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 1st 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) PSC 1st Generation (19651976) Description PSC 2nd Generation (19761988) PSC 3rd Generation (1988current) FTP None None 10% - 20% Cost Recovery Ceiling 40% 100% (no ceiling) 80% (due to FTP) Investment Credit None 20% 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 65%/35% 85%/15% 85%/15% 70%/30% or 65%/35% 70%/30% or 65%/35% Equity to be Split Government / Contractor Oil Gas PSC 2nd to 3rd 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) 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. Gross Production (-) (-) Investment Credit FTP (-) Cost Recovery (+) Equity Oil to be Split Gov. Share Contractor Share (+) Domestic Market Obligation: Obligation to sell the oil for domestic needs. (25% of Contractor share) (-) DMO (+) (+) DMO Fee Taxable Income Income Tax Government Take (-) (+) (-) Contractor Take (+) 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 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. Sections Descriptions I Scope and Definitions II Term: Term of Commerciality of Contract Area III Exclusion of Area: Relinquishment of Area IV Work Program and Budget Expenditures V Rights and Obligations of the Parties VI Recovery of Operating Costs and Handling Production VII Valuation of Crude Oil and Natural Gas VIII Compensation, Assistance, and Production Bonus IX Payments X Title of Equipment XI Consultation and Arbitration XII Employment and Training of Indonesian Personnel XIII Termination XIV Books and Accounts and Audits XV Other Provisions XVI Participation XVII 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. 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) Thank you 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!