Govt proposes royalty & tax scheme for Pertamina

The Ministry of Energy and Mineral will propose to the House of Representatives that the amended oil and gas law allow state owned oil and gas firm PT Pertamina or other SOEs wholly owned by the government to use the royalty and tax scheme in its contracts to develop certain types of oil and gas blocks.

Director General of Oil and Gas IGN Wiratmaja said the royalty & tax scheme is applicable for blocks where the risk is low and Pertamina does not need to have partners in developing them.

?Thus, if there are areas which Pertamina considers are good and involving low risks, Pertamina apply for a royalty & tax scheme rather production sharing contrat (PSC) scheme,? Wiratmaja said during a workshop at Grand Hyatt Hotel in Tuesday, according to a statement from the directorate general.

The royalty & tax contract is simpler than PSC in terms of accounting, he said. However, however oil and gas contractors generally favor PSC when it comes to high-risk blocks since the type of the contract allows them to get reimbursement from the government under the cost-recovery mechanism.

?If the working areas involve high risks, contractors are generally reluctant to adopt the royalty & tax contract. They may propose PSC,? he said.

Wiratmadja however noted the new contract scheme will only be applied in the future after the oil and gas law that allows it come into force.

The ministry has sent a draft oil and gas law to the House as part of the process to amend the 2001 oil and gas law.

He noted the government will apply the gross split contractual scheme for the coal bed methane (CBM) blocks, to replace to the PSC scheme whose application is considered one of the reasons the CBM industry has failed to grow. The ministry is drafting a regulation for the purpose.

PSC is considered unsuitable for CBM projects because CBM is different from oil. Drilling at CBM fields typically first produces water and then, after many years, gas. ?Under the current PSC system, the burden is too much for investors since they will only get full production after eight or ten years. Thereby, the contract needs to be adjusted,? he said.

Editing by Johannes Simbolon