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Indonesian PSCM81GEDPetroleum Economics

Indonesian PSC TermsFTP: First Tranche PetroleumInvestment CreditsDomestic Market Obligation

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 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. Domestic Market Obligation: Obligation to sell the oil for domestic needs. (25% of Contractor share)Cost RecoveryThe amount of expenditures such as costs of explorations, developments, and operations could be recouped by the contractor out of the Gross Revenue.The History of PSC in IndonesiaConcessionary (prior 1960)Working Contract Era (1960-1965)PSC 1st Generation 1965

Constitution No.44/1960All the oil and gas reserves in Indonesia belongs to the GovernmentThe petroleum activities is only done by the Gov.InstitutionMining 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 peopleAll foreign oil & gas companies contractorRisk and management the contractorOperating activities funded by the contractorTerm of the contract is 20 yearsShares was based on the net income 60%/40%DMO 25% of their shares with $0.2/bbl as a feeShares was based on the gross production (volume oil/gas)Indonesian PSC Evolution-First Generation (1967-1978)-Second Generation (1978-1990)-Third Generation (1990-current)

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)The significant decrease in oil price (because of the economic recession in 1980s) drove the government to change the PSC termsIndonesian PSC EvolutionDescriptionPSC 1st Generation (1965-1976)PSC 2nd Generation (1976-1988)PSC 3rd Generation (1988-current)FTPNoneNone10% - 20%Cost Recovery Ceiling40%100% (no ceiling)80% (due to FTP)Investment CreditNone20%17% - 20%DMO DMO was defined as 25% of equity oil at $0.2/barel25% of equity oil, full price for the first 60 months and $0.20/barrel there after25% of equity oil, full price for the first 60 months and 10% of export price there afterEquity to be SplitGovernment / ContractorOil65%/35%85%/15%85%/15%Gas70%/30% or 65%/35%70%/30% or 65%/35%

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 ConceptGross ProductionFTPInvestment CreditCost RecoveryEquity Oil to be Split(-)(-)(-)(+)Gov. ShareContractor ShareDMODMO FeeIncome TaxTaxable IncomeGovernment TakeContractor Take(+)(-)(+)(-)(-)(+)(+)(+)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. Domestic Market Obligation: Obligation to sell the oil for domestic needs. (25% of Contractor share)

FTP prior to 201010%15% depends on the Contract20%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.

First Tranche Petroleum

Cost Recovery Mechanism

Ring Fencing Policy in Indonesia

Contract A vs Contract BCapital & Non Capital Cost

Will be calculated beginning the Calendar Year, asset is PIS with monthly depreciation for the Initial Calendar YearThe method used is Declining balance methodBased on individual assetFull depreciation at the end of the individual assets useful lifeDepreciation Expenses

2 Group of Assets (based on Taxation system in Indonesia)Group 1 50% : useful life 5 years such as automobile, truck, buses, aircraft, construction equipment, Furniture & Office equipmentGroup 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. Depreciation Factor

Indonesian PSC FrameworkSectionsDescriptionsIScope and DefinitionsIITerm: Term of Commerciality of Contract AreaIIIExclusion of Area: Relinquishment of AreaIVWork Program and Budget Expenditures VRights and Obligations of the PartiesVIRecovery of Operating Costs and Handling ProductionVIIValuation of Crude Oil and Natural GasVIIICompensation, Assistance, and Production BonusIXPaymentsXTitle of EquipmentXIConsultation and ArbitrationXIIEmployment and Training of Indonesian PersonnelXIIITerminationXIVBooks and Accounts and AuditsXVOther ProvisionsXVIParticipationXVIIEffectiveness

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.Work Program and Budget

14Every 3 months the Contractor should establish this FQR to show the progress of the operation.FQR: Financial Quarterly Report

Conducted by GovernmentTo 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.Audit on Recoverable Cost

The goal of Petroleum Fiscal System is to attract investments.Instability in the fiscal system in Indonesia affect the investment climatesTough 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.

Petroleum Fiscal System 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 PSCsBPMigas 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)

Upstream industries regulator in Indonesia VS Investment Climate in Indonesia

Indonesia Oil Production VS Investment

Thank you

P.S: I am a student as you are.. it means Im still learning like you are Fasting month is coming, I am sorry for the mistakes Ive done , and happy fasting month for you guys wholl celebrate Ramadhan!