A5.1 Indonesian PSC

Oil and gas production activities in Indonesia are currently governed by the terms of Production Sharing Contracts (PSC). This section summarises the terms that we assume will apply to the representative analyses for Indonesia and the Natuna development case study analysed in the main body of this report. However, the actual terms that apply to any development are confidential and might differ from those set out here.

The key components of Indonesian PSC for oil and natural gas development include First Tranche Petroleum (FTP), Cost Recovery, Profit Sharing, Income Tax and Domestic Market Obligation (DMO).

FTP

The first claim on Gross Revenue from the sales of petroleum is FTP which is shared between the State and the contractors. FTP is currently 20% of the gross revenue in conventional areas. Shares of FPT are in principle negotiable, but are typically the same as the shares for Profit Petroleum (see below).

Cost Recovery

After FTP, the contractors are allowed to recover their costs from the remaining revenue. There is no cost recovery ceiling in Indonesian PSCs. The contractors can recover costs from 100% of the remaining revenue after the share of FTP.

Profit Sharing

The revenue remaining after FTP and Cost Recovery is Profit Petroleum which is shared between the State and the contractors. The shares vary depending on the location and the type of the development. Since the introduction of the 1993 incentives, the contractors' share of profit oil is 15% for conventional areas. The contractors' share of profit gas is 35% for conventional areas.

The profit shares given above are on an after-tax basis. However, the shares are expressed in contracts on a before-tax basis. The equivalent before-tax share is derived by dividing the given after-tax share by (1 – tax rate). Therefore, providing the current income tax rate of 44%, the before-tax shares are as follows.

Table 39 – Profit sharing on a before-tax basis in Indonesian PSC

Conventional areas Frontier areas
Oil 26.79% 62.50%
Gas 62.50% 71.43%

Income Tax

The current income tax rate is 44%. There is a ring fence around the contract area for income tax purposes. The income tax applying to the contracts signed between 1984 and 1994 was 48%.

Domestic Market Obligation (DMO)

Under Indonesian PSCs, in each year after the fifth year of production, contractors must sell a portion of their FTP and Profit Oil to the domestic Indonesian market at a discounted price. The DMO oil price is 15% of the price obtained in international markets for conventional contracts. Under the 2002 conventional model contract, DMO applies to natural gas as well, but the DMO gas price is at market rates.