Production Sharing Contract

In South East Asia

Indonesian Case

Acknowledgement: Bapak Ir. Sriyanta Hadi

March 2014
Contents
No Topic
1 Overview of E&P Industry in
Indonesia
2 History of Indonesian PSC
3 Indonesian PSC Terms
4 Exercise – Indonesian PSC
5 Other PSC in South East Asia
Objective
To know about the background of E&P
industry in Indonesia and relevant
matters e.g. regulation
To know and appreciate the
development of PSC
To understand Indonesian PSC terms
To be able to do PSC calculation
To apply the PSC terms into the PSC
calculation
To have some knowledge about some
other PSC in South East Asia countries
1. Overview of E&P Industry in Indonesia

Nusantara
1. Overview of E&P Industry in Indonesia
 1. Overview of E&P Industry in Indonesia

Country : Indonesia, officially the Republic of Indonesia.

Indonesia is an archipelago comprising approximately 17,508 islands. It is a sovereign state in
Southeast Asia and Oceania.

Capital: Jakarta
Population: 246.9 million (2012) World Bank
Government: Presidential system, Constitutional Republic
 1. Overview of E&P Industry in Indonesia

• Indonesian Government developed the Indonesian Production

Sharing Contract (PSC), which was introduced in 1966 and has
since been adopted by many other oil producing countries in
various modified forms

• Under PSC, contractors explore, develop and market resources

under the general supervision of SKKMIGAS (formerly BPMIGAS)

• Exploration costs borne by the contractors are recovered when

commercial production is established. The oil and gas produced is
then shared between SKKMIGAS and its partner
 1. Overview of E&P Industry in Indonesia

• The key to the contract is the ‘production sharing’ concept. The

investor does not share the profits of venture, but shares the
production.

• The PSC has evolved through a number of generations in line with

the Indonesian Government's belief the importance of assuring a
reasonable rate of return to investors considering dynamic business
environment.

“PSC can be compared to a business model of peasant farmers which are

commonly applied within the archipelago. The Government is the owner of
the “paddy field” mandating the management of the land to the “peasant
farmers”. In upstream oil and gas business, these “peasant farmers” are
both national and foreign oil and gas companies.”
 1. Overview of E&P Industry in Indonesia

Exploration and Production of Oil and Gas in Indonesia has

moved from western areas to eastern areas.
 2. The History of PSC in Indonesia
Concessionary (prior 1960)
Constitution No.44/1960
Working Contract Era (1960-1965)
• All foreign oil & gas companies  contractor
• Risk and management  the contractor
• Operating activities funded by the contractor
• Term of the contract is 20 years
• Shares was based on the net income 60%/40%
• DMO 25% of their shares with $0.2/bbl as a
fee
PSC 1st Generation 1965
• Shares was based on the gross production
(volume oil/gas)
• All the oil and gas reserves in Indonesia
belongs to the Government
• The petroleum activities is only done
by the Government Institution
• Mining Minister may appoint
contractor to conduct the activities
that could not be done by the
Government Institution.
 The basic constitution is the 1945
Constitution “all the resources under the
states belongs to the states and shall be
used to the greatest benefits of the
people
 2. The History of PSC in Indonesia
- First Generation (1967-1978)
• There was unclear taxation system in Indonesia. The tax paid by the IOC was not
considered by the USA as tax deductible (the first PSC was IIAPCO  Independence
Indonesian American Oil Company)

- Second Generation (1978-1990)

• The significant decrease in oil price (because of the economic recession in 1980’s)
drove the government to change the PSC terms

- Third Generation (1990-current)

 3. Indonesian PSC Terms
No Item Description Remarks
1 First Tranche Same concept as royalty but it is split based on 20% of
Petroleum the government shares and contractor shares gross
(FTP) production
2 Investment Cost recoverable but it is subjected to tax; 17-20% of
Credits (IC) applicable only to production facilities such as gross
platforms, pipelines and processing equipment production.
3 Cost Recovery The amount of expenditures such as costs of
explorations, developments, and operations could
be recouped by the contractor out of the Gross
Revenue.
4 Domestic Obligation to sell the oil for domestic needs. 25% of
Market contractor
Obligation share
3. Indonesian PSC Terms
3. Indonesian PSC Terms

IMPACT OF TAX CHANGES

 3. Indonesian PSC Terms
Gross Production
(-)
FTP (10%)

(-) Investment (+)

Credit
(+)
(-) (+)
Indonesia PSC
Cost Recovery
(1991)
Equity to be Split

Indonesia Share Contractor Share

(+) (-)
DMO
(-) (+)
DMO Fee

Taxable Income
(+) (-)
Tax

Indonesia Take Contractor Take

4. Exercise – Indonesian PSC
 4. Exercise – Indonesian PSC
Tax = 44%
,
Split 15% after Tax
Split before Tax = 0.15 / (1 – 0.44)
= 26.7857%
1) ? 2) ?
,
,

3) ?

4) ? 5) ?
6) ?

8) ?
7) ?

9) ? 10) ? 11) ?
12) Net?
 4. Exercise – Indonesian PSC
Tax = 44%
,
Split 15% after Tax
Split before Tax = 0.15 / (1 – 0.44)
= 26.7857%
1) ? 2) ?
,
,

3) ?

4) ? 5) ?
6) ?

8) ?
7) ?

9) ? 10) ? 11) ?
12) Net?
 4. Exercise – Indonesian PSC
Tax = 44%
Split 15% after Tax
Split before Tax = 0.15 / (1 – 0.44)
= 26.7857%
,
,
,

, ,

6,268.74 3,731.26
Net : 732.26
 4. Exercise – Indonesian PSC
Tax = 44%
,
Split 15% after Tax
Split before Tax = 0.15 / (1 – 0.44)
= 26.7857%
, ,
,

1,700.00 8,300.00
Net : 300.00
 5. Other PSC in South East Asia
Gross Production
(+)
(-)

Royalty

Special Thailand
(-)
(+)
Remuneration Concession
Benefit
(1991)
Tax Deductable
(+)

Taxable Income

(-)

Income Tax
50%
(+)

Government Take Contractor Take

 5. Other PSC in South East Asia

Gross Production
(-)

Royalty (8%)
Brunei PSC
(+)
(-) (+)
(2001)
Cost Recovery

Profit to be Split

Brunei Share Contractor Share

(+) Windfall Profit (-)

Sharing

Taxable Income
(+) (-)
Income Tax

Brunei Take Contractor Take

 5. Other PSC in South East Asia

Gross Production
(-)

Royalty (8%) Vietnam PSC

(+) (1997)
(-) (+)
Cost Recovery

Profit to be Split

Vietnam Share Contractor Share

Taxable Income

Income Tax
(+) 50% (-)

Vietnam Take Contractor Take

The End