With all due respect to Mr Machmud, I would like to comment on slight
inaccuracy of data (and interpretation) that he mentioned in his opinion
regarding PSC Contract and Cost Recovery, as follows:
1. There was no such a unilateral change of PSC contract, because -
legally - the changes in contract in the form of amandement were agreed upon
and signed by both parties, i.e.: Pertamina and the Contractor. The "offset"
mentioned in the writing also indicated that the changes were through
lengthy consideration and negotiation between parties, so that "the lost"
incurred by the PSC due to the reduced split portion could be "balanced" by
the 100% ceiling of cost-recovery.
2. What is perceived as a "standstill exploration & development" during 1977
and 1978 was in fact had been the trend since 1971 thru 1975 in the form of
numbers of contract signed, which averaged 3 contract/year (3 in 1971, 2 in
1972, 4 in 1973, 1 in 1974, 5 in 1975). In 1977: 2 contracts were signed,
and in 1978: 4 contracts were signed. So, average during those 2 years
mentioned by the article was 3 contract/year similar to the previous 5 year
contract rate. It was too tendensious to blame the new terms of PSC for the
continuing stand-still trend of E&P which already in the trend for the
previous 5 years.
3. On the "sanctity-of-contract" issue, my comment is: IF the "sacred"
Undang-Undang Dasar 45 can be ammended (and it was already), WHY should we
always insist to stick on the PSC contract, which level of sanctity is less
then the UUD?? As long as the changes were properly negotiated and on
mutual-benefit spirit, I think we can always try to offer some changes on
that, especially if external condition dictates (the soaring-up or
plummeting-down of oil prices, international political instability such as
wars, etc). Moreover, if the PSC concerned that their business were severely
damaged by the changes they could have always brought Pertamina to
international arbitration body as mentioned in the Contract, which they did
not do in this case (but they did it in other cases: KARAHA BODAS).
4. The article described the FTP (First Trench Petroleum) in the late 80's
(August 1988 to be exact) as a levy which comes "off the top" which goes to
the government before the cost recovery and production split. In fact it was
not only went to the government but ALSO SHARED BY THE CONTRACTOR according
to their split portion (15% of the 20% FTP = 3% of production revenue went
right away to the contractor). And it remained like that until 2003, when
the FTP -again- was changed JUST FOR NEW CONTRACTS to become 10% which all
goes to Government.
5. The argument raised that the cost recovery does not need fixing because
it has existed for 40 years and accepted and understood by all players is
slightly "unilaterally" judged. First of all, the definition of "players"
seems to be very narrow, especially if we refer to the political situation
within the last 8 years (reformation era) or 6 years (regional otonomy era).
With the new democratization spirit, which brings up the need of
transparency in all sectors including regulation-business in oil&gas, the
"players" of oil & gas has been including at least: DPR (representing the
people of Indonesia) and also local governments (because they have now
shares of revenues from oil&gas directly). Whether we like it or not, these
"other players" needs to be considered (and educated) in oil & gas
businesses. If they thought that the cost-recovery scheme was not proper to
be applied because of their lack of experiences in the businesses &
regulation (which have been there for 40 years), we cannot just say that:
""NO, guys... we are doing OK, government is doing OK,.. nothing's wrong
with Cost Recovery because both we (PSC) and Government already accepted and
understood it. So, dont interfere,.... Lets just do business as usual..." We
have to explain to them with numbers, values, and REAL BENEFITS that they
(the peoples) can get by allowing our 40 years Cost-Recovery scheme continue
remain as it was.
6. In contrary to the popular belief of the investors that the worst flaw of
the Cost-Recovery is it's over-controlled, the belief of the professionals
working directly in oil&gas bussiness in Indonesia is that the Cost-Recovery
is loosely-controlled (referred to: discussions in mail-list groups like
KMI, IAGINET,...).
Best Regards
Andang Bachtiar
Exploration Think Tank Indonesia
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
----- Original Message -----
From: "Rovicky Dwi Putrohari" <[EMAIL PROTECTED]>
To: <[email protected]>
Sent: Thursday, January 25, 2007 3:35 PM
Subject: Re: [iagi-net-l] Lagi Lagi Cost Recovery: Perlu Reformasi ??
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.
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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...
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