Kebijakan Migas - 0412 s2

POLICY AND REGULATION ON THE

OIL AND GAS ACTIVITIES

Program Magister TMFTKE Trisakti Oleh : Dr. Ir. Rachmat Sudibjo

THE CHARACTERISTIC OF THE CHARACTERISTIC OF OIL AND GAS INDUSTRYOIL AND GAS INDUSTRY

Oil and gas is needed in almost every Oil and gas is needed in almost every aspect of the human activitiesaspect of the human activities

Crude oil hardly replaceable by other kind Crude oil hardly replaceable by other kind of energyof energy

Oil and gas as non renewable energy are Oil and gas as non renewable energy are globally distributed unevenlyglobally distributed unevenly

As political target trigger conflicts As political target trigger conflicts between countriesbetween countries

The producer countries maximize their The producer countries maximize their effort to secure their revenue from their effort to secure their revenue from their natural resourcesnatural resources

Program Magister TMFTKE Trisakti

OIL AND GASOIL AND GAS INDUSTRY INDUSTRY

UPSTREAM UPSTREAM (subject to UUD 1945 ps. 33.3):(subject to UUD 1945 ps. 33.3):

Exploration, Exploitation Exploration, Exploitation (extracting oil & gas from Indonesian subsoil)(extracting oil & gas from Indonesian subsoil)

DOWNSTREAM DOWNSTREAM (subject to UUD 1945 ps. 33.2):(subject to UUD 1945 ps. 33.2):

Processing, storage, transportation, Processing, storage, transportation, trading trading (oil &gas undertaken could be either from (oil &gas undertaken could be either from

domestic or import)domestic or import)


HISTORY OF HISTORY OF WORLD WORLD OIL OIL INDUSTRYINDUSTRY & MARKETS & MARKETS

Globally, the history of oil industries have been marked by Globally, the history of oil industries have been marked by many many conflicts of interest conflicts of interest between the between the producers and producers and consumersconsumers. This happened since the early time of the . This happened since the early time of the industry.industry.

We can distinguish the erasWe can distinguish the eras dominated by dominated by::

• Rockefeller / Standard Oil (1870-1910)Rockefeller / Standard Oil (1870-1910)• Seven Sisters (1910-1970)Seven Sisters (1910-1970)• Producing Countries / OPEC (1970-1985)Producing Countries / OPEC (1970-1985)• Consuming Countries /OECD (1985-2000)Consuming Countries /OECD (1985-2000)• Free Traders (2000- now)Free Traders (2000- now)


WORLD OIL WORLD OIL SUPPLY AND DEMANDSUPPLY AND DEMAND

The world’s The world’s oil reserves (1 trillion barrels) are oil reserves (1 trillion barrels) are concentrated in the Middle East (75%) concentrated in the Middle East (75%)

The world oil production is 8The world oil production is 866 million bopd, million bopd, OPEC production is around 31 OPEC production is around 31 mmillion bopdillion bopd

Life time of the world oil reserve (R/P) = 35 years, Life time of the world oil reserve (R/P) = 35 years, R/P of Middle East oil = 90 yearsR/P of Middle East oil = 90 years

The reserve of The reserve of non conventional oil non conventional oil (shale, tar (shale, tar sand, EOR) = 9 trillion barrel, mostly located in sand, EOR) = 9 trillion barrel, mostly located in CanadaCanada

The The oil consumption of OECD is 75% oil consumption of OECD is 75% of the total of the total of the world consumption.of the world consumption.


THE OWNERSHIP THE OWNERSHIP OF SUBSURFACE NATURAL RESOURCESOF SUBSURFACE NATURAL RESOURCES

(2 school of thoughts)(2 school of thoughts)

The ownership of land The ownership of land includesincludes the right to the right to exploit natural resources in its subsurface. exploit natural resources in its subsurface. The natural resources contained therein are The natural resources contained therein are private proprietaryprivate proprietary

The ownership of land The ownership of land does not include does not include the the right to exploit natural resources in its right to exploit natural resources in its subsurface. The natural resources contained subsurface. The natural resources contained therein are therein are public proprietarypublic proprietary..


