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Jakarta Post

Options for oil contractors

  • Editorial Board

    The Jakarta Post

Jakarta   /   Wed, December 11, 2019   /   08:07 am
Options for oil contractors Back to work: Pertamina Hulu Energi West Madura Offshore (PHE WMO) workers are moved in a personnel basket from a ship to the company’s oil rig off the coast of Madura Island in East Java. (JP/Wahyoe Boediwardhana)

Energy and Mineral Resources Minister Arifin Tasrif’s recent statement at the House of Representatives that oil companies would be allowed to choose either cost-recovery or the fixed gross-split scheme for their production sharing contract (PSC) will go a long way toward reinvigorating investment in exploration.

Most oil companies have criticized the gross-split scheme, which was introduced in 2017 to replace the cost-recovery scheme, as they claim the new arrangement places much greater risk on investors.

Many analysts also view the gross-split scheme as unattractive for new oil blocks because the costs and split are fixed up front. No wonder that most of the contracts signed over the past two years have been extensions of expiring concessions given that the proven reserves are by and large known.

Consequently, exploration spending fell sharply to about US$600 million in 2017 and less than $500 million in 2018, down from $3 billion in 2013, although this has also been the result of low oil prices. The cost-recovery scheme is most attractive for greenfield oil blocks because the contractors will be reimbursed by the government for all upstream operational spending after commercial production.

The government’s new policy of offering the two PSCs is quite a big step toward boosting exploration, the most strategic stage in the upstream oil industry. Only by increasing proven oil and gas reserves will Indonesia be able to make its production sustainable and sufficient to meet its steadily rising consumption, but the only way to increase its proven hydrocarbon reserves is to increase investment in exploration.

We already depend on imports for 60 percent of our oil needs of about 1.6 million barrels per day (bpd) as domestic production has declined from 1.2 million bpd in the early 2000s to about 800,000 bpd now.

Increasing proven reserves is the key to reducing Indonesian oil imports, which totaled $24 billion in value in 2017 and almost $30 billion in 2018. Reducing fuel imports by expanding the use of palm oil-based biodiesel will also help, but it will take five to seven years to make this renewable energy a significant component of the country’s energy mix.

Moreover, even though we are now the world’s largest palm oil producer, the supporting infrastructure and the capacity of the blending industry still needs to be expanded.

Of more importance is that the government continues to improve the bureaucratic process of the cost-recovery mechanism. Oil companies welcomed the government rule last year that introduced a joint audit for PSCs using the cost-recovery mechanism. This measure removed the gross inefficiency and prevented different auditing opinions that PSCs were previously subjected to in multiple audits by auditors from the Development Finance Comptroller, the Supreme Audit Agency, the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas), the Energy and Mineral Resources Ministry and the customs service.

We are confident that the new policy will bolster exploration, especially after the government decided in August to exempt oil exploration from property and building tax, value added tax and luxury sales tax, thereby removing some of the main barriers to investment in the hydrocarbon industry.