Sunday, April 25, 2010

Should We Leave the PSC Model? *)

*) This article is prepared for SWAEnergy Website

This article is written to discuss the issue of upstream petroleum contract, which is focused for the case of Indonesia. This is motivated by the fact that there had been so many news in mass-media covering the issue of cost recovery and the possibility of leaving our existing production sharing contract (PSC) model.

Public pressure to review oil and gas contract is not only occur in Indonesia, during the period of oil price increases (2003 to mid 2008), many host governments reviewed and changed their fiscal terms. The main reason was simply the facts that their fiscal terms might have failed to generate higher government take as the profit soared. However, this worldwide trends should be carefully understood, most countries changed their fiscal terms not the type of model, some changes include the increasing of royalty, introducing of windfall profit tax and other form of taxes, etc.

The reality above show that designing fiscal system is a crucial task, the fiscal system should align the interests of both parties (the host government and the investor); the list of each interest may be summarized as follow:

The government’s interests include: increase financial resources for development, stimulate exploration activities to increase the country’s petroleum resources and reserves, achieve adequate control over resources and their optimal exploitation, maximize the state’s share of petroleum wealth, encourage the development of domestic industry, benefit from higher employment, benefit from technology transfer and know-how, etc.

The investors’ interests include: access to acreage, expand reserve base, access to new long-term supplies of petroleum, achieve the highest possible return on their investment and optimize portfolio, manage operations efficiently, minimize and mitigate risks, etc.

Besides the PSC model, there are two other models that are commonly used around the world, concessions (royalty/tax) and service contract (reader who interest for more details may see my previous postings). It is no wonder then if we find some people who may suddenly claim themselves as the oil and gas observers propose to adopt the royalty tax instead of PSC with very simple reason; because (they thought) that the royalty tax model has nothing to do with the cost recovery mechanism. There is also another idea, to introduce the model in which the government directly obtains its share from the gross revenue. The purpose is similar, to avoid the cost recovery mechanism.

Any model has shortcoming, PSC is not an exclusion; it is not necessary means that replacing PSC with the new models automatically solves the problem. I am a bit concerned with the statement made by some observers that we are unable to manage the cost recovery so that we have to find other models without dealing with this (cost recovery) mechanism. The fact that there are unique risks and rewards in oil and gas industry, the end result of the new model that is introduced may produce less government share compare to the existing PSC model.

The issue of adopting a new model is also a hot issue in Brazil. Differ from Indonesia, the Brazilian government proposes to switch to production sharing contract (PSC) instead of its current concession (royalty/tax) for potentially world-class discoveries in Santos pre-salt basin. Santos pre-salt basin is very important for Brazil oil industry, these projects will bring Brazil from net oil importing to a net oil exporting country.

Worldwide trends for the last decade show that terms and conditions in oil gas contracts are becoming more sophisticated, in the context of project economics, whatever the model selected, it may be the best from the perspective of the country (of course, one country may adopt some type of models depending upon the geological and other factors). For example, in Russia, majority of their contract models are concession with greater state participation for their national oil companies, surely this will provide the bigger share of profit to the country as a whole. At this point, I think the idea is clear, in the context of “division of revenue/profit between host government and investor,“ the issue is not about the “labels“ (PSC, concession or service) but the “content“ (terms and conditions).

There is also some critics on the poor practices of PSC in Indonesia, If there is a case in which the government has never received its share from the gross revenue even though the field/block has been produced for some years (since all revenue generated are used to pay for the cost recovery); or another “extreme case“ like the old Natuna Block contract, in which the government profit oil before tax is equal to zero; this kind of anomalies should not be blamed to the PSC as a  model, but to the parties that introduced the “new“ fiscal terms.

The responsiveness of the fiscal system to the oil price environment is important to consider. In a situation of high oil prices, the system, while maintaining its attractiveness, should soak up the resulting additional profits and obtain the maximum benefit for the interest of the host country.  The fiscal system should also protect the government revenues in case of a low oil price environment. If we can obtain these objectives with the PSC model, or if we can simply modify the PSC model to better reflect the dynamics of oil and gas industry, should we replace with the new one?


Disclaimer: the views presented in this article represent the personal views of the author.


husni said...

Pak Ben, setelah mebaca banyak artikel mengenai cost recovery di Indonesia, saya menarik kesimpulan bahwa terdapat dua aliran besar dalam menyikapi cost revovery tsb. aliran pertama mendukung bahwa cost recovery memberikan nilai tambah kepada negara. aliran yang lain mengatakan bahwa cost recovery di Indonesia adalah "aneh" jika dibandingkan dengan sistem PSC di negara lain. aliran mna yang lebih merepesentasikan cost recovery di Indonesia? Pak Ben, apakah bisa mengirimkan contoh kontrak perminyakan (TAC, JOB, dan PSC) ke email saya? alamt:
terima ksaih

Benny Lubiantara said...

Halo dik Hoesni, apa kabar?

Selalu ada dua sisi, ibarat melihat gelas yang terisi separuh, ada yang bilang: "setengah penuh", yang pesimis bilang: "setengah kosong".

Airan yang mana? saya nggak tahu, yang jelas cost recovery itu adalah representasi dari investasi. Kalau ada yang merasa cost recovery di PSC kita "aneh" , lha kok bisa aneh?. Kalau ada yang "aneh", bukannya malah instropeksi, apanya yang bikin jadi aneh dan diperbaiki. Kok malah menyalahkan modelnya. Model PSC dimana mana sama, kalau ada yang "aneh" itu ada problem di implementasinya. Tentu nggak bisa disembuhkan dengan mencari model baru. Tetap aja nantinya akan muncul keanehan baru...

