The Role of SKK Migas
Under the cost recovery PSC, one of the main roles of SKK Migas was to manage the cost recovery system through the review and approval of plans for development, authorisations for expenditure, work programmes and budgets and the procurement process. Under the Gross Split PSC, Contractors will still be required to submit a work programme and budget, but it is only the work programme that needs to be approved by SKK Migas. The budget will only serve as a supporting document in SKK Migas’ review of the work programme. SKK Migas still has control and oversight over the execution of the PSC but the control is limited to formulating policies on the work programme and budget.
SKK Migas’ role in the procurement of services and goods also appears to be changing under the Gross Split PSC, although regulations are unclear. On the one hand, the Gross Split PSC seems to allow Contractors to independently procure goods and services. This suggests that SKK Migas’ procurement guideline PTK 007, which required SKK Migas to approve procurement tenders over a certain amount and permit only certain contractors to bid for work, would no longer apply. However, comments made by Prahoro Nurtjahyo, an advisor on investment and infrastructure development at the Ministry of Energy and Mineral Resources suggested that Contractors will still need to meet obligations to use domestic goods and services. In fact, one of the factors affecting the production split in a Gross Split PSC is the level of local content used and could lead to a 4% increase in the Contractor’s share.
Although the intention of the Gross Split PSC is to allow Contractors to operate more cost effectively, it seems that SKK Migas will still have a significant role in reviewing and approving work programmes . Despite the relaxation over budget reviews, they are intrinsically linked to the work programme and by having a say in the work programme, SKK Migas still effectively have a say on the budget.
It is very unclear as to how procurement will be managed under the Gross Split PSC and what SKK Migas’ exact role will be. It seems that the sanction could be applied in the event of non-compliance to Local Content Requirements, with the loss of 4% of the production split. It may be the case that such a loss is offset by the savings made by the Contractor in procuring services from international providers.
Domestic Market Obligation
Under the Gross Split PSC, the Contactor will no longer have to sell a portion of production to the Indonesian market at a discounted price. Instead, the DMO is set at 25% of gross production, with the Contractor supplying an amount equal to 25% multiplied by its entitlement percentage. The price received by the Contractor for its share of DMO will be the ICP.
This change benefits the Contractors by increasing their revenue from DMO. Conversely, the domestic market must pay more for their oil, perhaps signalling a lowering of subsidies in Indonesia and more integration with the world crude market.
Under the Gross Split PSC, the State will continue to own all property purchased by the Contractor (i.e. land, goods and equipment). This is consistent with the cost recovery system.
Under the cost recovery PSC this was justified as the Contractor could recover the cost of procuring such assets. However, with the removal of the cost recovery system, it is difficult to see the justification in allowing the State to assume ownership of assets it has contributed nothing towards. With the incentive of asset ownership removed, it is likely that Contractors will continue to lease equipment, something which will not reduce operating costs in most cases.
Whilst the Indonesian Government feels it has provided a means by which to increase the reward to Contractors, it is felt by some industry participants that this may not be the case.
A study by Wood Mackenzie based on the January 2017 Gross Split PSC terms compared difference operation scenarios (e.g. oil field size, onshore/shelf/deep water and oil/gas) under the cost recovery and Gross Split PSCs. The study showed that the Contractor’s Net Present Value at a 10% discount rate (NPV10) was lower in each development scenario under the Gross Split PSC unless reductions of 10-20% in operating costs were applied. Given that E&P companies have already made significant reductions in operating costs in the lower oil price environment, it is questionable whether further reductions of 10-20% are achievable. Finally, the study found that the negative impact on the Contractor’s NPV10 was much greater for gas projects than for oil projects.
However, the September 2017 revisions made by SKK Migas have certainly made the Gross Split PSC more attractive. The economic analysis presented in Figure 3 shows that, under the revised terms, the Gross Split PSC gives a higher internal rate of return (“IRR”) and NPV across a number of scenarios.