Big waves pounding on the Indonesian PSCs
Head of BPMIGAS was quoted on daily Kompas yesterday that his team is currently in the process of evaluating three options to help increase state revenue from the oil & gas sector: application of windfall profit tax, control on cost recovery, and application of export tax on contractor’s share of crude oil. He also said that the impact on investment climate in the industry should be taken into consideration before implementing the options.
The whole industry indeed is closely watching the actions taken by the government (MIGAS, Ministry of Energy and Mineral Resources, BPMIGAS) related to the public, press, and parliament pressures to increase state revenue and to reduce cost recovery. Careful consideration as he mentioned is a must before making a decision to change the existing system or merely to provide a detailed guideline which is not entirely the same as the current common practices.
For example, applications of windfall profit and crude oil export taxes have never been done before. It is yet to be seen that the government has a solid legal and contractual basis to enforce them. The last thing we want is creating unnecessary controversy which is detrimental to investors’ trust on the legal and fiscal systems in Indonesia.
In a seminar on cost recovery held yesterday by the Petroleum Engineering Chapter of the PII (Persatuan Insinyur Indonesia – Indonesian Engineer Association), it was disclosed that a recent study conducted by Wood Mackenzie on fiscal system competiveness and attractiveness concluded that the Indonesian PSC ranks at 88 amongst 103 countries. That’s shocking and alarming: we are at the bottom quartile. If we really want to increase state revenue from the oil & gas sector, the best way is of course not by taking more from the smaller pie but rather we should do our utmost to increase the size of the pie by attracting more investors to explore and develop more reserves. In the petroleum business, there are no shortcuts to success nor easy wins , but surely there are a lot of potentials to make high impact blunders that back-fires instantly. A good move we make today (by improving the fiscal attractiveness of our contracts) will reap the benefits several years into the future, while a bad move today will have negative impacts on both time dimensions (short and long term).
If any, rather than making a big fuss about taking more from the contractors at their expense, we should probably focus our attention on improving our competitiveness so that they will be more than happy to give us more without us taking more from them.
PSC Discussion Forum 
It seems that almost everyone now is being hypnotized by a passion for a change, trying to improve things by probing in the dark and no clear path of where to go. Apparently, this post is a remainder to get back to the right track.
We have a clear question to answer: how to increase production. Conversely, we’ve been doing things in the opposite direction. We should attract prospective investors to work in a sufficient space, make them comfortable to put their funds in intensive exploration efforts and assume the risks. PSC provides the management with enormous power to control.
We’ve been trapped in unnecesary issues, we tend to detriment what we have found, we never learn from what we have been through. And now we tend to forget the main job, increasing production.
Perhaps we try to entertain the issues raised by communities out there. Some of them may be knowledgeable in the industry but surely they are not players, not even practicians in oil and gas. This is simply a business. Knowledge is not enough without talents, business sense, and experience.
We should have a gut to make them understand the nature of the business. Why should we worry about things we’ve done correctly? If we’re not sure of what we do, why don’t we let others to take care the industry?
Oil&gaslover,
That is a very good observation. Indeed, this industry is really complex. Some external parties tend to make comments and complaints without having and knowing the context nor the experience.
Everybody in this industry knows that increasing production, especially by discovering and developing new reserves, will financially generate so much more to both parties (especially the government) than tweaking existing terms within the declining producing PSCs. Too bad, something this obvious, which doesn’t even have to be demonstrated by a numerical example, is missing from the big picture today. If you dig looking for nickles and dimes, you will miss the gold bars !