Changes to PSC will see state lose control of resources: SKK Migas

Upstream authority SKK Migas has warned that plans to change the production-sharing contract (PSC) scheme into a revenue-sharing scheme, as suggested by the government?s recently established reform team for the oil and gas sector, could mean the country will lose control over its own resources, The Jakarta Post reported on Friday.

?Under the PSC system, there is state control, while under a royalty system, the ownership of natural resources will be transferred, to contractors. There are pluses and minuses; it depends on what the country wants," SKK Migas Deputy Chief Johannes Widjonarko said on Thursday.

He added that in international practices, when the geological risks and uncertainties of sub-surface works were high, a PSC was most suitable. Meanwhile, when the risks are low, the royalty and tax system could be better.

The Energy and Mineral Resources Ministry?s reform team for the oil and gas sector recently said that it was considering proposing changes to the country?s PSC scheme along with its cost-recovery mechanism as part of attempts to improve business practices in the sector. The team was established last month and is expected to review, among other things, the upstream and downstream oil and gas business in order to root out corrupt practices.

The team argued that oil and gas contractors would operate more efficiently if the government did not reimburse their costs (cost recovery). The elimination of cost recovery is also expected to reduce the time consuming approval process which includes work planning and budgeting that has contributed to delays in projects. The team plans to propose the royalty and tax system to replace the PSC and cost recovery scheme.

Currently, Indonesia implements the PSC system, in which the state owns all natural resources while oil and gas companies are appointed as contractors to work on the fields. As the owner, the government has full control over the oil and gas fields. Therefore, oil and gas contractors are required to obtain approval for all of their work, including planning and budgeting.

The system is considered to be beneficial to the country, which is thus exempt from the risk of expensive exploration activities. Contractors finance all activities and are only allowed to propose reimbursement to the government when their projects produce commercially viable oil and gas. The reimbursement is taken from the gross revenue of oil and gas production.

After the deduction of the recovery costs from the gross revenue, the net production is split between the government and the contractors. The division of oil is 85 percent for the government and 15 percent for the contractor. Meanwhile, for gas projects, the split is 60 percent and 40 percent in favor of the government.

The PSC system, which has been in place since the 1960s and has been copied by a number of countries, is said to be in line with the country?s Constitution stating that all natural resources are owned by the state.(*)