Indonesian PSC

M81GED
Petroleum Economics

Indonesian PSC Terms

FTP: First Tranche Petroleum
First Tranche Petroleum: FTP is basically having the same concept as
royalty but it is split based on the government shares and contractor
shares. (20% of Gross Prod)

Investment Credits
Investment Credit: cost recoverable but it is subject to tax (17%-20%
of gross production. IC applies only to production facilities such as
platforms, pipelines and processing equipment.

Cost Recovery
The amount of expenditures such as costs of explorations,
developments, and operations could be recouped by the contractor out
of the Gross Revenue.

Domestic Market Obligation

Domestic Market Obligation: Obligation to sell the oil for
domestic needs. (25% of Contractor share)

The History of PSC in Indonesia

Concessionary (prior 1960)

Constitution No.44/1960
Working Contract Era (19601965)
All foreign oil & gas companies contractor
Risk and management the contractor
Operating activities funded by the contractor
Term of the contract is 20 years
Shares was based on the net income
60%/40%
DMO 25% of their shares with $0.2/bbl as a
fee

PSC 1st Generation 1965

Shares was based on the gross production
(volume oil/gas)

All the oil and gas

reserves in Indonesia
belongs to the
Government
The petroleum
activities is only done
by the Gov.Institution
Mining Minister may
appoint contractor to
conduct the activities
that could not be
done by the
Government
Institution.
The basic constitution
is the 1945 Constitution
all the resources under
the states belongs to
the states and shall be
used to the greatest
benefits of the people

Indonesian PSC Evolution

-First Generation (1967-1978)
There was unclear taxation system in Indonesia.
The tax paid by the IOC was not considered by the
USA as tax deductible (the first PSC was IIAPCO
Independence Indonesian American Oil Company)

-Second Generation (19781990)

The significant decrease in oil price (because of the
economic recession in 1980s) drove the
government to change the PSC terms

-Third Generation (1990current)

Indonesian PSC Evolution

Description

PSC 1st Generation

(1965-1976)

PSC 2nd Generation (19761988)

PSC 3rd Generation

(1988-current)

FTP

None

None

10% - 20%

Cost Recovery
Ceiling

40%

100% (no ceiling)

80% (due to FTP)

Investment
Credit

None

20%

17% - 20%

DMO was defined as 25%

of equity oil at $0.2/barel

25% of equity oil, full price for

the first 60 months and
$0.20/barrel there after

25% of equity oil, full price

for the first 60 months and
10% of export price there
after

Equity to be
Split

Government /
Contractor

Oil

65%/35%

85%/15%

85%/15%

70%/30% or 65%/35%

70%/30% or 65%/35%

DMO

Gas

PSC 2nd to 3rd Generation : The significant decrease in oil price

(because of the economic recession in 1980s) drove the
government to change the PSC terms.
PSC shares: Shares was based on the gross
production (volume oil/gas)

Indonesian PSC Concept

First Tranche
Petroleum: FTP is
basically having the
same concept as
royalty but it is split
based on the
government shares
and contractor shares.
(10%-20% of Gross
Prod)

Investment
Credit: cost
recoverable
but it is
subject to tax
(17%-20% of
gross
production. IC
applies only
to production
facilities such
as platforms,
pipelines and
processing
equipment.

Gross Production
(-)

(-)

FTP

Investment
Credit
Cost Recovery

(-)

(+)
Equity Oil to be
Split

Gov. Share
(+)

Domestic Market
Obligation: Obligation
to sell the oil for
domestic needs. (25%
of Contractor share)

Government
Take

DMO

(-)

Contractor
Share

(+)

(-)

(+)

DMO
Fee

(+)

Income
Tax

(-)

Taxable
Income

Contractor
Take

(+)

First Tranche Petroleum

FTP prior to 2010
10%
15%
depends on the Contract
20%
The more remote area, the more difficult to be
developed, the smaller FTP will be applied.
FTP is split based on the % of the shares but
for some contracts they dont split the FTP.
The current PSC now only 20% FTP.

Cost Recovery Mechanism

Ring Fencing Policy in Indonesia

Contract A vs Contract B

Capital & Non Capital Cost

Depreciation Expenses
Will be calculated beginning the Calendar
Year, asset is PIS with monthly depreciation
for the Initial Calendar Year
The method used is Declining balance
method
Based on individual asset
Full depreciation at the end of the individual
assets useful life

Depreciation Factor
2 Group of Assets (based on Taxation system in
Indonesia)
a.

b.

Group 1 50% : useful life 5 years such as

automobile, truck, buses, aircraft, construction
equipment, Furniture & Office equipment
Group 2 25% : useful life 10 years such as
construction utilities and auxiliaries, platform and
storage plant, construction housing and welfare,
Production facilities, Vessels, Barges,tug and
similar water transportation equipment, drilling
and production tools, equipment and instruments.

Indonesian PSC Framework

Sections

Descriptions

Scope and Definitions

II

Term: Term of Commerciality of Contract Area

III

Exclusion of Area: Relinquishment of Area

IV

Work Program and Budget Expenditures

Rights and Obligations of the Parties

VI

Recovery of Operating Costs and Handling Production

VII

Valuation of Crude Oil and Natural Gas

VIII

Compensation, Assistance, and Production Bonus

IX

Payments

Title of Equipment

XI

Consultation and Arbitration

XII

Employment and Training of Indonesian Personnel

XIII

Termination

XIV

Books and Accounts and Audits

XV

Other Provisions

XVI

Participation

XVII

Effectiveness

Work Program and Budget

At least 3 months prior to the beginning of

each calendar year, or at such other times
as otherwise mutually agreed by the
Parties, Contractor shall prepare and submit
for approval BPMigas (now SKK Migas) a
Work Program and Budget of Operating Cost
for the Contract Area setting forth the
Petroleum Operations which Contractor
purposes to carry out during the ensuing
Calendar Year.

FQR: Financial Quarterly

Report
Every 3 months the Contractor should
establish this FQR to show the progress of the
operation.

Audit on Recoverable Cost

Conducted by Government
To ensure that the Recoverable Cost
recorded by the Contractor is recorded and
reported correctly.
Audit is conducted for Contractor that is
classified in the production phase.

Petroleum Fiscal System VS

Investment Climate in Indonesia

The goal of Petroleum Fiscal System is to attract

investments.
Instability in the fiscal system in Indonesia affect the
investment climates
Tough PSC terms in Indonesia leads the moral hazard of
the company (such as Cost Recovery)
This leads Indonesia create many new regulations come
from other regulators which are not consistent with PSC
signed raises the disillusions among the companies.

Upstream industries regulator in Indonesia

VS Investment Climate in Indonesia

Executive Agency for Upstream Oil and Gas Business Activities:

SKKMigas (before BPMigas) is responsible for monitoring

implementation and compliance with existing PSCs
BPMigas revised the Work Procedure Manual Supply Chain
Management in 2009 for PSCs (current issue: suspense
account)
Indonesian Taxation Government Institution gets involved in
upstream industries (such as changing in Land Tax
regulation)
Government of Indonesias Financial and Development
Supervisory Board (BPKP), Indonesian Government Audit
Institution (BPK) (related to Sunk Cost Audit)
Bank of Indonesia (export sales from this industry ,
must deposited in Bank of Indonesia)

Indonesia Oil Production VS

Investment

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