Exploration incentives halted under gross split scheme

Courtesy of ESDM

The government has maintained its position regarding the absence of incentives for oil and gas exploration activities under the brand-spanking gross split sliding scale scheme despite criticism that the new arrangement is unappealing, The Jakarta Post reported on Monday.

The scheme, introduced earlier this year, is intended to phase out the existing reimbursement scheme, locally dubbed cost recovery. However, both the old and new scheme do not include many incentives for exploration, which may in part be to blame for the lack of new discoveries in the past several years.

Even so, the Energy and Mineral Resources Ministry is adamant about not adding any more incentives for oil and gas companies seeking to conduct exploration activities as the government has deemed it unnecessary.

?There will not be any [incentives for exploration]. Realistically, every oil company wants to conduct exploration activities and all the factors have been calculated and included in the gross split scheme,? Energy and Mineral Resources Deputy Minister Arcandra Tahar said as quoted by The Post.

?It?s the same with the [cost recovery] production-sharing contract [PSC]. Failed explorations will lead to sunk costs.?

Indonesia desperately needs to boost investor interest in exploration fields and activities as its production rates have consistently decreased due to ageing wells and a lack of new discoveries. However, a combination of the low global crude oil prices and a lack of incentives in Indonesia?s oil and gas sector have contributed to declining investment in exploration activities.

More than half of all 283 oil and gas fields in the country are categorized as exploration fields. Even so, data from the upstream oil and gas authority SKKMigas shows that only US$800 million out of the total investment of $11.15 billion in the upstream oil and gas sector was funneled into exploration activities last year, with only $167 million invested into exploration fields.

In comparison, $970 million was used for exploration activities in 2015, with $442 million distributed into exploration fields.

The government introduced the gross-split scheme hoping that it would boost exploration activities, even though crude oil prices are recovering at a snail?s pace.

The gross-split scheme implements a mechanism with which the profit distribution between the government and the contractors in the PSC will slide up and down according to a few factors, including the depth and geological characteristics needed for the field.

Contacted separately, consultancy firm Wood Mackenzie senior research manager of the Southeastern Asia Upstream, Ashima Taneja, said the new scheme would deter investment in exploration fields, particular for frontier areas that are deemed high cost.

The gross split scheme places increased emphasis on cost control that may encourage a nimbler and more efficient upstream sector. However, strict cost reduction will be needed in order to improve returns for producing assets.

?Project economies are negatively impacted under the gross split scheme unless costs are reduced for producing PSCs and drastic cuts are made to exploration costs,? Taneja told The Post.

Oil and gas firm PT Pertamina Hulu Energy (PHE), a subsidiary of state-owned energy giant firm Pertamina, is currently seeking a revision of its renewed PSC of the Offshore Northwest Java (ONWJ) field, the first of its kind to use the gross split scheme as the profit shares excluded exploration costs.(*)