Upstream Petroleum

Business Process
 PETROLEUM BUSINESS ACTIVITIES
UPSTREAM
- EXPLORATION (Geology, Geophysics, Exploration well)
- EXPLOITATION (Development, Production)

DOWNSTREAM
- REFINERY
- TRANSPORTATION
- DISTRIBUTION
- MARKETING

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 Example: Exploration Result
1. KKKS: Talisman, WK: Sageri - Sulsel, Total Cost: 89
MM$, Status: Dry
2. KKKS: Marathon, WK: Pasang Kayu – Sulsel, total
cost: 103 MM$, Status: Dry
3. KKKS: - , WK: Laut Arafura, total cost: 103 MM$,
Status: Dry
4. KKKS: Exxon, WK: Surumana _ Sulawesi, total cost:
123 MM$, status: Dry
5. KKKS: Tately, WK: Budong-budong Sulawesi barat,
total cost: 50 MM$, status: technical problem and
uneconomic
UPSTREAM PETROLEUM ACTIVITIES
 COST CLASSIFICATION
 Acquisition of properties
 Exploration
 Development
 Production
 Support Facilities & Equipment

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 ACQUISITION COSTS

Acquisition costs are costs incurred in acquiring an economic

interest in the mineral rights whether through leasing or
purchase.
Costs incurred to purchase, lease or otherwise acquire a
property, including costs of lease bonuses and options to
purchase or lease properties, the portion of costs applicable
to minerals when land including mineral rights is purchased in
fee, brokers' fees, recording fees, legal costs, and other costs
incurred in acquiring properties.

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 EXPLORATION COSTS

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 DEVELOPMENT COSTS

Costs incurred in preparing proved reserves

for production, i.e., costs incurred to obtain
access to proved reserves and to provide
facilities for extracting, treating, gathering,
and storing oil and gas.

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 DEVELOPMENT COSTS CATEGORIES

Development drilling costs

Production facilities
 Lease flow lines
 Separators
 Treaters
 Heaters
 Storage tanks
 Gas cycling processing plants
 Optimize facilities

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 PRODUCTION COSTS
Costs incurred to operate and maintain wells and
related equipment and facilities, including
depreciation and applicable operating costs of
support equipment and facilities and other costs
of operating and maintaining those wells and
related equipment and facilities. They become
part of the cost of oil and gas produced.
Production costs = lease operating costs = lifting
costs.

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 EXAMPLE OF PRODUCTION COSTS
 Costs of labor to operate the wells and related
equipment and facilities.
 Repairs and maintenance.
 Materials, supplies, and fuel consumed and
services utilized in operating the wells and related
equipment and facilities.
 Property taxes and insurance applicable to proved
properties and wells and related equipment and
facilities.
 Severance taxes.

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 PRIMARY ASPECTS OF WINNING BLOCK
CONTRACT

 Technical (as of work commitment)

 Bonuses
 Seismic Acquisition
 Drilling Commitment
 Financial
 Performance

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UPSTREAM PETROLEUM INVESTMENT
• Long time splan before a return on
investment is received
• High level of risk and uncertainty
(regulation, complex tax rules,
• High capital investment
• High profit

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RISKS OF INTERNATIONAL OPERATION
• Political instability
• Foreign currency

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INDONESIA CRUDE OIL PRODUCTION
Peak I 1977 Peak II 1991

UU 22/2001

Economic
crisis 1998
ASPECTS OF PETROLEUM CONTRACTS

• Technical
• Commercial
• Legal
• Accounting

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 TECHNICAL
 Boundary of block
 Seismic
 G&G
 Reservoir
 POD
 Exploitation stage technical matter

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 COMMERCIAL
 Fiscal System
• Royalties/FTP
• Cost Recovery
• Profit Oil and Gas Splits
• Taxes
• Government Participation
 Taxation
 Cost Recovery
 Domestic Market Obligation
 Incentives
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 LEGAL
 National Constitution (UUD 1945 Art. 33)
 Tax Law
 Other Laws and Government Regulations
(e.g.: UU 22/2001)
 Petroleum Legislation
(e.g.: PP 34/1994 – PSC; PP 79/2010 – Cost recovery;
PTK 40/2010 – ASR; etc)
 Terms of Contract

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 ACCOUNTING

 Accounting Principles
 Full cost method
 Successful effort
 Depreciation
 Unrecovered costs at the end of the contract
 Abandonment and site restoration
 Interest Recovery
 Books and audits

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 FULL COST
Mid 50s, full cost method – all costs incurred in
exploring for, acquiring, and developing reserves
are capitalized. Amortized and charged to expense
as reserves are produced
- Some type a ceiling
- Various types of cost centers
- Single cost center
- Individual country as a cost center

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 SUCCESSFUL EFFORTS ACCOUNTING
Costs incurred in searching for, acquiring, and
developing oil and gas reserves should be
capitalized if they do result reserves. If the
costs are applicable to activities that do not
result in finding acquiring, or developing
specific resources, they should be charged to
expense

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 ECONOMIC RENT
The difference between the value of
production and the costs to extract it.
The costs consist of exploration,
development, and operating costs as well as
an appropriate share of profit for the
petroleum industry.
Rent is surplus. Economic Rent = excess profit

