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Jakarta Post

Good news from oil industry

  • Editorial Board

    The Jakarta Post

Jakarta   /   Wed, January 30, 2019   /   08:47 am
Good news from oil industry Illustration of worker in oil and gas industry. (Shutterstock/File)

It’s encouraging to learn that two years after its introduction, the gross-split scheme for oil and gas mining contracts, which was initially met with lukewarm reception from companies, has been used in 37 oil concessions. The latest report by reputable energy research institute Wood Mackenzie cites slightly higher interest in the scheme, pointing out that most expiring oil contracts have been extended under the gross-split scheme and negotiations have been much smoother and faster.

Energy and Mineral Resources Deputy Minister Arcandra Tahar has said that oil companies were increasingly looking at the scheme in a more positive light than standard production-sharing contracts, because the former guaranteed fiscal certainty and used more clear-cut parameters for the terms and conditions of revenue sharing between the contractor and the government. The base split for oil is 57 to 43 percent for the state and the contractor, respectively, and for gas 52:48. These advantages make negotiations much simpler and more efficient.

The gross-split scheme, made compulsory for new contracts and contract extensions in 2017, removes the controversial cost-recovery mechanism used in traditional production-sharing contracts, which have often caused disputes between oil contractors and the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas), as well the Supreme Audit Agency (BPK), over the classification of recoverable costs. 

The gross-split scheme replaces the cost recovery mechanism with a gross-split model that applies a variable percentage production share on a field-by-field basis, with the split adjusted by reference to the characteristics of the specific field and the revenue generated from the field’s production.

Yet more encouraging is Arcandra’s pronouncement that the government was also considering more improvements in the scheme, including lower rates for land and building tax (now about 0.5 percent) on oil blocks already in production, to make investment in oil explorations more attractive.

This shows that the government is always responding to oil companies’ grievances and suggestions. Continuous improvement would make the hydrocarbon sector more attractive to investors. As a net oil importer that imports almost 60 percent of its daily need of 1.6 million barrels, Indonesia badly needs to attract more investment in highly risky oil exploration. Providing certainty, stability and a favorable regulatory environment will encourage future exploration and development investment. 

Moreover, as exploration and production activities are moving to more remote and challenging deep-water locations that are much more expensive to develop, additional incentives are needed. Despite the development of renewable energy, the oil and gas industry will continue to be of strategic national importance in providing energy security and government revenue. Oil imports have been the main driver of the trade and current account deficits, the main source of downward pressures on the rupiah.