COST RECOVERY IN INDONESIA

By : Daniel Sitompul, Petroleum Engineering, Institut Teknologi Bandung

ABSTRACT

In Indonesia, cost recovery regulation which based on Production Sharing Contract (PSC) system is ruled by Law. According to PSC system, regulation of cost recovery is agreed in the contract by government, represented by BP Migas, and contractor. Cost recovery consists of many costs that used since exploration until exploitation.

Last 3 years, Indonesian cost recovery increase boosted by many factors. Although the costs are increase but Indonesian cost recovery is lower than the average level in other countries.

INTRODUCTION

In the PSC system, all cost spent by contractor will be reimbursed if the contractor succeeds in finding and producing oil. The mechanism is carried out before the government and contractor take their shares of the out put. The cost reimbursement is called cost recovery. Cost recovery will affect the production portions of the government and contractor.

Now, as a legal law, Indonesian government use Law No. 22/2001 to rule the contract system between government and contractor in oil and natural gas activities. Cost recovery regulation is ruled too in this law.

COST RECOVERY REGULATION IN INDONESIA

Law No. 44/1960 (UU No. 44 Tahun 1960)

Indonesian upstream oil and gas industry have been developed since 100 years ago. To manage all contractors, Indonesian government made the first law in 1960. Job Contract System (JCS) was introduced in this law. In Law No. 44/1960, work contract between contractor and government was ruled, government will get 60% and contractor will get other 40% of net oil production. In this contract system there was no cost recovery regulation yet.

Law No. 14/1963 (UU No. 14 Tahun 1963)

This law was made for legalize the Work Contract System which ruled in Law No. 44/1960. Job contract between P.N. PERTAMINA with P.T. CALTEX Indonesia, California Asiatic Oil Company (CALASIATIC), Texaco Overseas Petroleum Company (TOPCO); P.N. PERMINA with P.T. STANVAC Indonesia; P.N. PERMIGAN with P.T. SHELL Indonesia was legalize by this law. Cost recovery was not regulated in this law yet so the portion of net oil production that 60% for government and other 40% for contractor was same as in Law No.44/1960.

Law No. 8/1971 (UU No. 8 Tahun 1971)

By 1971, a new law was made. A new contract system was introduced in this law. The new contract system, named Production Sharing Contract (PSC) system, was ruled by Law No. 8/1971. In this new system, the regulation of cost recovery was introduced too. According to Government Regulation No. 27/1968 and this Law, on the contract system government was represented by only one integrated state oil company which named P.N. PERTAMINA.

According to verse 14 in this Law, Government will receive:

1. 60% from net operating income of P.N. PERTAMINA.

2. 60% from net operating income of PSC between P.N. PERTAMINA and contractor.

3. 60% of Work Contract as signed in Law No. 14/1963.

The net operating income was all revenue minus general cost. In the next time this general cost would call cost recovery, so value of cost recovery will affect portion of government, P.N. PERTAMINA, and contractors.

Law No. 22/2001 (UU No. 22 Tahun 2001)

This is legal law that uses to rule oil and natural gas activities in Indonesia now. According to Law No. 22/2001 regarding Oil and Gas, upstream oil and natural gas business are executed on basis of Production Sharing Contract (PSC). This Contract signed by contractor and government. As supervisor and controller of oil and natural gas exploitation activities in Indonesia, in the PSC system Indonesian government was not represented by P.N. PERTAMINA (P.T. Pertamina) any more, but by BP MIGAS (Government Executive Agency for Upstream Oil and Gas Business Activity). Now, P.T. Pertamina act as a contractor as same as other oil company.

Oil and natural gas companies as contractors that operate under Production Sharing Contracts (PSC) are allowed to claim back all of the production costs that arose in the extraction of crude oil and natural gas. Total recovery costs are then deducted from the total sales of oil or natural gas by the PSC operators, before proceeds are shared out with the government. Under the PSC scheme, operators receive 15 percent of net oil production and about 65 percent of net gas production, while the remainder goes to the government.

Contractor are allowed to reimburse cost from one working area but forbidden to consolidate cost and taxes of one working area with those of another working area.

COST RECOVERY COMPONENTS IN UPSTREAM OIL AND NATURAL GAS BUSINESS IN INDONESIA

According to PSC system, cost included in cost recovery consist of non-capital cost in the current year and exploration, development, production operation and overhead cost, depreciation cost in the current year, depreciation cost in the previous year, and unrecovered cost.

