M81GED
Petroleum Economics

FTP: First Tranche Petroleum
First Tranche Petroleum: FTP is basically having the same concept as royalty but it is split based on the government shares and contractor shares. (20% of Gross Prod)
Investment Credits
Investment Credit: cost recoverable but it is subject to tax (17%-20% of gross production. IC applies only to production facilities such as platforms, pipelines and processing equipment.
Cost Recovery
The amount of expenditures such as costs of explorations, developments, and operations could be recouped by the contractor out of the Gross Revenue.
Domestic Market Obligation
Domestic Market Obligation: Obligation to sell the oil for domestic needs. (25% of Contractor share)

Concessionary (prior 1960)
Constitution No.44/1960
Working Contract Era (1960-1965)
• All foreign oil & gas companies  contractor
• Risk and management  the contractor
• Operating activities funded by the contractor
• Term of the contract is 20 years
• Shares was based on the net income 60%/40%
• DMO 25% of their shares with $0.2/bbl as a fee
PSC 1 st Generation 1965
• Shares was based on the gross production
(volume oil/gas)
• All the oil and gas reserves in Indonesia belongs to the
Government
• The petroleum activities is only done by the Gov.Institution
• Mining Minister may appoint contractor to conduct the activities that could not be done by the Government
Institution.
 The basic constitution is the 1945 Constitution
“all the resources under the states belongs to the states and shall be used to the greatest benefits of the people

- First Generation (1967-1978)
• There was unclear taxation system in Indonesia. The tax paid by the IOC was not considered by the USA as tax deductible (the first PSC was IIAPCO 
Independence Indonesian American Oil Company)
- Second Generation (1978-1990)
• The significant decrease in oil price (because of the economic recession in 1980’s) drove the government to change the PSC terms
- Third Generation (1990-current)

Description
FTP
Cost Recovery
Ceiling
Investment Credit
PSC 1st Generation (1965-
1976)
None
40%
None
PSC 2nd Generation (1976-
1988)
None
100% (no ceiling)
20%
PSC 3rd Generation (1988current)
10% - 20%
80% (due to FTP)
17% - 20%
DMO
DMO was defined as 25% of equity oil at $0.2/barel
25% of equity oil, full price for the first 60 months and
$0.20/barrel there after
25% of equity oil, full price for the first 60 months and 10% of export price there after
Equity to be Split
Government /
Contractor
Oil
Gas
65%/35% 85%/15%
70%/30% or 65%/35%
85%/15%
70%/30% or 65%/35%
PSC 2 nd to 3 rd Generation : The significant decrease in oil price
(because of the economic recession in 1980’s) drove the government to change the PSC terms.
PSC shares: Shares was based on the gross production (volume oil/gas)

First Tranche
Petroleum: FTP is basically having the same concept as royalty but it is split based on the government shares and contractor shares.
(10%-20% of Gross
Prod)
(-)
FTP
(+)
Gross Production
(-)
(-)
Equity Oil to be Split
Investment Credit
Cost Recovery
Gov. Share
Domestic Market
Obligation: Obligation to sell the oil for domestic needs. (25% of Contractor share)
Government Take
Contractor Share
(+) (-)
DMO
(-) (+)
DMO
Fee
(+)
Income Tax
(-)
Taxable Income
Contractor
Take
(+) (+)
Investment
Credit: cost recoverable but it is subject to tax
(17%-20% of gross production. IC applies only to production facilities such as platforms, pipelines and processing equipment.


FTP prior to 2010
10%
15% depends on the Contract
20%
The more remote area, the more difficult to be developed, the smaller FTP will be applied.
FTP is split based on the % of the shares but for some contracts they don’t split the FTP.
The current PSC now only 20% FTP.

Contract A vs Contract B


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Will be calculated beginning the Calendar
Year, asset is PIS with monthly depreciation for the Initial Calendar Year
The method used is Declining balance method
Based on individual asset
Full depreciation at the end of the individual asset’s useful life

2 Group of Assets (based on Taxation system in Indonesia) a.
b.
Group 1  50% : useful life 5 years such as automobile, truck, buses, aircraft, construction equipment, Furniture & Office equipment
Group 2  25% : useful life 10 years such as construction utilities and auxiliaries, platform and storage plant, construction housing and welfare, Production facilities, Vessels, Barges,tug and similar water transportation equipment, drilling and production tools, equipment and instruments.

VI
VII
VIII
IX
X
XI
Sections
I
II
III
IV
V
XII
XIII
XIV
XV
XVI
XVII
Descriptions
Scope and Definitions
Term: Term of Commerciality of Contract Area
Exclusion of Area: Relinquishment of Area
Work Program and Budget Expenditures
Rights and Obligations of the Parties
Recovery of Operating Costs and Handling Production
Valuation of Crude Oil and Natural Gas
Compensation, Assistance, and Production Bonus
Payments
Title of Equipment
Consultation and Arbitration
Employment and Training of Indonesian Personnel
Termination
Books and Accounts and Audits
Other Provisions
Participation
Effectiveness


At least 3 months prior to the beginning of each calendar year, or at such other times as otherwise mutually agreed by the Parties,
Contractor shall prepare and submit for approval BPMigas (now SKK Migas) a Work
Program and Budget of Operating Cost for the Contract Area setting forth the Petroleum
Operations which Contractor purposes to carry out during the ensuing Calendar Year.

Every 3 months the Contractor should establish this FQR to show the progress of the operation.




Conducted by Government
To ensure that the Recoverable Cost recorded by the Contractor is recorded and reported correctly.
Audit is conducted for Contractor that is classified in the production phase.


The goal of Petroleum Fiscal System is to attract investments.
◦ Instability in the fiscal system in Indonesia affect the investment climates
◦ Tough PSC terms in Indonesia leads the moral hazard of the company (such as Cost Recovery)
◦ This leads Indonesia create many new regulations come from other regulators which are not consistent with PSC signed raises the disillusions among the companies.

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Executive Agency for Upstream Oil and Gas Business Activities:
SKKMigas (before BPMigas)  is responsible for monitoring implementation and compliance with existing PSCs
BPMigas revised the Work Procedure Manual Supply Chain
Management in 2009 for PSCs (current issue: suspense account)
Indonesian Taxation Government Institution gets involved in upstream industries (such as changing in Land Tax regulation)
Government of Indonesia’s Financial and Development
Supervisory Board (BPKP), Indonesian Government Audit
Institution (BPK)  (related to Sunk Cost Audit)
Bank of Indonesia (export sales from this industry , must deposited in Bank of Indonesia)

P.S: I am a student as you are.. it means I’m still learning like you are
Fasting month is coming, I am sorry for the mistakes I’ve done , and happy fasting month for you guys who’ll celebrate Ramadhan!