The Ministry of Energy and Mineral Resources (ESDM) has amended Ministerial Regulation No. 8/2017 concerning the Gross Split Production Sharing Contract. The Regulation, which enters into force back in 2018, is now being rebranded as the “New Simplified Gross Split”.
In the revision of the regulation, the Energy Ministry is drafting a new provision that provides special incentives for unconventional oil and gas projects in Indonesia.
The ESDM Ministry’s oil and gas director general Tutuka Ariadji underlined the significance of the regulation, highlighting the distinctive attributes between conventional and unconventional ones. Unconventional oil and gas development must be particularly swift.
Consequently, due to the unsuitability of the cost-recovery scheme for unconventional oil and gas projects, the Energy Ministry has decided to simplify the gross-split scheme, which will be out before the end of this year.
“In unconventional oil and gas development, many long lead items exist, so we are pursuing a simplified gross split. The preparation is underway. Hopefully, the ESDM Ministerial Regulation will be out [soon], in which the gross split [scheme] will change to accommodate unconventional oil and gas needs,” Ariadji said.
Enhancing flexibility and technological innovation for oil and gas contractors
In the previous ESDM Ministerial Regulation No. 8/2017, profit sharing refers to the base split, variable, and progressive components. In this scheme, there is no requirement for cost approval; rather, only the verification of the work program by the Energy Ministry is necessary.
The new gross-split scheme will introduce flexibility in the procurement process within the unconventional oil and gas sector. It adopts a structure akin to revenue tax or royalty systems and draws inspiration from successful shale oil developments in the US.
With the new gross-split scheme, the government will not interfere with the procurement process in the upstream oil and gas sector, a contrast to the previous practice under the cost-recovery scheme.
Regarding the base split revision, the government has balanced the profit-sharing arrangement between the government and the KKKS to make it more appealing.
The base split for oil has been changed to 53 percent for the government and 47 percent for the KKKS. Meanwhile, for gas, the base split is set at 51 percent for the government and 49 percent for the KKKS.
In comparison, the previous regulations stipulated a base split for 57 percent for the government and 43 percent for the KKKS in the case of oil, while for gas, it was 52 percent for the government and 48 percent for the KKKS.
This shift enables oil and gas contractors (KKKS) to exercise greater flexibility in reducing production costs and exploring technological innovations. The Energy Ministry stated the gross-split scheme will be similar to tax royalties, eliminating the necessity for customary proposals associated with the cost-recovery scheme.
The profit sharing portion will be set at the beginning of the contract and is fixed without any adjustment to various variable and progressive components sets in the previous gross-split version. As a result, this streamlined approach allows for expedited processing investments in the development of unconventional oil and gas resources.
Addressing the absence of proven reserves
A new and simplified gross-split scheme is necessary due to the absence of proven reserves in any unconventional and gas sector thus far. Furthermore, the development of such sectors necessitates the utilization of new technologies that have never been applied in Indonesia.
Additionally, unconventional oil and gas projects inherently entail significant costs and require a large number of wells, underscoring the importance of a quick and easy procurement process. That is why an attractive fiscal regime is needed to attract shale oil players to invest in Indonesia.
This is also in line with the Energy Ministry that require oil and gas contractors to include an unconventional oil and gas development program in their annual work plans and budgets. Additionally, operators of existing oil and gas blocks have the opportunity to swiftly explore and exploit discovered reserves without the need for a new contract.