SPE-186378-MS

Proposed Modification of Abandonment and Site Restoration Mechanism in

Gross Split PSC for Marginal Field in Indonesia

Temmy Surya Kurniawan and Jemi Jaenudin, PT Pertamina Persero

Copyright 2017, Society of Petroleum Engineers

This paper was prepared for presentation at the SPE/IATMI Asia Pacific Oil & Gas Conference and Exhibition held in Jakarta, Indonesia, 17-19 October 2017.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents
of the paper have not been reviewed by the Society of Petroleum Engineers and are subject to correction by the author(s). The material does not necessarily reflect
any position of the Society of Petroleum Engineers, its officers, or members. Electronic reproduction, distribution, or storage of any part of this paper without the written
consent of the Society of Petroleum Engineers is prohibited. Permission to reproduce in print is restricted to an abstract of not more than 300 words; illustrations may
not be copied. The abstract must contain conspicuous acknowledgment of SPE copyright.

Abstract
Referring to the Ministry of Energy and Mineral Resources regulation in 2017 number 8, the government
intends to encourage contractor in Indonesia to conduct exploration and exploitation activity to be more
effective and efficient in way of implementing gross split PSC in Indonesia, especially for expiry block. In
2018-2028, there will be 23 expired blocks. Some of those blocks have been reaching the marginal category
and they are needed to be evaluated with current regulation of fiscal regime. In marginal block, abandonment
and site restoration (ASR) cost is being issue for economic feasibility.
To evaluate impact of ASR mechanism in Indonesia's gross split PSC for marginal block, a model
block is evaluated. The model has high cost per barrel (USD39/boe) and ASR cost is 34% of total cost.
Economic evaluation for this marginal block with ASR issue is assessed using NPV as feasibility indicator.
The evaluation result using Indonesia's gross split PSC is not favorable for contractor. This paper presents
modification of ASR funding mechanism in Indonesia's gross split PSC.
Modification of funding mechanism consists of scenario with ASR cost is fully taken from government
take, ASR cost is taken from government take when the cash flow of contractor is negative, and ASR cost
is shared between government and contractor based on total split This modification gives positive result
for contractor side.

Introduction
Background
Over the next decade, 35 PSCs will expire in Indonesia. Started from Attaka and Offshore Mahakam in
December 2017, list of these licenses can be seen in Table 1. The 35-licenses account for more than one
million boe/d hydrocarbon production in 2016. In January 2017, Indonesian government released gross split
PSC as the new fiscal term for petroleum industry replacing cost recovery PSC. This new fiscal term will
be used for new contract of those blocks and regulate the activity in upstream sector.
2 SPE-186378-MS

Table 1—Expired Block 2017-2026

Meanwhile, most of the 35 blocks have entered mature phase of field life. The new contractors in those
blocks will face the obligation for abandoning all facilities and restoring the site. This obligation will be
challenging economically especially for marginal block since there is no block implementing the fully
restoration program at present. In addition, contractors have to set their plan for budgeting abandonment
and site restoration (ASR) cost based on the new fiscal term and related government regulation.

Research Purpose
The purpose of this study is to present analysis of ASR mechanism in Indonesia's gross split PSCfor marginal
block. Impact of current regulation will be exercised in the case study using marginal model block. The
NPV of project in 20 years of contract should be positive because it will be used as the economic indicator
for every contractor. Modification of ASR funding mechanism will be proposed if the block does not meet
the economic indicator.

Research Method
This study uses methodology as shown in flowchart Figure 1.

Figure 1—Flowchart of Method

SPE-186378-MS 3

Literature Study
Gross Split PSC in Indonesia
In January 2017, the Government of Indonesia issued Regulation of Energy and Mineral Resource (EMR)
Minister No. 08 of 2017 about Gross Split PSC. In accordance with the rule, Gross Split PSC is a profit-
sharing contract based on the principle of gross production sharing without cost recovery mechanism (see
Figure 2) so that all costs incurred for block operation are fully borne by the contractor.