WORLD’s WORLD’s OIL AND GAS OIL AND GAS MINING AGREEMENTMINING AGREEMENTSS

ConcessionConcession

Production Sharing ContractProduction Sharing Contract

Risk Service ContractRisk Service Contract

Service ContractService Contract

Joint VentureJoint Venture


HISTORY OF OIL AND GAS HISTORY OF OIL AND GAS LAWS IN INDONESIALAWS IN INDONESIA

Prior 1960 : INDISCHE MIJN WETPrior 1960 : INDISCHE MIJN WET

1960 – 2001 : OIL AND GAS LAW NO. 44/19601960 – 2001 : OIL AND GAS LAW NO. 44/1960

1971 – 2001 : PERTAMINA LAW NO. 8/19711971 – 2001 : PERTAMINA LAW NO. 8/1971

2001 2001 –– NowNow : OIL AND GAS LAW NO. 22/2001 : OIL AND GAS LAW NO. 22/2001


HISTORY OF OIL AND GAS HISTORY OF OIL AND GAS CONTRACTSCONTRACTS IN INDONESIA IN INDONESIA

Prior 1945:Prior 1945: CONCESSION CONCESSION

1950-1960: CONCESSION EXTENSION1950-1960: CONCESSION EXTENSION 1960-1966: CONTRACT OF WORK1960-1966: CONTRACT OF WORK

1966-2001: PRODUCTION SHARING CONTRACT1966-2001: PRODUCTION SHARING CONTRACT

20012001-Now-Now: COOPERATION CONTRACT: COOPERATION CONTRACT


THE SUMMARY OFTHE OIL & GAS LAW

NO. 22/2001


1. General Provision2. Principle and Purpose3. Control and Business4. Upstream Business Activities5. Downstream Business Activities6. State Revenue7. Land ownership8. Development and Supervision9. Executive Body and Regulatory Body10. Investigation11. Criminal Provisions12. Transitional Provisions13. Other Provisions14. Closing Provisions

CHAPTERS


• The oil and gas business activities are conducted within the Indonesian jurisdiction.

• The right on the working area does not include the right on land surface.

Note: the jurisdiction to explore and exploit the oil and gas resources is not limited within Indonesian’s territory only but covers the continental shelf as well

LAND OWNERSHIP & JURIDICTION


UPSTREAM ACTIVITIES

1. The government as the holder of the mining authority controls the oil and gas resources.

2. The government as the holder of the mining authority establish the Executive Body (BPMIGAS) to perform the management of the upstream business activities.

3. The business entity (BE) or permanent establishment (PE) shall conduct upstream business activities based on the Cooperation Contract with the Executive Body.

4. The Cooperation Contract shall at least fulfill the following requirement :

• Natural resources ownership remains under the government up to the point of transfer.

• The Executive Body controls the management operations.

• All capital and risk shall be undertaken by the business entity or permanent establishment.


1. The Minister shall stipulate and offer the working areas for the implementation of the upstream activities to business entities (BE) on permanent establishment (PE)

2. The Minister shall determine the BE/PE which will (...) conduct the exploration and production activities in the working areas.

3. Each BE or PE shall only be granted 1 operational area. In the event that they manage several working areas, a separate legal entity for each working area shall be established.

Note: the words be given the authority to between brackets in paragraph 2 has been deleted and be declared as null and void

WORKING AREAS


WORKING AREAWORKING AREA (continued)(continued)

Working areas are Working areas are set up and set up and approved by the approved by the Minister in Minister in consultation with BPMIGAS consultation with BPMIGAS and and relevant relevant Local GovernmentLocal Government officials officials

Working areas can be offered to BE/PE either through Working areas can be offered to BE/PE either through tenders or direct offers tenders or direct offers

Pertamina Pertamina can request can request for Minister approval to for Minister approval to operate an open working area that operate an open working area that has not been has not been tendered or offeredtendered or offered

A BE/PE can only hold A BE/PE can only hold one working area one working area (ring-fencing (ring-fencing principle)principle)

Working areas should be Working areas should be gradually relinquished gradually relinquished in in accordance with terms agreed in the Cooperation accordance with terms agreed in the Cooperation Contract.Contract.


1. The period of the cooperation contract shall be implemented for maximum of 30 years. A BE or PE may apply for the extension of cooperation contract period for maximum of 20 years.

2. The BE or PE shall be obligated to submit maximum 25% of its portion from the oil and/or gas production to fulfill the domestic demand.

3. The Executive Body shall appoint the seller of the state’s portion of oil and/or gas which will give the maximum benefit for the country.

PERIOD OF CONTRACT, DMO, SELLER OF CRUDE

Note: the word “maximum” in paragraph 2 has been deleted and be declared as null and void


• Downstream business activities comprising of processing, transportation, storage and trading shall be conducted by BE after receiving business license from the Government.

• Downstream business activities shall be conducted through the mechanism of appropriate, fair and transparent business competition.

• The government shall be obligated to guarantee the availability and the continuous distribution of oil products throughout the territory of the state.

