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PHE earns bigger slice under ‘gross split’
A light has appeared at the end of the tunnel for Pertamina as the government has confirmed an increase in the portion for the state-owned energy giant in the Offshore Northwest Java (ONWJ) block under agross-split scheme
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light has appeared at the end of the tunnel for Pertamina as the government has confirmed an increase in the portion for the state-owned energy giant in the Offshore Northwest Java (ONWJ) block under agross-split scheme.
The ONWJ oil and gas block was taken over by Pertamina subsidiary PT Pertamina Hulu Energy (PHE) earlier this year and is the first block to be operated under the government’s new gross-split scheme.
The new scheme stipulates that the profit split between the government and contractors will differ depending on several variables, including global oil prices and the stage of production, which negates the former’s responsibility to reimburse exploration and exploitation activities.
It was evident early on that PHE struggled with the profit split, especially because it did not include exploration in the calculation of costs. However, the tides have turned as PHE president director R. Gunung Sardjono confirmed that the Energy and Mineral Resources Ministry had increased the contractor’s portion after months of negotiations.
“This will be applicable until the end of 2017 and will change for 2018 based on oil prices and cumulative production,” he said, explaining that the government had agreed to boost PHE’s portion to 73.5 percent and 81 percent for the oil and gas fields, respectively, from an initial 57.5 percent and 62.5 percent.
While the increase is also partially due to a slight increase in global oil prices, PHE’s split was also enlarged after Energy and Mineral Resources Minister Ignasius Jonan granted the additional 5 percent that he is permitted to give based on existing regulations.
The increase in the profit split seems to have boosted PHE’s confidence. Gunung confirmed that the firm was planning to increase its total 20-year investment to US$15.9 billion from the initial $8.5 billion signed in the contract. Under the 20-year contract, PHE estimates that the block will be able to produce 331 million barrels of oil and 1.2 trillion cubic feet (tcf) of gas.
Moreover, PHE plans to expand an undisclosed number of wells drilled throughout the contract period. As for this year, the firm plans to drill six development wells. “We will conduct work on 12 wells and increase our well services,” Gunung said.
In addition to the ONWJ block, the Energy and Mineral Resources Ministry had previously assigned Pertamina to take over the Ogan Komering, Sanga-sanga, Southeast Sumatra, Central Kalimantan, East Kalimantan, Attaka and North Sumatra blocks using the gross-split scheme once the existing product sharing contracts expire in 2018.
The gross-split scheme has been criticized since it was launched under Energy and Mineral Resources Ministerial Decree No.8/2017 this year.
Global energy consulting group Wood Mackenzie claims that the regime’s emphasis on cost cutting and efficiency will deter investment in exploration, particularly in high cost, frontier areas.
Moreover, the contractor payback period is expected to be much longer with lower returns, unless strict cost reductions are achieved.
After waves of criticism, the Energy and Mineral Resources Ministry confirmed on Tuesday that it was currently working to fine-tune the gross-split regulation. The ministry’s spokesperson, Dadan Kusdiana, said the government would not completely do away with the scheme, but tweak it in order to benefit all stakeholders.
“The ministry is currently studying it. We will not revise the whole gross-split scheme, but focus more on the figures. The recipe is already correct, now it’s time to deal with the dosage,” he told The Jakarta Post.
The government remains optimistic about the gross-split scheme and is in the process of putting 15 oil and gas blocks up for auction, made up of 10 conventional and five unconventional blocks.
The Energy and Mineral Resources Ministry’s oil and gas director general, Ego Syahrial, said the documents for nine conventional blocks had been reviewed by firms looking to participate in this year’s auction.