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Pada industry hulu migas, economic rent didefinisikan
sebagai surplus atas biaya yang dikeluarkan untuk
melakukan kegiatan eksplorasi dan produksi minyak
ditambah dengan keuntungan kontraktor/investor
 GOVERNMENT ECONOMIC RENT

 Levies
 Taxes
 Royalties
 Bonuses

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 GOVERNMENT APROACH IN SEEKING RENT

 Simple Bonus with no subsequent royalties

or taxes
 Profit base taxation

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 CONTRACTOR TAKE
Contractor take is the percentage of profits to
which the contractor is entitled  focuses on
the division of profits and correlates directly
with:
 Reserve
 Field sizes
 Other economic measures

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 NEGOTIATIONS FISCAL SYSTEMS

 Government Objectives
 Oil Company Objectives

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 GOVERNMENT OBJECTIVES
To maximize wealth from its natural resources by
encouraging appropriate levels of exploration and
development activities 
 Provide fair return to the state and to the industry
 Avoid undue speculation
 Limit undue administrative burden
 Provide flexibility
 Create healthy competition and market efficiency

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 OIL COMPANY OBJECTIVES
To build equity and maximize wealth by
finding and producing oil and gas reserves at
the lowest possible cost and highest possible
profit margin  search for huge fields 
tight fiscal system

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Petroleum Fiscal Term
 CLASSIFICATION OF PETROLEUM FISCAL
SYSTEM

Source: Petroleum E&P contractual arrangement (Johnston, 1994:25)

 CONCESSIONARY SYSTEM
• Allow private ownership of mineral resources (Mineral,
mining and economic right)
• The company is then subject to payment of royalties
and taxes.
• In most countries the government owns all mineral
resources, but under concessionary systems it will
transfer title of the minerals to a company if they are
produced.
• The United States, of course, is the extreme example of
such a system where individuals may own mineral
rights.
 CONTRACTUAL SYSTEM
• Under contractual systems the government
retains ownership of minerals. Oil companies
have the right to receive a share of production
or revenues from the sale of oil and gas in
accordance with a production sharing contract
(PSC) or a service contract
 PSC Characteristic
• Perusahaan migas ditunjuk oleh pemerintah sebagai
kontraktor untuk mengelola WK tertentu
• Kontraktor menanggung semua resiko dan biaya E&P,
• Apabila eksplorasi secara teknis dan ekonomi berhasil
menemukan cadangan migas, maka kontraktor diberi
kesempatan untuk memperoleh pengembalian biaya /
cost recovery (CR) dari hasil produksi.
• Kontraktor akan mendapat bagian dari hasil produksi
setelah dikurangi CR, dalam bentuk natura (migas)
• Kontraktor juga diwajibkan membayar pajak
penghasilan dan pajak lainnya (PBDR)
• Semua peralatan menjadi milik negara
 SERVICE CONTRACTS AND PRODUCTION
SHARING CONTRACTS
The difference between them depends on
whether or not the contractor receives
compensation in cash or in kind (crude). This
is a rather modest distinction and, as a result,
systems on both branches are commonly
referred to as PSCs, or sometimes production
sharing agreements (PSAs).

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 PURE SERVICE CONTRACTS VS.
RISK SERVICE CONTRACTS
The difference between risk service and pure service
contracts depends on whether the fee is based on
profits or not. Pure service contracts are quite rare.
In pure (non-risk) service contracts the contractor
carries out exploration and/or development work on
behalf of the host country for a fee. All risk is borne
by the state. This arrangement is characteristic of
the Middle East where the state often has
substantial capital but seeks outside expertise
and/or technology.

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 FISCAL TERM MECHANISM
Concession PSC
Konsesi
Transfer kepemilikan hasil Ketika sumur diproduksi dan
produksi terjadi di wellhead
Reserves booking Setelah pembayaran royalty,
perusahaan dapat langsung
melakukan pembukuan
cadangan
Lubiantara, Benny (2012): “Ekonomi Migas, Tinjauan Aspek Komersial Kontrak Migas”. Jakarta: Grasindo
Contract Service
Servis PSC
Tidak ada Transfer terjadi di titik ekspor
Tidak ada hak Perusahaan membukukan
cadangan untuk bagian cost
recovery dan bagian
keuntungan kontraktor
 The History of Oil & Gas Resource
Management in Indonesia
Colonial concession era: 1899-1945

• Indonesia one of the birth place of modern oil & gas industry
– International supermajor Royal Dutch began in Indonesia, 1890

• During colonialism Indonesia’s oil & gas resource manage under

Indische Mijnwet of 1899

• Concession-based legislation
– Companies buy from the state all right to a natural resource in a
particular area
– Concession holder then has free and total control over this natural
resource (mining, mineral and economic right)
• Can produce however much they wants, whenever they wants
• Can sell it to whomever they wants at whatever price they wants
 The History of Oil & Gas Resource
Management in Indonesia
Independent concession era: 1945-1960