DOWNSREAM ACTIVITIES


• The government shall be responsible for regulating and supervising business activities on the oil products availability and distribution as well as gas transportation through pipelines.

• The implementation thereof shall be conducted by Regulatory Body (BPHMIGAS) which is established for that purpose.

DOWNSREAM ACTIVITIES (continued)


• Prices for oil products and natural gas shall be left to the mechanism of healthy and fair business competition.

• The implementation of such policy will not reduce the Government’s social responsibility to the certain groups of people.

DOWNSREAM ACTIVITIES (continued)

Article 28, 2-3 has been deleted and declared as null and

void)


1. BE and PE conducting upstream activities shall pay tax and non-tax state revenue.

2. The tax state revenue includes:

1. taxes

2. import duties, other contributions and levies

3. regional taxes and regional retributions

3. The non-tax state revenue includes:

1. state portion

2. state contributions: fix, exploration and exploitation

3. bonuses

STATE REVENUE


• The obligation to pay tax is done in accordance with (Lex Specialist):

• The tax law that prevailed when the Cooperation contract was signed ,or

• The prevailing tax law

• The state portion comprises the state and regional revenues the proportionality of which is determined by the related prevailing law

STATES REVENUE (continued)


SUPERVISIONS1. The responsibility for supervising compliance with

the prevailing laws and regulations shall remains under the competence of the Ministry whose duties and authorities cover the oil and gas activities and other related Ministries.

2. The Executive Body (BPMIGAS) shall conduct supervision on the implementation of upstream business activities based on the cooperation contract.

3. The Regulatory Body (BPHMIGAS) shall conduct supervision on the implementation of downstream business activities based on the business license.


SUPERVISIONSUPERVISIONSS OF OF UPSTREAM ACTIVITIESUPSTREAM ACTIVITIES

Guidance of upstream activities is the Guidance of upstream activities is the responsibility of GOI. The MoEMR is responsibility of GOI. The MoEMR is responsible for responsible for ensuring the implementation ensuring the implementation of upstream business activities of upstream business activities in accordance in accordance with the relevant laws and regulationswith the relevant laws and regulations..

Upstream business activities are executed Upstream business activities are executed and controlled through and controlled through Cooperation Contracts Cooperation Contracts (CCs) between BPMIGAS and BE/(CCs) between BPMIGAS and BE/PEPE..

BPMIGAS exercises BPMIGAS exercises supervision and control supervision and control over execution of CCsover execution of CCs. It is also responsible . It is also responsible for coordinating relationship between for coordinating relationship between Contractors and GOI.Contractors and GOI.


EXECUTIVE BODY(BPMIGAS)

1. The Executive Body shall be a state owned legal entity (BHMN)

2. The head of Executive Body shall be appointed and dismissed by the President after consultation with DPR

3. In performing his duty the head of Executive Body shall be accountable to the President.


REGULATORY BODYBPHMIGAS

1. The structure of Regulatory Body shall comprise of the committee and division

2. The Regulatory Body shall consist of 1 Chairman and 8 members

3. The chairman and members of the Committee shall be appointed and dismissed by the President upon approval of DPR.

4. The Regulatory Body shall be accountable to the President.


1. Within a maximum period of 1 year the Executive Body shall be established.

2. Within a maximum period of 1 year the Regulatory Body shall be established.

3. Within a maximum period of 2 years PERTAMINA shall be transformed into a state owned limited liability company.

4. On the date of the establishment of the company as the replacement of PERTAMINA, the afore mentioned company shall be obligated to enter into cooperation contracts with the Executive Body to continue upstream business activities in the former PERTAMINA areas

5. The company shall deemed as having obtained the required licenses for processing, transporting, storage and trading businesses.

TRANSITION PROVISIONS


5. At the time this law comes into effect :

• with the establishment of the Executive Body, all rights, obligations and consequences of PSC between Pertamina and other parties shall be transferred into Executing Body.

• all said PSC contracts shall be declared as remaining applicable until the expiration of the contracts concerned.

