Comparison between PSC Gross Split and Cost Recovery

One of the key considerations for an oil and gas company before making an investment is the type of contract that will be used in the country concerned. In order to increase investment in the upstream sector, Indonesia decided to use the Gross Split scheme as the new type of production sharing contract (PSC) in 2017. Before the PSC Gross Split, Indonesia had various types of contracts but mostly in the last fifty years is PSC Cost Recovery.

According to data from SKK Migas, the basic difference between both PSC contract types is how the government and the oil and gas company take their share. In PSC cost recovery, they divide their share from the net revenue. While in the PSC gross split scheme, they directly split the gross revenue.

Under PSC Gross Split, in terms of the cost sharing, the oil and gas company will bear all the costs. It will be compensated in the company's share and can be claimed as a deductible for taxable revenue. While in PSC cost recovery, both the company and the government will jointly bear the costs according to their share. The company should cover first the costs which will then be reimbursable once they succeed in producing oil and gas.

In the PSC gross split scheme, the company's shares are calculated from base split, variable split, and progressive split. The base splits for the company are 43% for oil fields and 48% for gas. While for the government, the base splits are 57% for oil and 52% for gas. It is quite different with the PSC Cost Recovery.

In most of the PSC cost recovery, the state’s share is around 85% for oil and 70% for gas, with the remainder being allocated for the company. These actual shares could be changed if the company executes any programs which need more incentives to be economic.

Most of the costs will be covered by the Government therefore both the company and government meet to discuss and agree the annual work program and budget. All the activities that will be done by the Company must refer to the approved Work Program & Budget. While under the PSC gross split scheme, the government would only evaluate the company's work program, excluding the budget.

The Energy and Mineral Resources Minister, Arifin Tasrif, has stated that each contract mechanism has its own advantages as well as disadvantages. Therefore, he plans to use both mechanisms for the next oil and gas blocks bid round. "In the next bid, both types of PSC contracts can be used," he said to the media recently.

As informed, the government plans to bid 12 conventional and unconventional oil and gas blocks this year. The minister is very optimistic that Indonesia still has a chance to increase the oil and gas production due to the fact that there are still 74 unexplored basins throughout the country offering good prospectivity. (*)

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Posted by Niza Upperline