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Oil and gas PSCs: Cost recovery vs gross split
With such incomparable determinants, it is not entirely appropriate to say that the gross split PSC is better than the cost recovery PSC in attracting upstream investment.
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Workers tighten a drilling machine at an oil and gas block in Indonesia. (Kompas.com/File)
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n the last three years, Indonesia has been struggling to lure fresh investment to its capital-hungry upstream petroleum sector. Oil and gas block auctions are a key entry point for new investment. Interestingly, the government employed different approaches to its oil and gas block auctions in 2015, 2016 and 2017.
Let’s go back to 2015, the year when the global crude price continued its declining trend of 2014. In its 2015 auction, the government offered eight conventional oil and gas blocks to investors.
The so-called cost recovery production sharing contract (PSC) would apply to whole blocks, with predetermined and non-negotiable oil and gas splits and signature bonuses.
A signature bonus is the amount (US$1 million, for example) that a company pays to the government when it signs a PSC.
In the context of cost recovery PSCs, an oil and gas split is a percentage of the oil and gas to be divided between the government and the company after cost deduction.
In gas production, for example, the government will receive 65 percent and the contractor the other 35 percent.
How does the cost recovery PSC work? Put simply, the investors shall provide all capital required for finding hydrocarbon in advance. If they do not discover commercial oil and gas deposits, every financial resource spent will be their loss (the government does not assume any financial risk).