Figure 2—Gross Split PSC Mechanism

Unlike previous PSC that used fixed net split after tax for contractor and government, in this new fiscal
term, contractor split is determined by using a base split that is adjusted based on variable and progressive
components. Variable components depend on block status, field location, reservoir depth,supporting
infrastructure, reservoir type, CO2 content, H2S content, specific gravity of oil, local content, and production
stages (see Table 2). Meanwhile, the progressive component depends on the price of crude oil and the
cummulative amount of production (see Table 3). Contractor base split is set at 43% for oil and 48% for
gas. Outside of the split, the contractor may obtain additional split of 5% at maximum if the calculation
of field commercialization does not meet certain economic criteria. Conversely, the contractor split will be
reduced to 5% at maximum if the calculation of field commercialization exceeds certain economic criteria.
However, there is still no clear definition of the certain economic criteria in this regulation.
4 SPE-186378-MS

Table 2—Variable Component

SPE-186378-MS 5

Table 3—Progressive Component

ASR Regulation in Indonesia

Regulations concerning ASR obligations in mining activities in Indonesia were initially stated in State
Gazette Regulation (Peraturan Keselamatan Kerja Tambang Lembaran Negara) No.341 of 1930 article 18
which states that abandoned wells must be closed. In addition, Government Regulation No.17 of 1974 article
41 states that Employers are prohibited from leaving the well before taking appropriate action to prevent
accidents. Despite those regulations have been released, the specificrulesfor implementing ASR activities
is not stated in the PSCs signed before 1994, neither for the implementingnor provisioning of ASR cost.
Rule concerning ASR liabilities are included in PSCs signed after 1995. However, the rule only clearly
regulatesabout the obligation meanwhile procedure for provisioning the ASR cost are still not added.
The next regulation concerning the provision of ASR cost are contained in Government Regulation No.35
of 2004 Article 36 stating that contractors shall allocate funds for post-operating activities of upstream
business activities and the funds shall be carried out since the commencement of the exploration period and
implemented through the work plan and budget. The placement of the ASR cost allocation is agreed upon
by the contractor and government. In 2010, issued Government Regulation No.79 of 2010 regulates the
amount of funding ASR cost is calculated based on the economic useful life shall be saved in joint accounts
agreed between the government and the contractor in commercial banks in Indonesia. The technical rules
of provisions of ASR cost are contained in Pedoman Tata Kerja ASR No.040 / PTK / XI / 2010. The PTK
ASR No.40 regulates the provision of ASR cost mechanism which includes the estimated cost of ASR and
the ASR cost provision period.
Currently, most of PSCs do not include rules regarding ASR on both the implementation obligation and
the cost allocation. However, after the issuance of Government Regulation No.35 of 2004, GR No.79 of
2010, and PTK ASR No.40 of 2010, the contractor has to conduct the ASR program and allocate its cost
since the beginning of contract.
Under PTK ASR No.40 of 2010, the contractor has an obligation to prepare an ASR reserve fund report
of each field in a block for existing assets, assets under construction, and assets to be built in accordance
with POD. ASR cost estimation calculations using assumptions that are for all assets requiring dismantling
of all production facilities and other supporting facilities, ASR will be implemented at the end of production
period in a field, ASR cost estimation does not take into account exploration wells, and ASR cost estimation
calculations escalated to the ASR plan year. ASR fund reserves are performed by the Contractor each
semester by depositing funds into joint accounts during the collection period.
6 SPE-186378-MS

Annual reserves of ASR funds are determined based on the estimated cost of the last ASR divided by
the ASR fund raising period with the following formula.

Adjustment: adjustment value resulting from asset changes and ASR cost estimate changes.
Balance of ASR Funds: Balance of ASR funds (including net interest) on the last day of the period.
To be summarized, based on the existing regulation in Indonesia, all new contractors in the 35 blocks
have obligation to conduct ASR program for existing asset and prepare the budget.

Result and Analysis

A block model is evaluated as the case study for implementation of ASR program in marginal field. This
block has 15 existing fields and there is no plan for development of discovery resource opportunity. Forecast
of oil and gas production can be seen in the Figure 3. As mentioned before, this evaluation uses Indonesia's
gross split PSC. According to the Ministry of MEMR Regulation, contractor base split is set at 43% for oil
and 48% for gas. Based on characteristic of existing fields, contractor have adjusted variable component.
Adjusted variable component for each field can be seen in the Table 4. In addition, there is progressive split
which is determined by oil price and cummulative production. Oil price assumption of Block X is referred
to Indonesian Crude Price (ICP) and gas price is set at USD6/MMBTU. IEA forecast as of Q4 2016 will be
used as reference foroil price assumption and can be seen in the Figure 4. Thus, contractor will gain total
split consisting of base split as well asadjusted variable and progressive component. Total split for each
year is shown in Figure 5.

