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Article in Petrominer, August 2009

Article in Petrominer, August 2009

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Published by Benny Lubiantara

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Published by: Benny Lubiantara on Aug 25, 2010
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No. 08/August 20, 2009
n foreign countries, such matter isno new practice, in the case of of-fering a block that uses a competi-tive bidding method, any parameter maybecome part of the tender, including roy-alty, cost recovery limit, profit or split,ROR and others.It needs to be understood that costrecovery limit is cost limitation that maybe borne in one period (1 year), whichmeans, the cost that has not been re-covered may be carried over into thefollowing year. Eventually all costs willbe recovered. Cost recovery limit ismost important in the initial develop-ment of an oil field, as it ensures profitoil to be shared between the state andthe investor.Ideally, from the beginning, a modelof oil and gas contract should have an-ticipated a change of parameter, such asreserves reflected by production rate, oilprice and cost. In other words, the modelis expected to be quite flexible againstchanges of various parameters during theon-going contract. The changing of pa-rameter in this respect is related to thelevel of profit. A rigid and inflexible sys-tem may give rise to imbalance in theproportion of profit sharing. Just to re-mind, the parameter commonly used togauge the government portion id theGovernment Take (GT), defined as theoverall income of the government, be itroyalty, tax and profit oil share dividedby the total profit.
How to Design Oil & Gas Contractthat Benefits the State
Looking for a compatible andLooking for a compatible andLooking for a compatible andLooking for a compatible andLooking for a compatible andprofitable model?profitable model?profitable model?profitable model?profitable model?The effort to search for a compat-ible method of contract to be appliedshould be stimulated and studied. How-ever, it should be remembered that ev-ery project has a unique risk, so that themodel proposed should reflect theproject’s risk.Is there the best model of contract?Periodically, OPEC holds a workshop toexchange information among fellowmember countries on the experience of implementing the model of contract intheir respective countries.On the basis of two workshops heldearlier, the agreement reached was thatone size fits all model does not exist. Why?Because, the risk faced in each projectdiffers in the respective countries. Evenin one country risks vary. The contractmodel chosen preferably reflects the riskof said project.Discussions in the mailing list of oiland gas communities, blogs and others(where senior experts, PSC practitionersand bureaucrats are involved in this dis-cussion), there are debates, proposals andcritics on the possibility of proposing thenew oil and gas contract model that ben-efits the state. According to my observa-tion, so far there are two groups of thoughts.1.The group that considers modifica-tion or improvement of terms &conditions of the prevailing PSC isbetter (modification may be in theform of cost recovery, sliding scaleprofit-oil split, profitability based etc.)2.The group that is allergic to cost re-covery and proposes for oil and gascontract to be directly shared basedon gross revenue.The mass media at home reportedthat Indonesia is to learn from models of other countries, such as Algeria and Libya(refers to the statement of VP Jusuf Kallaafter meeting with OPEC President Dr.Chekib Khelil). Just for information, Dr.Khelil has a long experience in oil and gascontract model. He happened to be VPfor Industry and Energy in the WorldBank. One of his papers (1995) entitled:‘Fiscal System for Oil – The GovernmentTake and Competition for ExplorationInvestment’.Of course one needs to learn fromother countries, although in fact the twoabove-mentioned countries whose ‘flyinghours’ as far as PSC is concerned are rela-tively ‘junior’ compared with Indonesia.But it does not mean that the senior is al-ways better than the junior, moreover if the senior is lacking in improvisation.If we look a little in depth into thecontract model in Algeria and Libya,comparing directly their PSC terms &conditions, it could be misleading. Why?First, especially Libya, in general is pro-spectively higher than Indonesia, thus it isnormal if the terms & conditions are
Benny Lubiantara *)
In the past one year, discussions in seeking a new model of oil and gas contracts wasquite good, either in a forum, seminar or mailing list related to oil and gas industry. Ina meeting with OPEC President Chekib Khelil, Vice-President Jusuf Kalla mentionedthat the Indonesian government is to change the system of oil and gas contract nowapplied, and will not calculate the component of cost recovery put forward by theoil company. Conversely, the government will open a tender for cost recovery.

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