1. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 Introduction to PSC Economics

2. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 OBJECTTIVE By the end of this two days course, it is expected that the students understand the flow calculation of economics of Indonesian Kontraktor Production Sharing

3. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 SYLLABI -Time Value of Money -Interest Rate -Present Value and Future Value -Pay Out Time -DCFROR (Discounted Cash Flow Rate of Return) -Cash Flow -Capital Expenditure -Depreciation -Operating Expenditure/Cost -Tax - PSC Economics

4. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 TIME VALUE OF MONEY -Interest Rate Difference between present and future values -Present Value and Future Value FV = PV (1 + i)nPV = FV [ 1 / (1+I)n ] -Pay Out Time Time, when the cumulative un-discounted net cash flow is zero -DCFROR (Discounted Cash Flow Rate of Return) Interest rate at the cumulative discounted net cash flow is zero

5. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 CASH FLOW -Capital Expenditure Definition Tangible and Intangible -Depreciation of Tangible Investment Definition - Cost Recovery Straight Line, Declining Balance, Double Declining Balance, Unit Production, Sum of Years Digit -Operating Expenditure/Cost Intangible In term of $/BBL, $/month or /year, $/well or field, etc OH cost -Tax 44%, 48%, 56%

6. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 CAPITAL EXPENDITURE -Capital : wealth used to produce more wealth -Investment : money to obtain more income - Tangible : can be touched - depreciation -Intangible : con not be touched - is treated as the same as operating cost DEPRECIATION of TANGIBLE INVESTMENT -Definition : decrease in value - for Tax purposes, Cost Recovery -Cost Recovery : recover cost from production that had been spent -Straight Line - divided evenly the tangible capital expenditure by specify years - Cap/n

7. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 DEPRECIATION of TANGIBLE INVESTMENT (continued) -Declining Balance - tangible capital expenditure decline in specify year - depreciation factor of previous year balance -Double Declining Balance - tangible capital expenditure doubling of decline in specify year - 2 depreciation factor of previous year balance -Unit of Production - according to the production of the year -Sun of the Years Digit - according to the year OPERATING COST -Recovered immediately in the year - for cost recovery

8. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 OPERATING COST (continued) -In term of Production (Oil, Water, or Gas), Well (number of well online), Time (per month or per year) -Over Head cost, is part of Operating Cost which taken from percentage of expenditure being made in the year. TAX -Tax is varies between one company to others, from 44% to 56% -Usually the Contract does not mentioned the Tax, but the split before the Tax. -Depreciation for Tax Purposes

9. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 PSC ECOONOMICS -Expenses are recovered by production and then being split with After Tax Split of 85-15 or other splits -Production = Expenses + Indonesian Government + BP- MIGAS + Contractor -Cost Recovery : recovering any expenses (Investment and Operating Cost) out of production -First Tranche Petroleum : the maximum allowable Cost Recovery -FTP - Cost Recovery - Split before Tax -Others : Investment Credit, Uplift, Operator, Over Head, Liability, Burden

10. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 PSC CONTRACT - BASIN -DMO Sub Section 5.2.15 : (Contractor) fulfill(s) its obligation towards the supply of the domestic market in Indonesia. Contractor... etc. DMO (bbl) = lowest ( Indonesia oil demand/supply, 25% Contractor Area ) Oil Production Crude Price = 15% of Market Crude Price 60 months from the first delivery of Free DMO -Oil Split Sub Section 6.1.3 : … (73.2143%) for PERTAMINA … (26.7857%) for CONTRACTOR... -Investment Credit Sub Section : 6.1.7 : … (15.7800%) of the capital investment cost directly required for developing Crude Oil production facilities

11. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 PSC CONTRACT - BASIN … new secondary recovery and enhanced oil recovery projects, but not applicable to interim production schemes Gas Split Sub Section 6.2.2 : PERTAMINA … (37.5000%) … CONTRACTOR... (62.5000%). -First Tranche Petroleum Sub Section 6.3 : … the Parties shall be entitled to first take … (20%) of the first Petroleum production... -Pertamina Participation Section XVI : … (10%) … acquires by PERTAMINA... -Depreciation Article III - 3.1 : … declining balance...

12. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 Production Sharing Contract (Kontraktor Production Sharing)

13. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 PSC CONTRACT - BASIN Some Important Equations Cost Recovery = minimum of ( 80% gross income, expense to be recovered and unrecovered expense from last year ) Equity to be split (of 80% gross income) = 80% gross income - cost recovery Taxable Income = Eq (20%) + Eq (80%) - DMO Contractor Cash Flow = - Tang - Intan - OpCost + Cost Rec + Eq (20%) + Eq (80%) - Tax - DMO with INVESMENT CREDIT Cost Recovery = minimum of ( 80% gross income less investment credit, expense to be recovered and unrecovered expense from last year )

14. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 PSC CONTRACT - BASIN Some Important Equations Equity to be split (of 80% gross income) = 80% gross income - investment credit - cost recovery Taxable Income = Eq (20%) + Eq (80%) - DMO + inv. cr. Contractor Cash Flow = - Tang - Intan - OpCost + Cost Rec + Eq (20%) + Eq (80%) - Tax - DMO + inv. cr.

15. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 JOB CONTRACT - ISLAND -Participating Interest Sub Section 1.2.19 : PERTAMINA 50 (fifty) % - Contractor 50 (fifty) % -Investment Sub Section 4.1.2 - explains that Contractor should provide fund -DMO Sub Section 5.1.3.c : … fulfill its obligation towards the supply of the domestic market in Indonesia. Contractor... DMO (bbl) = lowest ( Indonesia oil demand/supply, 25% Contractor Area ) Oil Production Sub Section 5.1.3.d : Crude Price = 10% of Market Crude Price 60 months from the first delivery of Free DMO

16. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 JOB CONTRACT - ISLAND -Oil Split - Marginal Field Sub Section 6.1.3 : … (61.5385%) for PERTAMINA … (38.4615%) for CONTRACTOR … Pre-Tertiary : 0 - 50,000 BOPD => 61.5385% / 38.4615%, next 50,001 - 150,000 BOPD => 71.1538% / 28.8462%, next above 150,001 BOPD => 80.7692% / 19.2308% -Investment Credit Sub Section : 6.1.7 : … 17% of its Participating Interest share of capital investment cost... … new secondary recovery projects and enhanced oil recovery projects, but not applicable to “interim production schemes” or further investments to enhance production and reservoir drainage within the primary production phase.

17. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 JOB CONTRACT - ISLAND -Uplift Sub Section : 6.1.8 : … plus an uplift of 50% on PERTAMINA’s Participating Interest share of the development fund... Gas Split Sub Section 6.2.3 : PERTAMINA … (42.3077%) … CONTRACTOR... (57.6923%). -First Tranche Petroleum Sub Section 6.3.1 : … the Parties shall be entitled to first take … (20%) of Contractor Participating Interest share of Petroleum production... -Depreciation Article III - 1 : … by the depreciation factor...

18. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 Joint Operation Body Contract (JOB)

19. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 JOB CONTRACT - ISLAND Some Important Equations Cost Recovery = minimum of ( 80% of 50% gross income, 50% of expense to be recovered and unrecovered expense from last year ) Equity to be split (of 80% gross income) = 80% of 50% gross income - cost recovery Taxable Income = Eq (20%) + Eq (80%) - DMO Contractor Cash Flow = - 50% of Tang - 50% of Intan - 50% of OpCost + Cost Rec + Eq (20%) + Eq (80%) - Tax - DMO + Pertamina carry/pay back

20. Introduction to PSC Economics- UPN “Veteran” Yogyakarta, March 2005 JOB CONTRACT - ISLAND Some Important Equations with INVESMENT CREDIT and UPLIFT Cost Recovery = minimum of ( 80% of 50% gross income less 50% of investment credit, expense to be recovered and unrecovered expense from last year ) Equity to be split (of 80% gross income) = 80% of 50% gross income - 50% of investment credit - cost recovery Taxable Income = Eq (20%) + Eq (80%) - DMO + inv. cr. Contractor Cash Flow = - 50% of Tang - 50% of Intan - 50% of OpCost + Cost Rec + Eq (20%) + Eq (80%) - Tax - DMO + inv. cr. + Pertamina Carry/Pay Back and Uplift