• 1945 independence effectively left concession regime in place

• Article 33 of the 1945 constitution
• 1951-1960 no new concession were allowed
• 1957-1958 Took over Royal Dutch field in Sumatera and
nationalized
 The History of Oil & Gas Resource
Management in Indonesia
Contract of Work era: 1960-1966
• Oil & Gas Mining law No. 44/1960 first real attempt at change
– All oil & gas found within the territory of Indonesia is national
property and controlled by the state
– Oil & gas mining shall only be carried out by the state and be
implemented only by the state enterprises
– The Minister of Mines may appoint other parties as contractors of the
state enterprise if necessary
• Development of Contract of Work agreement
• Economic rights on contractor
• Foreign oil companies refused
 The History of Oil & Gas Resource
Management in Indonesia
Production Sharing Contract era: 1967-1998

• 1957 Permina contract for Pangkalan Brandan oil field at North Sumatera
become model for future
– American/Canadian partners put up the capital, executed the works and received a
share of production in return
• 1966 first production sharing contract (PSC) agreed between Indonesia
and Independent Indonesian American Petroleum Company (IIAPC)
• Objectives of PSC
– Increase Indonesian control over oil & gas production
– Enable state enterprise to learn how to manage oil & gas operation efficiency,
technology transfer
• Law No.8/1971
– Pertamina was responsible for licensing and contracting with foreign operator,
marketing the crude oil and gas produced in PSC term, and supplying the
domestic market with refined product
 Oil and Gas Management
Law No. 44/1960 and No. 8/1971

Pertamina’s monopoly over upstream to downstream of oil and gas industry

 The History of Oil & Gas Resource
Management in Indonesia
Production Sharing Contract era: 2001 – present

• Oil & gas law No.22/2001

– Remove the special legal status from Pertamina – make it an ordinary state enterprise
– Remove the governmental and regulatory function from Pertamina and turn these over
to specialized independent bodies
– Redirect the government’s share of oil revenue away from Pertamina and directly to the
Central Bank
– Make both contracting and revenue accounting transparent and make data available to
the public
– Introduce legal and financial unbundling of Pertamina’s upstream and downstream
operation
– Permit new entry into downstream operations

• Pertamina changing role of NOC in the international market

• International investment and expansion into foreign upstream activities

• Monopoly on refinery and retail product distribution ended by 2004

Oil and Gas Management
Law No. 22/2001
PSC GENERATION
 Gross Revenue
(production x price)

First Tranche Petroleum Recoverable Cost

(20% GR)
Inv. Credit Cost Rec.
(20% cap) (NC+UR+OC+D)

Equity to be Split
(GR-FTP-RC)

Government Share Contractor Share

(1-SH/(1-t)) x ETS (SH/(1-t)) x ETS

DMO
(25%*CS*prod)*(1-DMO fee)*price

Cont. Tax Taxable income

TI*tax (IC+CS-DMO)

Government Take Contractor Take (TI-CT)

(Rev-CT)

Contractor Entitlement
(CTake+RC)
 Generasi PSC
1st PSC Generation 2nd PSC Generation 3rd PSC Generation
(1965-1975) (1976-1988) (Since 1988)
FTP None None 20%
Cost recovery 40% 100% (no ceiling) 80% (due to FTP)
ceiling
Investment credit - 20% 17% to 20%
DMO DMO was defined 25% of equity oil, 25% of equity oil,
as 25% of equity oil full price for the full price for the
at 0.2$/bbl first 60 months and first 60 months and
0.2$/bbl there after 10% of export price
there after

ETS After tax split:

Government:Contr 65% : 35% (tax incl.) 85% : 15% (oil) 85% : 15%
actor - 70% : 30% (gas) or 70% : 30% or
Oil and Gas Before tax split: 65% : 35%
65% : 35% (oil)
32% : 68% (gas)
tax 56%
 1st Incentive Package 2nd Incentive Package 3rd Incentive Package 4th Incentive After UU. 22/2001
(Aug 1988) (Feb 1989) (Aug 1992) Package (Dec
1993)

Investment 17% Deepwater over 600 100% - 120% Capex No longer - ASR (PTK 40/2010)
Credit ft: 110% Capex (oil) depend on water applied - POD Basis
55% Capex (Gas) depth - Tax changes
- Partisipasi
Commerciality Minimum Abolished Abolished Abolished Perusahaan daerah
guarantee is 25% of - WK komersial
the GR for Gov’t terbatas
- Insentif baru untuk
DMO Price 10% of export price No change 15% of export price 25% of export
lapangan marginal
price

FTP 20% No change No change 15% 10% tidak dibagi

ETS – Oil Frontier Area: Marginal Field & Frontier Area: 65% : 35% Perubahan pajak
<50000 bph=80:20 EOR: 80% : 20%
50K-150K = 85:15 Frontier Area:
> 150K bph =90:10 75% : 25% Water depth > 1500
Conventional Area: Conv. Area: mtr = 75% : 25%
85% : 15% 80% : 20%

- Gas 70% : 30% No change Conv. Area = 60% : 40%

65% : 35%
Frontier Area =
60% : 40%
Water Depth > 1500
mtr = 55% : 45%
TERIMA KASIH