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ollowing the signing of a new production sharing contract (PSC) for the Mahakam block on Tuesday, the government instructed state-owned oil and gas firm Pertamina to maintain the production rate at the block.

'€œThe company [Pertamina] has to avoid sharp production decline and maintain production at a stable rate, cannot layoff employees and divest shares to the current operator, as has been suggested by the government,'€ said IGN Wiratmaja Puja, the Energy and Mineral Resources Ministry'€™s oil and gas director
general.

Under the newly signed contract, the Mahakam block will be operated under Pertamina'€™s newly established arm, Pertamina Hulu Mahakam, starting on Jan. 1, 2018.

The current Mahakam PSC, held by Total E&P Indonesie and Inpex Corp., both of whom possess a 50 percent stake, is set to expire at the end of 2017. The government has decided to terminate the PSC and has appointed Pertamina the new operator starting in January 2018. The government has given a green light for Pertamina to release up to a 30 percent stake to existing contractors for the sake of production
continuity.

Mahakam, the biggest gas block in the country, currently produces around 1.68 billion cubic feet per day (bcfd) of gas and 69,000 barrels of oil per day (bopd). The block has been in operation since 1967 and is seen as a mature block with a declining rate. Therefore, massive works investment is needed to ensure the block produces at a stable rate.

The current contractors spend around US$2 billion per year for the block, or nearly half of Pertamina'€™s $5 billion spending per year, underlining the significance of the partnership.

Pertamina is currently working to forge a deal with Total and Inpex for cooperation in the future.

In mid-December, Pertamina, Total and Inpex signed a head of agreement (HoA) related to the transition of operatorship of the block.

Pertamina president director Dwi Soetjipto said discussion with Total and Inpex would continue after the PSC signing to determine whether terms under the contract, particularly regarding the contractors'€™ production split, remained attractive for the two companies.

Under the new contract, Pertamina'€™s Mahakam PSC will use a revenue-over-cost mechanism, in which the government'€™s and contractors'€™ share of production will be dynamic at a range of 80:20 to 90:10 for oil and 65:35 to 75:25 for gas. The mechanism is seen as a way to ease operations amid pressures brought on by world oil prices.

'€œThey [Total and Inpex] were involved during discussion of the splits. They still see that the dynamic portion is difficult for them,'€ Dwi said after the PSC signing.

Under the current PSC, the government'€™s share of Mahakam production is 85 percent for oil and 70 percent for gas. Total and Inpex has 15 percent split for oil production and 30 for gas.

Total declined to comment on the issue.

Apart from new Mahakam PSC signing, the Upstream Oil and Gas Regulatory Special Task Force also signed a new PSC for the Offshore Northwest Java (ONWJ) block. The PSC is an extension of a current PSC, which is also set to expire in 2017. ONWJ will be operated by PT Pertamina Hulu Energi along with existing contractors, namely EMP ONWJ Ltd. and Kufpec Indonesia (ONWJ) BV . However, Pertamina'€™s interest will be higher compared to the previous PSC at 73.5 percent, leaving EMP and Kufpec with 24 percent and 2.5 percent stakes, respectively.