M81GED Petroleum Economics

FTP: First Tranche Petroleum Investment Credits Domestic 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 Recovery The amount of expenditures such as costs of explorations, developments, and operations could be recouped by the contractor out of the Gross Revenue.

Concessionary (prior 1960) Working Contract Era ( ) PSC 1 st Generation 1965 Constitution No.44/1960 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 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 Shares was based on the gross production (volume oil/gas)

- First Generation ( ) - Second Generation ( ) - 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 1980’s) drove the government to change the PSC terms

Description PSC 1st Generation ( ) PSC 2nd Generation ( ) PSC 3rd Generation (1988- current) FTPNone 10% - 20% Cost Recovery Ceiling 40%100% (no ceiling)80% (due to FTP) Investment CreditNone20%17% - 20% DMO 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 Oil65%/35%85%/15% Gas70%/30% or 65%/35% PSC 2 nd to 3 rd Generation : The significant decrease in oil price (because of the economic recession in 1980’s) drove the government to change the PSC terms. PSC shares: Shares was based on the gross production (volume oil/gas)

Gross Production FTP Investment Credit Cost Recovery Equity Oil to be Split (-) (+) Gov. ShareContractor Share DMO DMO Fee Income Tax Taxable Income Government Take Contractor 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 % 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 don’t split the FTP. The current PSC now only 20% FTP.

Contract A vs Contract B

 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 asset’s useful life

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

SectionsDescriptions IScope and Definitions IITerm: Term of Commerciality of Contract Area IIIExclusion of Area: Relinquishment of Area IVWork Program and Budget Expenditures VRights and Obligations of the Parties VIRecovery of Operating Costs and Handling Production VIIValuation of Crude Oil and Natural Gas VIIICompensation, Assistance, and Production Bonus IXPayments XTitle of Equipment XIConsultation and Arbitration XIIEmployment and Training of Indonesian Personnel XIIITermination XIVBooks and Accounts and Audits XVOther Provisions XVIParticipation XVIIEffectiveness

 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.

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

 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.

 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.

 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 Indonesia’s 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)

Thank you P.S: I am a student as you are.. it means I’m still learning like you are Fasting month is coming, I am sorry for the mistakes I’ve done, and happy fasting month for you guys who’ll celebrate Ramadhan!