Minister issues regulation on gross split mechanism

Minister of Energy and Mineral Resources Ignasius Jonan has issued new Ministerial Regulation No 8/2017 on oil and gas production sharing contract (PSC) based on gross split scheme to replace the cost recovery scheme.

According to the regulation, a copy of which was obtained by Petromindo.com on Thursday, the gross split scheme will be applied on new oil and gas contracts. Meanwhile, oil and gas contracts which are set to expire, but will be extended, the government can either apply the new gross split scheme or maintain the original production sharing contract.

By applying the gross split scheme, the government will no longer cover the operating expenses of oil and gas contractors as set under the previous cost recovery scheme, thus freeing financial pressure on the state budget. Last year, for instance, the cost recovery limit was initially set at US$8.4 billion, but then inflated to $11.4 billion.

Jonan has said that by applying the gross split scheme, upstream oil and gas projects are expected to be more efficient as contractors will be free to determine the technology and the most efficient operation. Bureaucratic procedure will also be much more simplified. All of these are expected to help lure fresh investment into the upstream sector, he said.

According to the new regulation, the base split from oil for the government is set at 57 percent, and 43 percent for the contractor, while government?s base split from gas is 52 percent, and 48 percent for the contractor.

The regulation says that the base split will be used as a basis to determine the production split upon approval of an oil and gas field?s development plan which will also depend on variable components including field?s condition, infrastructure availability, CO2 content, H2S content, specific gravity, and the level of domestic components being used during development and production stage; and on progressive components including oil price and oil and gas cumulative production volume.

The regulation says that in the case the fields fail to reach certain level of economic returns upon commercialization, the government can allocate an additional 5 percent split to the contractor, and vice versa in case economic returns exceed certain level.

The regulation says that adjustment to the production split due to changes in progressive components is made monthly based on evaluation made by upstream oil and gas authority SKK Migas.

According to the regulation, contractors must also give priority on the use of local components and services.

Editing by Reiner Simanjuntak