On 1/25/07, noor syarifuddin <[EMAIL PROTECTED]> wrote:
Di koran jakarta post tgl 8 januari 2007 lalu (halaman 6) ada artikel bagus tentang cost recovery ini (ditulis oleh bekas presiden Arco, TN Machmud). salam,
aku bantuin buat rekan yg ga sempat membaca tulisan yg dimaksdud Mas Noor diatas. Oil industry cost recovery -- don't fix what's not broken Opinion and Editorial - January 08, 2007 T.N. Machmud, Jakarta There have been reports in newspapers and professional magazines such as Petrominer that the government is planning to issue a set of new regulations on the oil and gas industry dealing with cost recovery, among other issues. Although the proposed regulations are undoubtedly well-intended, past experience has taught us to leave well enough alone. Cost recovery is dealt with in the Production Sharing Contract (PSC). An attachment called Exhibit C determines how and when costs may be recovered. This system has been in place and workable since 1967. A change was made in 1977 due to the perception that oil companies were making a windfall. Oil prices had increased sharply as a result of the Middle East embargo and the Iran situation. The government argued that it should benefit from the windfall more than the companies. Hence the production split, after cost recovery, was unilaterally changed from 65/35 to 85/15 in favor of state oil and gas company Pertamina. As an offset, the companies were allowed to use all of their production to recover their costs, as opposed to the previous 40 percent cost-recovery ceiling. This unilateral change caused a shock wave through the industry and brought exploration and development to a standstill throughout 1977 and 1978. There are lessons learned here which seem to have been forgotten. One lesson is that, because the sanctity of the contract was violated, Indonesia's image suffered a severe setback. Likewise, the oil and gas industry suffered a setback. We got lucky, however, because oil prices continued to rise steadily in the late 1970s, which made the economics of the revised contract workable, and by end of 1978 both exploration and development had resumed. Oil prices are cyclical in nature, so guess what happened next? You're right: Oil prices took a nose dive in the 80s and by 1986 reached an all-time low of US$9 per barrel! Can you imagine the pain? At that price level it took forever for a company to recover its costs. In all new fields, the government had to wait for a long time for its revenue share, because of that 1977 cost recovery mechanism. As a result, in the late 1980s, the government changed the rules unilaterally again, this time adopting something it called First Tranche Petroleum (FTP), which is simply a royalty. It is a levy which comes "off the top" which goes to the government before the cost recovery and production split. It is currently set at 10 percent to 15 percent of production. Why not just call it a royalty? That term was passed over because in certain quarters it smacked of the old colonial concession system. This ignored the fact that Malaysia had applied a 10 percent royalty from the outset, so that both its federal government and state governments receive an early cut from any production. This is why there have been few complaints from the states in Malaysia about how the pie gets divided. Thanks to the royalty -- excuse me, thanks to FTP, our government is now guaranteed a share of production "off the top" while cost recovery is going on, which greatly helps the government in a low-price scenario. This seems unlikely now given the current high-price environment, but it is still a possibility worth considering. Again, while it was well intended, the introduction of the FTP constituted another unilaterally imposed change in PSC terms. Back to our favorite subject, cost recovery. If past lessons are any example we should be very careful in making yet another change in PSC terms. Such changes may very well conflict with the existing PSC and cause the net economic impact of the PSC on the investor to further deteriorate. Before signing the PSC (or KKS as it is now called), the investor built an economic model, calculating his return on investment using several scenarios. He negotiated a contract expecting a certain minimum net result. If this expected net result no longer holds true because the deal was unilaterally changed, or if he is, for example, subject to sudden spurious tax levies at the central and local levels, he will demand that his economic expectations under the agreed contract be restored. If he does not get that, he may pack his bags and leave, and/or resort to arbitration. Admittedly, there will always be a need for some degree of regulation, especially in the event of what economists call market failures. But the government should step in only when it needs to fix something. As the saying goes, if it ain't broke, don't fix it. That is the prevailing management theory and a fundamental credo of microeconomics. The bottom line here is that, contrary to popular belief, cost recovery does not need fixing. It has existed for 40 years and is accepted and understood by all players. It is a workable system, and no serious objections have ever been raised to it. Only in the last few years has pressure mounted, demanding increased control. It is not perfect. Nothing is. But it is the best we have. If you ask the investors about flaws, they will tell you its worst flaw is that is already over-controlled. Therefore, the most we should do is a little fine-tuning after consultation with our investors. Petrominer, it its most recent issue, provided an excellent overview about why cost appears to be high while production is going down. Any oil and gas person can tell you that when you are faced with aging fields (like in Indonesia) your maintenance cost goes up. When you couple that with decreasing production, your cost per barrel goes up (like in Indonesia). In addition, the cost of goods and services worldwide is increasing. It is ridiculous to say that if production goes down, cost must also go down. More often it is the other way around. We hasten to say that the Supreme Audit Agency (BPK) has every right to look into cost. For that matter, the Development Finance Comptroller and Upstream Oil and Gas Regulating Agency have that right, and it is exercised frequently. BPK has legitimate questions which deserve legitimate answers. Those answers will be duly provided. Certain individuals have even suggested, irresponsibly, that the law enforcement agencies should be brought in. But that suggestion seems to be politically motivated. My feeling is that the companies' books will tell their own story. Cost is what it is. In a way it could even be good news when costs go up. It could mean that the companies are spending more money on exploration and development, finding new production, at which point costs become recoverable. We cannot achieve the higher production target of 1.3 million barrels per day by 2009 by holding cost down at an artificially low level, which seems to be what we are hearing. We may have heard wrong, we hope. Hopefully, when everybody has had his say, the oil and gas industry can go back to work and concentrate on what it does: explore and develop. This is, after all, what the country needs most. We need to create space for them to do so, and not endlessly interfere with spurious accusations and still more regulations. Let us learn from history not to fix something that isn't broken. The writer is former President and CEO of ARCO Indonesia. He is a lawyer and an observer of the oil and gas industry who teaches in several leading business schools. --------------------------------------------------------------------- siap melancong dan presentasi di Bali pada tahun 2007 ini??? ayo bersiap untuk PIT Bersama HAGI-IAGI dan asosiasi2 lainnya di Pulau Dewata!!! semarakkan dengan makalah-makalah yang berkualitas internasional... --------------------------------------------------------------------- To unsubscribe, send email to: iagi-net-unsubscribe[at]iagi.or.id To subscribe, send email to: iagi-net-subscribe[at]iagi.or.id Visit IAGI Website: http://iagi.or.id Pembayaran iuran anggota ditujukan ke: Bank Mandiri Cab. Wisma Alia Jakarta No. Rek: 123 0085005314 Atas nama: Ikatan Ahli Geologi Indonesia (IAGI) Bank BCA KCP. 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