after 4, 6, and 8 years after acquired, depends on the data type. Obviously, it does not work at all. In one hand, industry has been screaming for the open data policy, on the other hand, Oil and Gas Companies keep the data tight for decades.

Why is it? Lack of law enforcement causes company hesitates to return the data. Government really needs to enforce the policy effectively, period. By enforcing the policy, the government actually opens the door to new ideas of exploring for new resources since companies can have access to more data. Let’s look at the current bid round, some of the offered block such as Ebuny, Kaimana can be categorized as frontier area where lack of data is very common. Access to data in the surrounding area will definitely help in exploring the area, if they are available.

Last example is the dumping permit for drilling waste. This example represents a problem of overlapping rule and regulation from different government authorities that confuses the investor in deciding which rules need to be complied.

Conflicting rules and regulation on drilling waste have confused the industry when a new rule in the subject is introduced by the Ministry of Environment. To make it worse, it took almost 11 months to get the dumping permit when the writer managed an exploration block in Papua in 2013.

Those examples above, in my opinion, as the oil and gas practitioner, have been key issues which discourage investors to come in and explore oil and gas resources in Indonesia. In conclusion, in my opinion, instead of proposing a new Gross Split Scheme, I humbly suggest the government to work on solving the root cause of the problem as described above.  (*)

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