Government open to changes in PSC system

The government is open to possible adjustments to the current production sharing contract (PSC) system as it seeks to lure more investment in the country?s oil and gas sector, The Jakarta Post reported Tuesday.

The paper quoted Energy and Mineral Resources Minister Sudirman Said as saying that the government was ready to abandon the traditional cost structure as long as it provided breakthrough improvements for the oil and gas industry.

?Any breakthrough will be supported as long as it is inline with existing regulations.

The Finance Ministry has given us the challenge to create [a new] plan for oil and gas. And if the plan causes us to scrap cost recovery, we will, because now is the time to think outside of the box,? the minister said recently.

Indonesia now implements a PSC system for the oil and gas business, under which the state is the owner of oil and gas resources while companies are contractors working on the fields that are required to report and obtain approval from the government for all of their activities.

The PSC system is seen as most advantageous for the state because all initial investments and spending will be shouldered by the contractors, excluding the government from exposure to any risks from the multibillion dollar projects, many of which fall to find the valuable hydrocarbons.

The government will only reimburse spending if the oil and gas blocks successfully provide output. The reimbursement, known as cost recovery, is taken from the net production of the respective blocks.

But recently, the portion of cost recovery has been increasing, though the production continues to decline. The government is expected to pay US$14.1 billion for cost recovery, or 41 percent of total gross revenue from the Oil and gas sector in the 2015 revised state budget, up from 31 percent last year.

The current PSC system is also being criticized for how slow it is. It takes companies a while to obtain approval from the government and the Upstream Oil and Gas Regulatory Task Force (SKKMigas) before they can actually carry out their activities.

The Energy and Mineral Resources Ministry?s head of performance control, Widhyawan Prawiraatmadja, said current laws allowed other types of contracts for oil and gas businesses aside from the prevailing PSC.

?Other kinds of contracts are allowed, such as service contracts. However, to date, none have used this option,? he said.

Under the recently proposed draft to the revision of the oil and gas law, the Energy and Mineral Resources Ministry has also proposed that a new oil and gas regulatory body could sign contracts with companies under several different kinds of fiscal arrangements.

Commenting on the government?s plan to welcome different kinds of contracts, ExxonMobil Indonesia vice president for public and government affairs Erwin Maryoto said industry players would be open for any changes as long as it gave certainty to the industry.

Recently, the Indonesian Petroleum Association (IPA) has also called for adjustment in the PSC period from the current 30 years to 40 years, as contemporary regulations can no longer match the business valuations for oil and gas contractors in the country. (*)