General Comments

Let there be light shining on the Indonesian PSCs

Let there be light shining on the Indonesian PSCs

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18 responses to “General Comments

  1. If nationalizing the PSCs are out of reach, I think we should talk about at least nationalizing the employees in the PSCs. This should save costs big time, so alligned with the drive to cut cost recovery.

  2. Agree. Expatriates are too expensive, lots of Indonesian with skills and experience should be able to replace them. No conflict with contracts, no sanctity issue !

  3. Lennon & Mmd,
    Nationalizing the employees is great. But we still need to develop ourselves. How? the IOC will mostly be reluctant given that this is their business and they put their money. Also, they use their Indonesian business to “reward” their employees with expat package.
    So, we need BPMIGAS or GOI to impose rules saying after certain years of production, all managers have to be Indonesian. And after x years, most VPs are Indonesian and after that the president needs to be Indonesian.
    This will force the IOC to develop talents because they will need the business running and at the same time following the rules.
    The problem is however laying on our own “culture”. Sometimes, Melayu (especially within IOC) competes each other and has sharp elbow. Instead of hand-in-hand with our fellow Indonesians, we compete for the expat attention.
    Enough said, my point is that I agree with you nationalize the employees, we just need a proper way to get it done. Develop a breed of leaders made in Indonesia.


  4. Wolverine,
    Certain countries actually put the gradual phasing requirements to localize employees in the PSC contract itself. In China, they even have a clause that after certain years of running production then the operatorship should be handed over to the NOC (CNOOC or Petro China).
    Nationalizing positions in the IOC is not that easy, and the legal basis is somehow argueable. Going back to my example of you assigning Schlumberger Indonesia as your contractor to do a seismic work in your block, you are not really in the position to ask them to have local indonesian VPs or President. It is true that in a PSC, the costs are recoverable, hence there is some management and control element with the government, but the employees are still employed by the IOCs rather than by the government. Hence, standards of qualifications and performance should be based on merit as they have inside the company. Competition should be global and company-wide. It’s questionable whether you should assign an Indonesian VP for your PSC operation in Indonesia if this person is not in par with similar people having similar roles in the US or UK based on company’s policy and standards.
    What I think would be better is to have the IOCs develop indonesian employees to reach the same level of competencies and for them to realize that in the end it’s more cost efficient to do so. Forcing them to nationalize in a short timeframe will not do, as I believe they’d better absorb the costs as non cost recovery and keep the expatriates rather than risking the business on incompetent nationals. Even worse, some national employees might actually be used as window dressing or puppets to give the impression that the IOCs deliver the nationalization program.
    I agree with your conclusion, this takes time, will have to be done properly, and should be something natural based on merit and simple objective to improve efficiency. It takes time to nurture trust. How would a US investor trust a local incapable indonesian VP when it’s their money being at risk ?

  5. I don’t mind being a puppet VP or President as long as they pay me big money. Let the expatriates do the work. This is better than indonesian doing all the work and expatriates make more money.

  6. Lennon,
    Easy for you to say as you’re not there in that situation. It’s more than just about the money.

  7. Mmd,
    Lennon is not 100% wrong. That is actually the case in Middle east. It is well-known that managers or certain position are given to the locals while all the working bees are the the third-world expatriates (Indonesia, India, Philliphines). I have heard from friends working there, the arabs are plainly laid-back (lazy to be extreme).

    However, I dont like to use this model.
    But at the same time I have to disagree with B.A.D. if we just leave the process to the IOC.

    Market (for the locals to raise up) at this time is not perfect. There is in-balance betwen the expats and the locals. Expats own the money, the skills and the power/politics. While locals only posses the skills and power (through government). Here is why I believe trusting 100% to cost-eficient just dont work:
    1. Money is never been an issue when talking about expats. It costs $500K per expat but yet, they are still importing more expats. Expats are here for two reasons: develop the company and reward / career track. Based on my experience (working with more-than-one large IOCs), no KPI (or other performance index) that tracks the use of expats. Given the price of oil as now, cost is not an issue.
    2. Most locals are comfortable serving their expat boss. Their aspiration is going 2 year assignment abroad. Not truly lead the company. After returning from assignment and they become manager earning big bucks with tons of money from saving (during assignment). Then, they play safe, enjoying their days until retirement.
    Also, there is inferiority among locals, that the top is only for expats. And there is unspoken rule about that.

    So just like how China or any other up-rising economy protecting their industry from foreign competitors until their industry is strong enough, the locals need a push from the regulator.
    This is not saying locals need to lay back & relax. In contrary, locals need to be challenged, pushed, busted and developed or whatever it takes to get them better. Make the locals par with their folks in other countries. I am sure out of 500 local employees working for one IOC, one person can stand out. Or start a recruiting process such as management development program or other real-defined way of developing local talents.