TRANSITION PROVISIONS(continued)


SUPERVISION FUNCTION AND DUTY

MINISTRY OF ENERGY & MINERAL RESOURCES

DJMIGAS

EXECUTIVE BODY

BPMIGASREGULATORY BODY

BPHMIGASConservation of the Natural Oil and Gas resources and reserves;

Management of data regarding Natural Oil and Gas

Application of good technical principles;

Types and qualities of the processed products of Oil and Natural Gas

Allocation and distribution of Oil Fuel (BBM) and basic commodities;

Work safety and health

Environmental management;

Utilization of domestic goods, services, technology and engineering and designing capabilities;

Employment of expatriates;

Development of Indonesia work force;

Development of local environment and community;

Control over, development of and application of Natural Oil and Gas technology;

Other activities in the field of Natural Oil and Gas activities insofar as such activities involve the public interest.

a

b c

d

ef

g

Provide its consideration to the Minister on his policy in preparing and offering the Operational Area as well as the Cooperation Contract.Conduct the execution of the Cooperation Contract;Review and submit the plan to develop the field to be produced for the first time within any Operational Area to the Minister to obtain approval;Approve field development plans other than as referred to in sub paragraph c;Approve work programs and budgets;Implement monitoring and to report the implementation of the Cooperation Contract to Minister.Appoint the seller of the state’s portion of Natural Oil and/or Natural Gas which will give the maximum benefit for the county.

Availability and distribution of Oil Fuel National Oil product reserves;The use and Transportation and Storage facilities of Oil products.Tariff of Natural Gas Transportation through the pipelines;Price of Natural Gas for households and small-scale customersNatural Gas transmission and distribution business;

a

b

e

f

a

b

c

d

e

f

g

h

i

j

k

l

m

OIL AND GAS LAW OIL AND GAS LAW NO. 22/2001 NO. 22/2001 & IMPLEMENTATION& IMPLEMENTATION

PP No. 42/2002PP No. 42/2002 – BPMIGAS’ Establishment – BPMIGAS’ Establishment

PP No. 86/2002 – BPH MIGAS’ EstablishmentPP No. 86/2002 – BPH MIGAS’ Establishment

PP No. 35/200PP No. 35/2004 – Upstream Regulation4 – Upstream Regulation

PP No. 36/2004 – Downstream RegulationPP No. 36/2004 – Downstream Regulation


APPENDIXESAPPENDIXES


OIL AND GAS OIL AND GAS MINING MINING JURIDICTIONJURIDICTION

ARCHIPELAGIC STATE (JUANDA ARCHIPELAGIC STATE (JUANDA DECLARATION)DECLARATION)

GENEVA CONVENTION 1958GENEVA CONVENTION 1958

UNITED NATION CONVENTION UNITED NATION CONVENTION LAW OF THE SEA (UNCLOS) 1982LAW OF THE SEA (UNCLOS) 1982


INDONESIAN CONT. SHELFINDONESIAN CONT. SHELF

INDONESIA GEOMORPHOLOGYINDONESIA GEOMORPHOLOGY

CONTINENTAL SHELFCONTINENTAL SHELF

CONTINENTAL SHELF (2)CONTINENTAL SHELF (2)

EXPLORATIONEXPLORATION

EXPLOITATIONEXPLOITATION

OIL PROCESSINGOIL PROCESSING

OIL TRANSPORTATION (A)OIL TRANSPORTATION (A)

TRANSPORTATION (B)TRANSPORTATION (B)

OIL TRANSPORTATION (C)OIL TRANSPORTATION (C)

OIL STORAGEOIL STORAGE

OIL TRADINGOIL TRADING

OIL AND GAS OIL AND GAS MINING RIGHTMINING RIGHT

MINERAL RIGHT (STATE)MINERAL RIGHT (STATE)

MINING RIGHT (GOVERNMENT)MINING RIGHT (GOVERNMENT):: Executed by BPMIGASExecuted by BPMIGAS

ECONOMIC RIGHT (BE)ECONOMIC RIGHT (BE)


OIL AND GAS MINING RIGHTOIL AND GAS MINING RIGHTlegal / business entitylegal / business entity

PT PERSERO :PT PERSERO : PROFIT ORIENTED VS. SOCIAL MISSION = 100 : 0PROFIT ORIENTED VS. SOCIAL MISSION = 100 : 0 PERUM:PERUM: PROFIT ORIENTED VS. SOCIAL MISSION = 65 : PROFIT ORIENTED VS. SOCIAL MISSION = 65 :

3535 PERJAN:PERJAN: PROFIT ORIENTED VS. SOCIAL MISSION = 35 : 65PROFIT ORIENTED VS. SOCIAL MISSION = 35 : 65 BHMN:BHMN: PROFIT ORIENTED VS. SOCIAL MISSION = 0 : 100PROFIT ORIENTED VS. SOCIAL MISSION = 0 : 100