Figure 3—Production and Sales Forecast

SPE-186378-MS 7

Table 4—Base Split and Adjusted Variable Component

Figure 4—Price Assumption

Figure 5—Total Split

8 SPE-186378-MS

Inflation rate used in the evaluation is 2% per annum with value added tax (VAT) rate 10% for capital
expenditure and operational expenditure. Nominal term of all costs after inflation and VAT can be seen in
the Figure 6.

Figure 6—Cost Assumption

Cost per barrel in this field is USD39/boe. Based on average cost in Indonesia field, this value is
considered as high cost category. ASR cost takes considerable percentage of total cost which is 34%. High
spending for ASR cost is due to there are many wells and facilities which need to be decommisioned.
Cashflow for contractor and government using gross split PSC is shown at Figure 7. By using discount
rate 10%, NPV for contractor is USD -73 million while government NPV is USD 797 million. This economic
indicator is not favorable for contractor to conduct the operation of this marginal field. To make this block
meets the positive NPV, contractor is able to propose additional split 5% to Ministry of EMR as discretion.
Justification of this proposal is that the field contributes in national energy security so that shutting down
this block will be impactful for stability of energy supply. However, by acquiring this additional split, the
NPV is still USD -10 million while government NPV is USD 730 million. Another solution need to be
developed for this case.

Figure 7—Contractor and Government Cashflow

SPE-186378-MS 9

Since ASR cost plays significant roles for the marginal field, modification of mechanism for ASR funding
can be considered as the solution. Based on Indonesia's PSC, the ownership of all facilities in upstream
refers to the government of Indonesia so that the government is considered to take part in abandoning those
facilities. That will be the basis for proposedmodification. The potential solution is to put government take
aside for funding the ASR program. In this paper, the authors use threealternative modifications of funding
mechanism:
1. ASR cost is fully taken from government take. The result is:
Contractor NPV= USD 186 million
Government NPV= USD 495 million
2. ASR cost is taken from government take when the cash flow of contractor is negative. Based on this
case study, negative cashflow for contractor starts in Year-9 so that government will cover the ASR
cost in this year until the end of contract. The result is:
Contractor NPV= USD 69 million
Government NPV= USD 655 million
3. ASR cost is shared between government and contractor based on total split. The result is:
Contractor NPV= USD 23 million
Government NPV= USD 699 million

Conclusions
1. Development of marginal field faces challenge of ASR obligation from government to decommission
facilities and wells.
2. In this study, the existing regulation is not able to reach economic criteria of contractor so that
improvement shall be taken.
3. Modification of funding mechanism can be alternative solution consisting of:
a. ASR cost is fully taken from government take
b. ASR cost is taken from government take when the cash flow of contractor is negative
c. ASR cost is shared between government and contractor based on total split

References
Government Decree No.35 year 2004. Upstream Oil and Gas Business Activities. State Gazette No. 123 year 2004.
Republic of Indonesia.
Government Decree No.79 year 2010. Refundable Operating Expenses and Income Tax Treatment in Upstream Oil and
Gas Business. State Gazette No. 139 year 2010. Republic of Indonesia.
Minister of Energy and Mineral Resources Decree No. 08 year 2017. Production Sharing Contract Gross Split. State
Gazette No. 116 year 2017. Republif of Indonesia.
Lubiantara, Benny. 2012. Ekonomi Migas: Tinjauan Aspek Komersial Kontrak Migas. Jakarta: Grasindo.
N K A, Ophelia and Irawaty, Rosewitha (2013). Analisis Pelaksanaan Kegiatan Abandonment and Site Restoration dalam
Kegiatan Usaha Hulu Minyak dan Gas Bumi di Indonesia. Program Kekhususan Tentang Kegiatan Ekonomi, Fakultas
Hukum Universitas Indonesia. Jakarta.
Satuan Kerja Khusus Minyak dan Gas Bumi. Surat Keputusan Nomor. KEP-0139/BP00000/2010/S0 Tentang Pedoman
Tata Kerja Abandonment and Site Restoration. Pedoman Tata Kerja Satuan Khusus Minyak dan Gas Bumi No. 040/
PTK/IX/2010.