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BPMIGAS

Marginal Field Incentive

by
Benny Lubiantara

Evaluation & Dev. Plan Division, BPMIGAS


The Executive Agency for Upstream Oil & Gas Activities

BPMIGAS

DEFINITION
A marginal field is an oil field located within a producing
block that, under the current PSC terms and conditions, is
not economics to be developed.

Old Definition in PSC Contract:


Marginal Field is the first field of the Contract Area proposed by

Contractor for development and approved, capable of Crude Oil


production not exceeding 10,000 Barrels daily average projected for
the initial two (2) production years (24 production months).
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BPMIGAS

Conditions for Marginal Field

Located within a producing block.


Its main product is oil.
The exploration costs for that field has been fully recovered,
i.e. no more sunk costs considered.
If calculate based on the current PSC terms and conditions
and other incentive packages that may be applied for that
field in accordance with laws and regulations, the Internal
Rate of Return (IRR) is estimated less than 15%.
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BPMIGAS

Marginal Field Candidates

Working Area / Block

Undeveloped Field

Field "A"
(producing)

Field "B"
(producing)

BPMIGAS

Type of Incentive

20% Operating Cost*) recovery up-lift.

Other incentive packages that may be applied for that


field in accordance with the prevailing PSC, laws and
regulations.

*) Under Definition of the PSC, the Operating Cost consist of:


1. Current Years Non Capital Costs
2. Current Years Depreciation for Capital Costs

Marginal Field Incentive


BPMIGAS

The Mechanism

Incentive is not permanently given and will be evaluated on


yearly basis.
The new incentive package is issued in order to improve the
economics of the field, after receiving the incentive, the IRR of
the field is expected at least 15%. (The Incentive is ON)
The Incentive will be removed if the actual cumulative IRR has
reached 30% (The Incentive is OFF).
The Incentive will be re-apllied if the actual cumulative IRR in
the followong year has dropped below 15%.
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The Concept of IRR Cumulative


10,000
Net Cash Flow

5,000

US$ (000)

BPMIGAS

2005

2006

2007

2008

2009

2010

2011

2012

2013

(5,000)

(10,000)

IRR = 18.5%

(15,000)

Year
7

20%

IRR Cumulative
BPMIGAS

10%
0%
2005

2006

2007

2008

2009

2010

2011

2012

2013

-10%
-20%

IRR = 18.5%

-30%
-40%
10,000

Net Cash Flow

5,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

(5,000)

(10,000)
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(15,000)

BPMIGAS

Incentive OFF
50%
IRR Cumulative if Incentive not OFF
IRR Cumulative

40%
30%
20%
10%
0%
2005

2006

2007

2008

2009

2010

2011

2012

2013

-10%
-20%
-30%
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Most Likely Case

BPMIGAS

"On - Off" Mechanism

IRR Cumulative

Expected IRR Cumulative Trend if the Incentive is NOT Removed

Incentive "Off"

Incentive "On"

30%

15%

Year
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Extreme - Case

BPMIGAS

"On - Off" Mechanism

IRR Cumulative

Expected IRR Cumulative Trend if Incentive is NOT Removed

Incentive "On"

Incentive "Off"

30%

15%
Incentive "On"

Incentive "Off"

Year
11

Illutration

BPMIGAS

Marginal Field
( Realization)

Field "A"
(producing)

Marginal Field
( Initial Condition )

Field "B"
(producing)

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Always On - Case

BPMIGAS

IRR Cumulative

"On - Off" Mechanism

Incentive always "On"

30%

15%

Year
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BPMIGAS

Procedure

Registration & Submission


1.

PSC could register the candidates for marginal field by submitting the
summary of POD. BPMIGAS will response by sending the written answer no
longer than 10 working days.

2.

No longer than 6 months following the registration, PSC should submit


complete POD (in order to speed-up the process, the draft of AFE proposal
need also to be attached).

3.

Registration period is 12 months (25 April 2005 24 April 2006)

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BPMIGAS

Procedure

Evaluation, Approval & Implementation


1. When submitting the POD, the assumption for oil price is
US$ 25 per barrel.
2. BPMIGAS will approve or not approve the POD proposal by
sending the written answer to the PSC no longer than 30
days after receiving the POD proposal.
3. PSC should commence the activities no longer than one year
after POD approved.
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BPMIGAS

Procedure

Evaluation, Approval & Implementation

4. The commencement of the activies is


declared if:
Tender Plan is appoved; or
Tender Announced; or
Execution of the Field Development

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BPMIGAS

Procedure

Implementing and Reporting


1. PSC should make the special book account for marginal field.
2. The marginal field insentive is taxable.

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BPMIGAS

Thank You