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Jakarta Post

Cost recovery or gross split in oil, gas contracts?

The good intention to boost investment in the oil and gas industry should be appreciated by all stakeholders. However, I beg to differ.

Yusak Setiawan (The Jakarta Post)
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Jakarta
Fri, March 13, 2020

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Cost recovery or gross split in oil, gas contracts? The good intention to boost investment in the oil and gas industry should be appreciated by all stakeholders. However, I beg to differ. (Shutterstock/File)

T

he gross split system was introduced in January 2017 in place of the old cost recovery scheme for oil and gas. However, the energy and mineral resources minister decided in late 2019 to allow companies bidding for new blocks or contract extensions to choose between the two contract mechanisms.

The good intention to boost investment in the oil and gas industry should be appreciated by all stakeholders. However, I beg to differ.

In each game (system), the rules are set by the organizer, who has the authority to maintain, or change, them. The players who are interested are welcome to join the game, assuming they are comfortable with the rules. In this case, the game plan is set by the government and the players are the investors who are interested in risking their money for profit over time.

Seeking high returns is intrinsic to an investor just as it is the duty of the government as the game master to make the game as attractive as possible without compromising the welfare of its people.

Fairness is the keyword in conducting any business deal, yet fairness is relative. The government needs to set a game plan that is tempting enough so the investors will choose to come here instead of other countries, while also putting more weight on the state’s benefits.

Both fiscal regimes have their own positive and negative sides, which have been discussed in many articles, and it is not the purpose of this article to compare them. This article merely suggests that it is a bad idea to have two variant fiscal systems. The government should pick one system and fully implement it.

However, before any decision is made, the government needs to seriously revise and simplify the split calculation under the gross split fiscal system, as it is defined incorrectly and is overly complex and impractical. One of the reasons is the lack of subsurface input.

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