COOPERATION COOPERATION CONTRACTS / PSCCONTRACTS / PSC


COOPERATION CONTRACTCOOPERATION CONTRACTSS IN INDONESIAIN INDONESIA

Contract of WorkContract of Work

Production Sharing Contract Production Sharing Contract

Technical AssistTechnical Assistaanncece Contract Contract

EOR ContractEOR Contract

Joint Operation AgreementJoint Operation Agreement


REGULATION APPLIED ON REGULATION APPLIED ON COOPERATION CONTRACTCOOPERATION CONTRACTSS

Investment and riskInvestment and risk

Return on Investment and ProfitReturn on Investment and Profit

Management ControlManagement Control

Production sharingProduction sharing

Asset ownershipAsset ownership


CONTRACT OF WORKCONTRACT OF WORK

State own companies as the holder of mining rightState own companies as the holder of mining right

Management is in the hand of ContractorManagement is in the hand of Contractor

Profit sharing 60:40 Profit sharing 60:40

Government share may not less than 20% of gross Government share may not less than 20% of gross productionproduction

DMO maximum 25% of gross production based on DMO maximum 25% of gross production based on costcost && feefee


PRODUCTION SHARING PRODUCTION SHARING CONTRACT (PSC)CONTRACT (PSC)

The state as the holder of mining rightThe state as the holder of mining right

BPMIGAS holds the operational BPMIGAS holds the operational management of PSCmanagement of PSC

InIn--kind Production sharingkind Production sharing

DMO 25% of the Contractor shareDMO 25% of the Contractor share


GENERAL PROVISIONS OF PSCGENERAL PROVISIONS OF PSC The term of agreementThe term of agreement Working area RelinquishmentWorking area Relinquishment Minimum investmentMinimum investment Work Program & BudgetWork Program & Budget TaxTaxeses BonusBonuseses MarketingMarketing Domestic Market Obligation Domestic Market Obligation Health, Safety & Environment Health, Safety & Environment

protection and Post Miningprotection and Post Mining Local Content (employee, Goods Local Content (employee, Goods

and Services)and Services)Program Magister TM

FTKE Trisakti

THE EVOLUTION OF PSC THE EVOLUTION OF PSC

Cost recovery max. 40% annuallyCost recovery max. 40% annually Pertamina pays tax for Contractor revenuePertamina pays tax for Contractor revenue After commerciality 10% of Contractor After commerciality 10% of Contractor

interest should be offered to national companyinterest should be offered to national company In the period of 1974-1977 contraIn the period of 1974-1977 contraccttoror pays an pays an

additional income to Governmentadditional income to Government

1964-1977



No Cost recovery ceiling (in accordance No Cost recovery ceiling (in accordance to GAAP)to GAAP)

Contractor directly pays 56% income tax Contractor directly pays 56% income tax to Government (IRS ruling) to Government (IRS ruling)

DMO incentive with international price DMO incentive with international price set up for the first 5 yearsset up for the first 5 years

Investment Credit 20% of production Investment Credit 20% of production facilities investmentfacilities investment

1978-1987



ContractorContractor directly pays 48% income tax to directly pays 48% income tax to GovernmentGovernment

Investment credit is given with no condition of Investment credit is given with no condition of minimum Government revenue of 49% of gross minimum Government revenue of 49% of gross revenuerevenue

DMO with 10% international price for the first 5 DMO with 10% international price for the first 5 yearsyears

CommercialityCommerciality is given with no guarantee is given with no guarantee requirement for Government receiving 25% requirement for Government receiving 25% minimum of gross revenueminimum of gross revenue

Special Special incentifincentif for EOR, deep water, frontier for EOR, deep water, frontier area and tertiary formationarea and tertiary formation

1988-2002


Upstream:Upstream:1.1. Guidance of upstream business activities is the responsibility Guidance of upstream business activities is the responsibility

of the Government. of the Government. 2.2. The Minister of EMR is responsible for ensuring the The Minister of EMR is responsible for ensuring the

implementation of upstream business activities in accordance implementation of upstream business activities in accordance with the relevant laws and regulations. with the relevant laws and regulations.

3.3. Upstream business activities are executed and controlled Upstream business activities are executed and controlled through Cooperation Contract between BPMIGAS and business through Cooperation Contract between BPMIGAS and business entities / Permanent Establishmententities / Permanent Establishment..

Downstream:Downstream:1.1. Downstream business can be operated in a fair and transparent Downstream business can be operated in a fair and transparent

manner by a corporate body that has obtained a business manner by a corporate body that has obtained a business license issued by the Minister of EMR. license issued by the Minister of EMR.

2.2. BPH MIGAS is responsible for regulating the distribution of fuel BPH MIGAS is responsible for regulating the distribution of fuel products as well as natural gas trough pipelines.products as well as natural gas trough pipelines.

