As stipulated in the Constitution, the Indonesian state owns all oil and gas resources within the Archipelago. However, in order to locate and exploit these resources, the government enters into agreements with contractors (profit sharing contracts).

Currently Indonesia still uses the cost recovery scheme for profit sharing contracts with oil and gas contractors, meaning that these contractors are eligible for reimbursement of exploration costs provided they indeed find reserves that are suitable for commercial exploitation (this makes exploration a risky affair for contractors, not for the government). Profit sharing is then split between the government and contractor after several components have been deducted from profit, including first tranche petroleum (FTP) and income tax.

Read: Understanding Indonesia's Cost Recovery Scheme in the Oil & Gas Industry

It sometimes happens that contractor and the Indonesian government disagree on the exact amount of reimbursements (under the cost recovery scheme) that should be transferred to the contractor. In some cases the government claims that contractors deliberately inflate reimbursements of their operating cost claims.

The Indonesian government has a limited budget (set in the annual state budget) for reimbursements under the oil recovery scheme. In fact, over the past few years the government has been eager to cut its budget for the oil recovery scheme (see table below) as this would make contractors' activities more efficient.

Indonesia's Cost Recovery 2010-2017:

Year Cost Recovery
(in USD billion)
2017¹        10.40
2016¹         8.50
2015        13.70
2014        16.30
2013        15.92
2012        15.54
2011        15.22
2010        10.90

¹ projection
Source: Investor Daily

Indonesian Energy Minister Ignasius Jonan said the gross profit sharing scheme would eliminate any future difficult negotiations between contractor and government about the amount of reimbursements. Moreover, the annual state budget would not be burdened anymore by the oil recovery mechanism.

Under the newly proposed gross profit sharing scheme, however, the Indonesian government and oil & gas contractors will agree on a proportion for sharing gross profit beforehand. This system was applied in Indonesia before the 1960s (before the government changed to the oil recovery mechanism).

The proposal tochange the sharing scheme in Indonesia's oil and gas industry has been sent to the Indonesia Petroleum Association (IPA), a lobby group for the oil and gas contractors, for further study of the details. Christina Verchere, President of the IPA, said oil & gas contractors welcome a new structure as long as it includes incentives that make projects more economically-viable in Indonesia as well as a higher degree of regulatory certainty.

If the Ministerial Regulation can be implemented in January 2017, then the gross profit sharing scheme is expected to be applied for the first time for new contracts regarding the Offshore North West Java (ONWJ) project. Indonesian state oil and gas company Pertamina was already awarded a 100 percent stake in this project after contracts expire on 18 January 2017. The new contract is expected to use the gross profit sharing mechanism.

Meanwhile, Dito Ganinduto, member of the House of Representatives' Commission VII (that oversees the nation's energy sector), is concerned that the new scheme would encourage contractors to seek foreign technology and foreign workers to maximize profits, rather than local resources and labor. Ganinduto prefers to maintain the oil recovery scheme and "cleanse" it from the high degree of red tape and inefficiency.

Read: Overview & Analysis of Indonesia's Crude Oil Industry

Also the Confederation of National Trade Unions (KSPN) raised its concern as the new mechanism threatens to reduce the number of Indonesian workers in the upstream oil and gas industry because the state can no longer intervene in contractors' policies. For example, Chevron Pacific Indonesia that operates a block in Riau wanted to fire 1,500 workers due to low global crude oil prices. However, the upstream oil and gas regulator SKK Migas was able to prevent this move.

Indonesia Crude Oil Production 2009-2016:

Year Production
2016 834,000 bpd¹
2015 786,000 bpd
2014 794,000 bpd
2013 826,000 bpd
2012 860,000 bpd
2011 900,000 bpd
2010 945,000 bpd
2009 949,000 bpd

¹ oil production January-June 2016
Source: SKKMigas