Types of International Petroleum Fiscal Regimes: Indonesia
Posted by D Nathan Meehan July 30, 2011

Indonesia is the originator of the classic Production Sharing Contract, or PSC. Under this contract foreign oil companies fund all aspects of exploration and exploitation on behalf of Pertamina, the national oil company. In return, companies are entitled to lift hydrocarbons according to a “production sharing” formula.

The formula has changed slightly over the years and is currently different for oil and gas, and traditional and frontier areas. However, classically it is known as an “85:15” split. After the allowance of sufficient liftings for recovery of the oil companies’ (contractor’s) costs, Pertamina (representing the State) will receive 85% or the hydrocarbons, and the Contractor 15%.

The formula is slightly more complex than this. Indonesia does not have a royalty, rather it has a concept called “First Tranche Petroleum”, by which the first 20% of production is shared between Pertamina and the oil companies according to the 85:15 (or other applicable) split. Thereafter, the distribution looks to the recovery of operating and investment costs, the latter by reference to an amortization schedule, although an uplift or “investment credit” of up to 27% is allowed. Some regimes also have explicit limitations on the amount of production that can be allocated to cost recovery. Indonesia effectively limits this to 80% by application of First Tranche Petroleum and by amortization rather than immediate recovery of costs. After computation of cost recovery, all remaining production is shared according to the production split.

In addition, Indonesia imposes a domestic obligation. This requires companies to provide a proportion of their production to the domestic market below world market prices. Although not explicitly styled as “government take”, it effectively acts like one.

Corporation tax applies to oil companies in Indonesia, but it is deemed to be paid on behalf of the companies by Pertamina (this mechanism applies in a number of countries). In practice, there is an official corporation tax rate, and the 85:15 split is adjusted such that after application of the tax rate the split is 85:15. The net result is the same, but it allows companies much greater flexibility in arranging taxation affairs with their home jurisdiction and is a very important component of the structure.

Contract awards in Indonesia have typically been by a combined process of competition and negotiation. Indonesia has not typically held “rounds” in the way other countries have, but it has opened areas to the industry and then negotiated directly with interested companies. Contract duration has varied over the years, but is presently three years exploration (with the possibility of a second three-year term), and twenty years development.

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Rodolfo Galecio says:

There is something interesting with India corporation taxes regime; indeed the so-called taxes “in lieu” is a mechanism by which taxes are paid for and on behalf of the Contractor out of the NOC share of profit oil. Despite fiscal concerns companies must be aware of a “grossing up” effect in booking reserves since after applying this mechanism contractor share of profit oil is divided by (1 – tax rate)

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