REGULATORY FRAMEWORKREGULATORY FRAMEWORK


THANK YOUTHANK YOU


OIL AND GAS POLICY OIL AND GAS POLICY AND REGULATORY AND REGULATORY

FRAMEWORK FRAMEWORK

SUPERVISION OF UPSTREAM SUPERVISION OF UPSTREAM ACTIVITIESACTIVITIES

Guidance Guidance of upstream activities is the of upstream activities is the responsibility of responsibility of GOIGOI. The MoEMR is responsible for ensuring the . The MoEMR is responsible for ensuring the implementation of upstream business activities implementation of upstream business activities in in accordance with the relevant laws and regulationsaccordance with the relevant laws and regulations..

Upstream business activities are Upstream business activities are executed and executed and controlled through Cooperation Contracts (CCs)controlled through Cooperation Contracts (CCs) between BPMIGAS and BE/PE.between BPMIGAS and BE/PE.

BPMIGAS exercises BPMIGAS exercises supervision and control over supervision and control over execution of CCsexecution of CCs. It is also responsible for coordinating . It is also responsible for coordinating relationship between Contractors and GOI.relationship between Contractors and GOI.

Duties of BPMIGAS :Duties of BPMIGAS :

to provide to provide opinionopinion to the MoEMR regarding its policies on to the MoEMR regarding its policies on matters of matters of preparation and offers of working areas and preparation and offers of working areas and Cooperation ContractsCooperation Contracts;;

to conduct the signing of Cooperation Contracts;to conduct the signing of Cooperation Contracts; to to evaluate Plan of Developmentevaluate Plan of Development of fields that are put on of fields that are put on

production in a given working area and to submit the production in a given working area and to submit the evaluation to the MoEMR to obtain approval;evaluation to the MoEMR to obtain approval;

to grant to grant approval for Plan of Developmentapproval for Plan of Development;; to grant to grant approval for Work Program and budgetsapproval for Work Program and budgets;; to conduct monitoring of, and reporting to the MoEMR on, to conduct monitoring of, and reporting to the MoEMR on,

the implementation of Cooperation Contracts; andthe implementation of Cooperation Contracts; and to to appoint sellersappoint sellers of the State's share of crude oil and/or of the State's share of crude oil and/or

natural gas that can provide the greatest possible natural gas that can provide the greatest possible advantage to the Government.advantage to the Government.

Working AreasWorking Areas Working areas are formalized upon Working areas are formalized upon approval of the approval of the

MoEMR in consultation with BPMIGAS and relevant MoEMR in consultation with BPMIGAS and relevant Local Government officialsLocal Government officials;;

Working areas can be offered to business entities and Working areas can be offered to business entities and PEs either through PEs either through tenders or through direct offerstenders or through direct offers; ;

Pertamina can requestPertamina can request to operate an open working to operate an open working area that area that has not been tendered or offeredhas not been tendered or offered, and the , and the MoEMR may approve such request;MoEMR may approve such request;

A business unit or A business unit or PE can only hold one working areaPE can only hold one working area (i.e. the "ring-fencing" principle); and(i.e. the "ring-fencing" principle); and

Working areas should be Working areas should be returned (in stages or in full) returned (in stages or in full) and commitments fulfilledand commitments fulfilled in accordance with terms in accordance with terms agreed in the Cooperation Contract.agreed in the Cooperation Contract.

General SurveysGeneral Surveys

General surveys in open areas within Indonesia General surveys in open areas within Indonesia jurisdiction are to be conducted by a business entity at jurisdiction are to be conducted by a business entity at its its own expense and riskown expense and risk with specific permission from with specific permission from the MoEMR;the MoEMR;

General surveys and exploration General surveys and exploration data are the property data are the property of the Stateof the State and controlled by the Government. Any and controlled by the Government. Any utilization and transfer of data inside or outside of utilization and transfer of data inside or outside of Indonesia requires specific permission from the Indonesia requires specific permission from the MoEMRMoEMR

Data resulting from exploration and exploitation Data resulting from exploration and exploitation activities must activities must be surrendered to the MoEMRbe surrendered to the MoEMR (through (through BPMIGAS) within three months of its collection, BPMIGAS) within three months of its collection, processing and interpretation.processing and interpretation.

