IPA opinion on the revised gross split PSC contract regulation

(October 02, 2017)--In principle, the oil & gas industry needs a business climate with a high level legal certainty and competitive fiscal terms. This becomes much more important and relevant during the current difficult times when oil and gas companies are significantly reducing capital expenditures and are very selective to only invest in projects with most competitive return.

Related to the fiscal terms or the type of cooperation contract, it needs to be understood that each block or field has different characteristic, risk profile, development and production challenges, and thus potentially requiring different contract type, fiscal terms and incentives to ensure that the development strategy is both economic and competitive on a national and global basis.

In that regard, IPA has seen positive changes in the revision of Minister regulation on Gross Split in the effort to increase the competitiveness of Indonesia oil and gas industry. These changes are:
o Increase in some of the Variable Splits that can improve the project economics

o The addition of new Progressive Split (Gas price), adjustment of the parameter and increase of the existing Progressive Splits to help improving the fields economic, particularly during the early stage of the production
o There is no longer limitation on the amount of incentive, in the form of additional Contractor Split, that the Minister can give (as needed) to support certain fields development
o Incentive is given for fields development beyond 1st POD

At the same time, we also see that the optionality on the type of Contract available for the PSC extension is still preserved in this revision. This is important, considering there may be specific matters related to the extension that need to be discussed further between Government and Contractor.

IPA has conveyed our concerns to all relevant parties involved (MoF, MoE, SKK Migas, DGT) re. GoI?s idea/proposal to implementation the Deemed Profit (DP) approach. Using DP approach will potentially increase the economic burden of the contractors because (1) uniform DP percentage cannot represent all fields? unique characteristic, (2) may result in the PSC Contractor paying tax in years in which they are still at loss position and (3) may result a double taxation on the same income as the competent authority in home office might refuse/deny the income tax paid in Indonesia as tax credit in home country. In line with this, IPA strongly encourages GoI to consider maintaining the current oil & gas income tax regime (i.e. revenue ? all relevant cost). However, in the event GoI insists for the application of DP, IPA believes that this should be optional where Contractor has the right to choose either to use DP or normal income tax.

At the end, the investment decision is with each investor / Contractor which will be made based on their portfolio of investment opportunities and other strategic considerations