The government of Indonesia is confident that the new gross profit sharing mechanism that is set to replace the cost recovery scheme in the oil and gas industry in early 2017 is a fairer system for both the oil & gas contractor and the government. Earlier this month, Indonesia's Energy and Mineral Resources Ministry announced this change in course. However, the new gross profit sharing mechanism in the oil and gas industry will only be applied to new contracts starting from early 2017.
Indonesian Energy Minister Ignasius Jonan said the new mechanism is fairer compared to the oil cost recovery mechanism and will lead to more efficient operations in oil & gas exploration and production as contractors will be more careful when spending. This new approach should lead to a boost in Indonesia's upstream oil and gas activities, particularly exploration, as the contractor will not need to face a lengthy process to obtain approval from Indonesia's upstream oil and gas regulator SKK Migas.
In the new gross profit sharing system the Indonesian government will generate earnings from (part of) gross profit as well as tax revenue from contractors' activities in the upstream oil and gas sector, without needing to reimburse exploration and production costs to contractors.
Deputy Energy Minister Arcandra Tahar added that there are several factors that are considered by the government when determining the exact split in gross profit between the government and contractor:
- a contractor for an offshore oil and gas block (which requires a higher capital intensive investment and more complex technology) can count on a higher share of gross profit compared to an onshore project
- a contractor of an unconventional oil and gas block will get a higher share of gross profit
- when the hydrocarbons contain impurities (such as carbon dioxide or hydrogen sulfide) the contractor will also be able to get a larger gross profit share
- if the contractor uses a high degree of domestic equipment and services, then it can get a larger share in gross profit
- if global crude oil prices are low then the government will allow a higher share in gross profit for the contractor in order to attract investment in exploration and production in times of low oil prices
Advantages of the gross profit sharing mechanism:
- contractors will become more efficient when spending capital in the exploration and production stage
- it is a more transparent system
- less bureaucracy