Execution of Upstream Execution of Upstream Business ActivitiesBusiness Activities

Upstream business activities can be conducted by business entitiesUpstream business activities can be conducted by business entitiesand/or PEs on the basis of Cooperation Contracts entered intoand/or PEs on the basis of Cooperation Contracts entered intowith BPMIGAS. These contracts must contain at a minimum thewith BPMIGAS. These contracts must contain at a minimum thefollowing terms and conditions:following terms and conditions:

OwnershipOwnership of oil and gas natural resources to of oil and gas natural resources to remain with the remain with the Government until the point of deliveryGovernment until the point of delivery; ;

Ultimate Ultimate management controlmanagement control of operations to remain with of operations to remain with BPMIGAS; andBPMIGAS; and

All All capital and riskscapital and risks to be borne by the Contractor. to be borne by the Contractor.

The basic provisions of a Cooperation Contract need to be inThe basic provisions of a Cooperation Contract need to be inaccordance with prevailing laws and regulations and for the greatest accordance with prevailing laws and regulations and for the greatest benefit to the Government. The form and the basic provisions of a benefit to the Government. The form and the basic provisions of a Cooperation Contract require approval of the MoEMR and the Head Cooperation Contract require approval of the MoEMR and the Head

of BPMIGAS.of BPMIGAS.

Basic provisions required in Basic provisions required in Cooperation Contracts :Cooperation Contracts :

state revenues, work areas and their return, state revenues, work areas and their return, obligation to incur funds, obligation to incur funds, transfer of ownership of the of oil and gas production, transfer of ownership of the of oil and gas production, time periods and conditions for extension of contracts, time periods and conditions for extension of contracts, resolution of disputes, resolution of disputes, obligation to supply crude oil and/or natural gas for obligation to supply crude oil and/or natural gas for

domestic needs, domestic needs, termination of contracts, termination of contracts, obligations post mining operations,obligations post mining operations, occupational safety and health, occupational safety and health,

……..Continued..Continued

……ContinuedContinued

management of the environment, management of the environment, transfer of rights and responsibilities, transfer of rights and responsibilities, reporting requirements, reporting requirements, field development plans, field development plans, priority on use of domestic goods and services,priority on use of domestic goods and services, Community development and preserve the Community development and preserve the

rights of traditional communities, and rights of traditional communities, and priority on the use of Indonesian manpower.priority on the use of Indonesian manpower.

The Term of a Cooperation The Term of a Cooperation ContractContract

The The termterm of a Cooperation Contract is of a Cooperation Contract is thirty yearsthirty years from the date of approval and the Contractor must from the date of approval and the Contractor must startstart the activity within the activity within six monthssix months from the date of from the date of signing of the Cooperation Contract. signing of the Cooperation Contract.

The terms start with an The terms start with an exploration period of six exploration period of six yearsyears which may be which may be extended up to ten years. extended up to ten years.

If there are If there are no commercially viable discoveriesno commercially viable discoveries in in the exploration period, the Cooperation Contract the exploration period, the Cooperation Contract terminates.terminates.

……ContinuedContinued

The original thirty year term can be The original thirty year term can be extended for a extended for a twenty yeartwenty year period for which specific approval from period for which specific approval from the MoEMR is required.the MoEMR is required.

A request for extension can be A request for extension can be submitted no submitted no earlier than ten yearsearlier than ten years and and no later than two yearsno later than two years before the Cooperation Contract expires. before the Cooperation Contract expires.

If the Contractor If the Contractor has a natural gas sale/purchase has a natural gas sale/purchase contractcontract, the Contractor may request extension of , the Contractor may request extension of the Cooperation Contract the Cooperation Contract before the above-before the above-stipulated time limitsstipulated time limits..

Expenditure During the Expenditure During the Exploration PeriodExploration Period

A Contractor is required to carry out A Contractor is required to carry out definite work definite work programs with the estimated total expenditure programs with the estimated total expenditure laid out laid out in the CCin the CC during the first three years during the first three years of the exploration of the exploration period. period.

Under-expenditureUnder-expenditure can be made up only with the can be made up only with the MoEMR's consent. MoEMR's consent.

Inability to carry out the required obligationInability to carry out the required obligation may lead to may lead to termination of the CC. termination of the CC.

If a Contractor terminates a CC without meeting work If a Contractor terminates a CC without meeting work program commitments, program commitments, under-expenditure may need to under-expenditure may need to be paidbe paid to the Government. to the Government.

Participating InterestParticipating Interest

A Contractor can A Contractor can transfertransfer part or all of its part or all of its participating interestparticipating interest to a to a non-affiliatenon-affiliate with prior with prior approval of the MoEMR and BPMIGAS. approval of the MoEMR and BPMIGAS.

If such a transfer is to a If such a transfer is to a non-affiliated non-affiliated company, or company, or partnerpartner, the MoEMR may require the Contractor to , the MoEMR may require the Contractor to first first offer it to a national companyoffer it to a national company. .

