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Economy

Indonesia adopts 'gross split' scheme for oil, gas contracts

Government aims to boost revenue, sustain investment

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Indonesian construction workers prepare pipe at state oil company Pertamina's exploration site in Bekasi, West Java Province.   © Reuters

JAKARTA -- The Indonesian government introduced a new scheme for sharing oil and gas revenue with contractors in an attempt to boost dwindling state revenue from the sector while drawing much-needed investment.

A new regulation, signed by the energy minister earlier this week, replaces the old "cost recovery" scheme for production output sharing between the government and contractors with a "gross split" system.

Under cost recovery, the government reimburses contractors for all exploration and production costs, but receives as much as 85% of output, which can roughly be translated into revenue for the state.

The new gross split rules, however, make contractors bear all the costs in turn for a higher share of the output. The base split for oil blocks is 57% to 43% for the government and contractors, respectively, and 52% to 48% for natural gas fields.

The new scheme also gives contractors an additional share of output under certain conditions. An offshore operation, for example, entitles a contractor to an additional 8-16% share, depending on the depth of the field. Contractors also can enjoy incentives during times of low oil prices, the same way that high prices will subject them to disincentives.

Indonesia's largest oil and gas firm, state-owned Pertamina, is the first company trying the new scheme. It renewed its contract for an offshore oil block in the Java Sea on Wednesday with a gross split of 42.5% to 57.5% for the government versus the company; and 37.5% to 62.5% for gas.

The government said gross split is mandatory for all new oil and gas contracts. The government commonly tenders new oil and gas blocks once or twice a year. For this year, the first tender will be held in May. Holders of old contracts can extend them under the old cost recovery scheme or adopt the new one.

The move came after a decline in oil prices over the past two years, which hit state revenue hard and halted new investment in exploration. Oil and gas accounted for nearly a quarter of state revenues in 2006 but fell to an estimated 3.4% last year, according to PricewaterhouseCoopers. In 2015, the government paid more in cost recovery than what it received in oil and gas revenue.

Meanwhile, attempts to offer new oil and gas contracts through tenders over the past couple of years have barely attracted bidders, resulting in no major exploration activities and leaving Indonesia with shrinking old fields, continually declining production and a potential energy crisis in the future.

"The problem with cost recovery is, there have been endless debates between [oil and gas regulator] SKK Migas and contractors as to how much exactly the production costs should be," Deputy Energy Minister Arcandra Tahar said Friday. "It's not easy to calculate technology costs, especially in cases where only one company has a particular technology."

Tahar added that "contractors have not been encouraged to improve efficiency" when costs are covered by the government. He said the new scheme could shorten the time between discovery of a new oil and gas field and the start of production, which in Indonesia has increased from an average of five years in the 1970s to more than 15 years in the 2000s.

This, coupled with the many incentives and improved clarity on revenue expectations offered under the new scheme, is expected to make investment in Indonesia's oil and gas sector more attractive.

Indonesian Petroleum Association Director Marjolijn Wajong said the organization "fully supports" the government's move to encourage efficiency through the new gross split scheme.

She added, though, that reviews of the new regulation will be needed to make sure it will indeed make investment more attractive in Indonesia.

"For example, there should be an intensive study of deep-sea operations ... because that's where we'll be headed in the future," Wajong said.

Nikkei staff writer Wataru Suzuki in Jakarta contributed to this report.

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