    Just like raising children (locals are still inferior against expats), we need to protect them but yet also challenge and make them work hard. It is a balance.

    So, at conclusion: Balance is the key – the locals need to work hard, the GOI need to push through some regulation.


  8. Is it true that now BPMIGAS has a maximum limit of expatriate cost recovery at $550k per head ?

  9. All,
    The media has been exploiting LNG Tangguh contract. But, actually there is another big gas (pipeline) export contract which is tremendously cheap being sold to our neighbor.
    At current oil price of $115/bbl, the gas is only sold for around $3/mmbtu. This is roughly $18/ barrel oil equivalent.
    with the total dedicated reserve is 1701 TBtu, the gas has been flowing since 2002 through 2028 with an average take of 200-250bbtu per day.
    By simple calculation with the current price of oil $100 (equal to $15/mmbtu), this republic loss this year alone is ($15-$3)x 250x1000x365 = $1.1Billion = IDR 10 trillion.
    Imagine for the whole contract… could top $10B easily.
    And the funny thing is that this neigbor sells the gas to another neighbor.

    Anyway, the contract can only be negoitated G to G and it is time for this country to step up. BPMIGAS is fully aware of this issue but yet I have not heard any move on this.
    I dont think BPMIGAS will dare to open up this issue. Since they will be blamed for this (although it was Pertamina who signed the agreement back in late 90’s).

    Any comment folks???


  10. All,
    Where is everybody? B.A.D, oil&gaslover, what happen with our plan for fast breaking?
    Gee.. I wonder maybe people are preparing for “mudik”.

  11. Darwish Pakpahan

    Saya ingin mendapatkan copy Incentive I, II, III dan IV yang pernal dikeluarkan Pemerintah (Pertamina) kalau mempunyai saya ingin mendpatkan copy nya.
    Tolong direspons ke email saya saja Pak.

    Salam, Darwish

  12. Pak,

    Thanks for this blog. It illumines me as the Center for Energy’s programmer. You indeed possess incomparable knowledge in the subject of PSCs and deducting from the blog you started, a passion for the subject.

    Fresher PSCs are the main appeal of many players presently and we hope to help create a win-win dialogue and platform between the Indonesian government and oil players/investors and push more E&P projects in Asia/Indonesia.

    Might you be interested in chairing the agenda at the Center for Energy’s conference for 1 day on 28 April 2010?

    I could forward you the program should you be available.


    Frank Mercado

  13. Pak, would you like PSC Forum to be our Blog Partner for the E&P Sharing Contracts and Agreements 2010 Power Forum this April in Jakarta? No need to appear there, we will just forward you our regular updates and you can post what you think is relevant for your readers. Please contact me: +65 6844 2080 / Thank you!

  14. Dear Pak B.A.D,

    As an accounting master student, I do really attracted with accounting side of PSC. Do you know why there are some differences between PSC accounting rules and IFRS? And what the impacts of these accounting differences to International Oil Company?
    It is very kind of you if you can share some readings about these.

    Thank u

  15. Gillies Kleboe

    Dear B.A.D.

    I’d be very keen to speak to you regarding a position in the UK if you are at all interested?

    Kind regards


  16. Please, has any one ever consider this topic. – Project cost in the Oil and Gas Industry: Production Sharing contract (PSC) Verse Concessionary Contract. What is your take on it?

  17. Dear Sir,
    I’m a law professor at University of Brasília (UnB), in Brazil, where also coordinate the Grupo de Estudos em Direito dos Recursos Naturais – GERN/UnB (, a research group devoted to legal analysis related to the exploration/exploitation of natural resources.
    My original background is electricity law (production, transmission, distribution) but in recent times I’ve studying oil/gas regulation in Brazil, mostly because of the recent changes in our regulatory framework. As you may now, Brazil has introduced a PSC model for the first time in its history (we had Petrobras’ monopoly until 1997 and a tax and royalty regime from then on, until 2010).
    Since it is an absolute novelty for everyone here, I would be very grateful if you could provide me with some bits of information regarding materials, cases and literature related to PSC. I have already learned a lot just from navigating through your excellent blog and felt motivated to send you this message.
    Thank you in advance,
    Gustavo Kaercher Loureiro

  18. How to calculate PSC tax such as (Corporate, VAT, third party & employee income tax including expatriate personal tax) and other PSC SEA subsidiaries C&D tax ? If any sample from some case, will be help me.
    Thanks for your kindness

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