Indonesia – The New Gross Split PSC; Problem Solved?

25 April, 2018

 

The Special Taskforce for Upstream Oil and Gas Business Activities (SKK MIGAS) has issued the latest draft of the gross split production sharing contract (PSC) for the Indonesian 2018 oil and gas bid round.

 

We have prepared a summary of the differences between the gross split PSC and the conventional cost recovery PSC. Not surprisingly, the two documents are very similar – SKK MIGAS has essentially taken the conventional cost recovery PSC and replaced the cost recovery provisions with the various base split adjustments/sliding scale adjustments to be incorporated into the gross split regime.

 

However, there are a few key points to note in respect of the gross split PSC:

 

• The new PSC reflects the increased incentives granted to gross split PSCs by Minister of Energy and Mineral Resources Regulation No. 08 of 2017 on Gross Split Production Sharing Contract (as amended by Regulation No. 52 of 2017 of the Ministry of Energy and Mineral Resources) (Regulation 8 of 2017).
• There is a continuing domestic market obligation (DMO) for oil, as well as for gas. As a welcome relief, however, in line with Regulation 8 of 2017, the price set for DMO oil is the Indonesia Crude Oil (ICP) price.
• The new form of PSC contains additional requirements in relation to sourcing/import of goods and equipment. It says nothing about the PTK 0071 guidelines not applying. Accordingly, it is not yet clear whether the new form of PSC will, in fact, significantly reduce bureaucratic oversight by SKK MIGAS. But some provisions of Regulation 8 of 2017, ie, articles 18(2) (which refers to "independent" procurement by contractor) and 23(1) (under which SKK MIGAS' key function is to supervise contractors' work programme and budgeting process) may – perhaps – offer a little comfort in this regard.
• Counter-intuitively, given the absence of a cost recovery regime, title in goods and equipment that are not otherwise leased to the PSC contractor continue to belong to the Government. The rationale for this is unclear (although it would seem to be premised on the argument that the Government is still paying for these through tax deductions).
• The tax provisions are complex to read. However, income tax is still set at the rate prevailing when the PSC is signed. In addition, among other deductible costs (in respect of which no value added tax (VAT) will be levied either), shared facility costs and indirect overhead charges are deductible.
• The PSC makes very clear that the contractor bears the risk of local Government taxes/levies. This is probably a fairly accurate reflection of what the position is under the current cost recovery PSC.
• In line with Minister of Energy and Mineral Resources Regulation No. 48 of 2017 on Supervision of the Implementation of Business Activities in the Field of Energy and Mineral Resources, changes in control happening at the level of the PSC party require Government approval. However, perhaps as an unanticipated consequence, control is defined widely, to also capture indirect changes in control. There is no longer what used to be interpreted as a package exemption, where a change in control is part of a larger set of transactions.
• The PSC seems to anticipate that there may be adjustments to the Firm Commitment, after the contract is awarded. As we can see no real reason why the Firm Commitment would ever be adjusted upwards, query whether this change is designed to accommodate a downward revision to the Firm Commitment (as part of an upward adjustment by an affiliated company under another PSC?).
• The amount of the performance bond to be submitted when applying for the PSC is still set at USD1,500,000. This is in line with Minister of Energy and Mineral Resources Regulation No. 35 of 2008 on the Procedures for Offering Oil and Gas Work Areas, under which the amount of the bond should be the higher of USD1,500,000 or 10% of the Firm Commitment.

 

Notwithstanding that the forms of agreement are substantially similar, the gross split PSCs offer a radical, conceptual break from the cost recovery PSC previously championed by Indonesia. It remains to be seen whether the Government has done enough to make the production splits in the gross split PSC sufficiently attractive – and definite – to oil and gas companies. Given the discretionary/variable elements that apply to these splits, any optimism that the new PSC format will be well received may be misplaced. 

 

Please click here for the full annex with details on the COST RECOVERY PSC and GROSS SPLIT PSC .

 

 

1 SKK MIGAS Guideline No. PTK-007/SKKMA0000/2017/S0 

 

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