As example, in the table below there are components of cost recovery in Indonesian upstream oil and natural gas business by year 2005 to 2006.

Components of Cost Recovery in Indonesian Upstream Oil and Natural Gas Business by year 2005-2006
No.	Item	2005	2006
1.	Current Year Operation Expenditures	5,622	5,439
	Exploration	495	451
	Development	1,428	1,315
	Production	2,994	3,048
	General and Admin	705	625
2.	Current Year Depreciation	1,420	1,720
3.	Previous Year Depreciation	206	408
4.	Unrecovered Cost	285	253
	Total Cost Recovery	7,553	7,815
	Cost Recovery, Pertamina E&P	1,864	1,893
	Cost Recovery, other PSC contractors	5,669	5,922
Source: BP Migas

INCREASE OF COST RECOVERY FOR LAST 3 YEARS IN INDONESIA

As shown in previous table, compared to 2005, cost recovery was higher in the next year. Commonly, Indonesian cost recovery for last 3 years have been increased. The increase was boosted by factors, namely:

1. Mature fields: most of the oil production fields in Indonesia are mature, already operating over 50 years. In general, more mature field means lower production and increasingly expensive cost used for operation/production. The natural decline rate of mature fields in Indonesia is above 10 percent.

2. High oil price: the high oil price increased upstream oil and natural gas activities throughout the world. The condition drives up competition to seek goods and services for the operational need of oil industry (drilling rig, steel, ship, crane barge, etc), so as to cause the price to increase drastically.

3. Small reserve fields: most of the recently developed fields have small reserves thus making the development cost unit high.

4. Unrecovered cost: when crude oil price is low, cost recovery of several working areas cannot be fully reimbursed and is thus postponed till next year. When oil price is high, as it is now, revenue is much bigger that the recovery of costs of the current year and unrecovered cost is possible. As a result, the recovery in the current year is bigger than that in the previous years.

5. Pertamina E&P: the entry of Pertamina as a PSC Contractors contributes to the increase in cost recovery, given that Pertamina E&P’s cost of oil production per barrel is bigger than the average cost of other contractors.

INDONESIAN COST RECOVERY VS OTHER COUNTRIES IN THE WORLD

The production cost of oil and gas increased not only in Indonesia but also all over the world. Compared to the cost increase in other countries, the rise in production cost in Indonesia is relatively low.

Data presented by OPEC in 2004 about cost recovery of oil in countries, such as Angola, China, The United States (Onshore), Russia, Gulf Of Mexico (GOM), and Canada show that cost recovery of oil and gas in Indonesia is lower than the average level in other countries.

CONCLUSIONS

1. Cost Recovery are all costs spent by contractor that reimbursed if the contractor succeeds in finding and producing oil before government and contractor take their shares of the out put.

2. Law series that uses to rule oil and natural gas activities in Indonesia are: Law No. 44/1960, Law No. 14/1963, Law No. 8/1971, Law No. 22/2001.

3. Now in Indonesia, According to Law No. 22/2001, upstream oil and natural gas business are executed on basis of Production Sharing Contract (PSC).

4. According to PSC system, cost included in cost recovery consist of non-capital cost in the current year and exploration, development, production operation and overhead cost, depreciation cost in the current year, depreciation cost in the previous year, and unrecovered cost.

5. The increase of cost recovery in Indonesia was boosted by factors, namely: mature field, high oil price, small reserve field, unrecovered cost of previous year, and entry of Pertamina E&P.

6. Cost recovery of oil and natural gas in Indonesia is lower than the average level in other countries.

REFERENCES

1. BPMIGAS, “2006 Annual Report,” BPMIGAS, Jakarta, 2007.

2. Sumiarso, Luluk, “Kebijakan dan Regulasi Sumber Daya Alam Minyak dan Gas Bumi,” paper presented at the Seminar Nasional Geologi ITB, Bandung, May 17th, 2008.

3. Indonesian Republic government, “Undang-undang Republik Indonesia Nomor 44 Tahun 1960,” Jakarta, 1960.

4. Indonesian Republic government, “Undang-undang Republik Indonesia Nomor 14 Tahun 1963,” Jakarta, 1963.

5. Indonesian Republic government, “Undang-undang Republik Indonesia Nomor 8 Tahun 1971 tentang Perusahaan Pertambangan Minyak dan Gas Bumi Negara,” Jakarta, 1971.

6. Indonesian Repulic government, “Undang-undang Republik Indonesia Nomor 22 Tahun 2001 tentang Minyak dan Gas Bumi,” Jakarta, 2001.