Selama di negeri kita banyak yang aneh bin ajaib, selama itu pula orang sibuk mencari keanehan, tanpa berpikir bahwa dia sendiri bagian dari keanehan itu he he..

Mengenai kontrak PSC dll, mohon maaf saya nggak punya soft-filenya.

adelaidean said...

pak benny,
halo apa kabar? di sana sudah mulai hangat ya? di sini kebalikannya, sudah mulai dingin nih ... :-)

ya, saya sependapat dgn anda bhw cost recovery merupakan bagian tak terpisahkan dari sistem psc. selain itu, cost recovery juga bisa diartikan sebagai 'investasi' tidak langsung oleh pemerintah. jika kita berpikiran positif, maka indirect investment itu relatif tidak beresiko, karena resiko-nya sudah ditanggung oleh kontraktor. meskipun demikian, sama seperti kegiatan investasi apapun, indirect investment itu pun tidak tanpa resiko. tetapi, menurut hemat saya, resikonya berbeda. di sisi pemerintah, bukan resiko bisnis (mikro), tapi lebih pada resiko di sisi makro yg cakupannya lebih luas.

dgn pemahaman bhw cost recovery adalah bagian dari sistem psc dan sbg indirect investment pemerintah, bbrp waktu yg lalu saya terheran-2 dgn adanya gagasan utk mengembangkan sistem psc tanpa cost recovery. rasanya koq ganjil, ya ... saya tidak tahu apakah gagasan psc tanpa cost recovery itu akhirnya tuntas dikaji atau belum.

menurut hemat saya, sistem psc sudah pas dgn semangat para founding fathers kita yg termaktub dalam konstitusi UUD 1945 (tp yg asli, lho ... he3x). karena itu, jika ada 'keanehan' pada cost recovery, mestinya itu terjadi pada tahap implementasi di lapangan, bukan pada sistem psc-nya. oleh karena itu, kita harus rajin me-review dan memperbaiki implementasinya agar 'keanehan-2' itu bisa makin dikurangi.

tks & salam hangat,

husni said...

kbar baik pak Ben. Terima kasih atas jawbn Bapak. he5, banyak yang wait post2 Bapak selanjutnya;)

husni said...

pak Ben, koq blum nulis? he5. Literatur Akuntansi Perminyakan yang munggunakan Bahasa Indonesia selain Pak Haryono, apakah ada?

Orang Gila said...

saya pernah mengikuti seminar "Analisis Kontrak Bagi Hasil Industri Migas di Indonesis..." tahun 2008. Topik yang dibahas dan akhirnya diributkan adalah mengenai judul yang Pak tuliskan ini. Sangat menarik. Dari beberapa narasumber yang didatangkan mereka saling beradu argumen.Tipe mereka ada yang melihat gelas setengah kosong dan setengah penuh. Saling menyalahkan dan menuntut model PSC dimodif atau diganti. Karena perdebatan sudah hampir time out muncul Pak Wid [Widjajono Partowidagdo] beliau berkata "Tidak ada yang salah dengan Model PSC kita, yang salah adalah orang-orang yang menjalankannya" Dan saya sependapat dengan beliau, bahwa tidak ada yang salah dengan PSC. Contohnya Malaysia juga berguru dan mengadopsi sistem ini dan lihat sekarang mereka berhasil dengan Petronasnya. Sedangkan kita yang "sang guru-nya" malah ketinggalan jauh. Jadi sekali lagi tidak ada yang salah dengan PSC. :)

Blog yang informatif Pak, kebetulan saya mahasiswi semester akhir yang lagi belajar ekonomi migas...Salam kenal Pak...

Cerita Kita said...

Well, PSC will always be interesting subject to discuss. I would prefer what Prof. Alex Kemp's said that the best fiscal system is economic rent which deliver no distortions which means fiscal system that could accomodate oil price changes and development costs. Personally, I think PSC is still the best that our country can have. It keeps the ownership and controls of lands/resources to the country as our constitution (UUD 1945) requires, provide risk share to the investor to keep it interesting (since we only have marginal fields to offered) while accomodates the oil price and development cost changes as what happen in current years.

Pak Benny, I'm a student from Intl Business Energy & Petroleum - Aberdeen University, Scotland and I'm doing my project on PSC financial modelling. It comes from a very simple idea: how attractive our fiscal system (with all the components and the incentives offered) to investors in each stage (appraisal, exploration, development). Since this topic might be very common to have, Could you give me some issues or insights which I could explore in my project to make it more useful and 'above the average'? :) It would be wonderful if I could have your email adress and contact you in private. Cheers.

Benny Lubiantara said...


monggo dik..

hoesnie said...

pak ben, isu International Financial Accounting Reporting Standard (IFRS) apa hangat diperbincangkan di OPEC? apakah IFRS berpengaruh dalam PSC di Indonesia?

Anonymous said...

Mr. Ben, i am interested about oil and gas law, and want to make a mini-thesis about it.
and what i want to ask you is, what is your opinion about the issue that important to discussed, especially about contract (PSC or PSC's derivative), for my mini thesis.
i'm looking forward for your reply at my email:
thx before.

sigit.pambudi said...

salam perkenalan Pak Benny...saya banker dan awam dalam industri migas..namun saya punya ketertarikan tuk belajar migas karena terkait dgn ekspansi bisnis banking yg masuk dalam pembiayaan migas...sehub hal tsb, mohon advis dan masukan Pak benny, kira2 adakah websites/blog ttg industri migas dilihat dari aspek tehnis produski cukup lengkap dan memadai utk mempelajari industri migas utk orang non-migas.

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