The permission of the MoEMR is also required The permission of the MoEMR is also required before before disclosure of working area datadisclosure of working area data to another to another party that may be necessary for effecting such party that may be necessary for effecting such transfer. transfer.

…….Continued.Continued


Transfer of a Contractor's majority participating interest Transfer of a Contractor's majority participating interest to a non-affiliate is to a non-affiliate is not allowednot allowed during the during the first three first three years of the exploration periodyears of the exploration period..

The Contractor is required to The Contractor is required to offer a participating offer a participating interest to a regionally owned business entityinterest to a regionally owned business entity (BUMD) (BUMD) upon first commercial discovery of a work area, which upon first commercial discovery of a work area, which the local company must accept within 60 days from the the local company must accept within 60 days from the offer date. offer date.

If the offer is not availed by a regionally owned If the offer is not availed by a regionally owned company within the stipulated period, the Contractor is company within the stipulated period, the Contractor is required to required to offeroffer such interest to a such interest to a national companynational company. .

The The offer is declared closedoffer is declared closed if the national company if the national company does not accept the offer within a period of 60 days does not accept the offer within a period of 60 days from the date of receiving the offer.from the date of receiving the offer.

Jurisdiction and ReportingJurisdiction and Reporting

Cooperation Contracts are required to be Cooperation Contracts are required to be subject to subject to Indonesian lawIndonesian law. .

Contractors are obligated to Contractors are obligated to report their report their discoveries and the results of certificationdiscoveries and the results of certification of oil of oil and/or gas reserves to the MoEMR/BPMIGAS. and/or gas reserves to the MoEMR/BPMIGAS.

Contractors are also required to perform their Contractors are also required to perform their activities in line with activities in line with good engineering good engineering practices.practices.

Reservoir Extension & Reservoir Extension & UnitizationUnitization

A A reservoir extensionreservoir extension into another Contractor's into another Contractor's work area, an open area, or the territory/continental work area, an open area, or the territory/continental shelf of another country must be reported to the shelf of another country must be reported to the MoEMR/ BPMIGAS. MoEMR/ BPMIGAS.

UnitizationUnitization arrangements must be formalized when arrangements must be formalized when a reservoir extends into another Contractor's work a reservoir extends into another Contractor's work area. area.

If the If the reservoir extends into an open areareservoir extends into an open area, a , a unitization must be formalized when such open unitization must be formalized when such open area becomes a work area. area becomes a work area.

… ….Continued .Continued


However, if such open area does not become a However, if such open area does not become a work area within a period of five years, work area within a period of five years, a a proportionate extension of a contract's workingproportionate extension of a contract's working area can be requested.area can be requested.

All unitizations must be approved by the MoEMR.All unitizations must be approved by the MoEMR. For a reservoir that For a reservoir that extends into boundaries of extends into boundaries of

another countryanother country, the MoEMR may pass a , the MoEMR may pass a resolution based on the continental shelf resolution based on the continental shelf agreement with the other country, and on agreement with the other country, and on considerations of optimum benefit to the considerations of optimum benefit to the Government.Government.

Upstream FacilitiesUpstream Facilities The activities of The activities of field processing, transportation, storage, field processing, transportation, storage,

and sale of own productionand sale of own production, by a Contractor within the , by a Contractor within the domain of an overall upstream development/project are domain of an overall upstream development/project are classified as upstream business activities. These should classified as upstream business activities. These should not be aimed at obtaining a profit. not be aimed at obtaining a profit.

Use of such facilities Use of such facilities by a third partyby a third party on a proportional on a proportional operating cost sharing basis is allowed provided there is operating cost sharing basis is allowed provided there is excess capacity, approval of BPMIGAS has been excess capacity, approval of BPMIGAS has been obtained, and that such activities are not aimed at obtained, and that such activities are not aimed at making a profit. making a profit.

However, if such facilities are used jointly with another However, if such facilities are used jointly with another party, with an objective of party, with an objective of making a profit, these making a profit, these represent downstream activitiesrepresent downstream activities and require and require establishment of a separate business entity under a establishment of a separate business entity under a downstream business permit.downstream business permit.

Utilization of Crude Oil & Utilization of Crude Oil & Natural Gas to Fulfill Domestic Natural Gas to Fulfill Domestic NeedsNeeds

The Contractor is responsible for participating in The Contractor is responsible for participating in meeting the demand for crude oil and/or natural gas for meeting the demand for crude oil and/or natural gas for domestic needs. domestic needs.

Under GR No. 35 the Contractor's share in meeting Under GR No. 35 the Contractor's share in meeting domestic needs was set at a maximum of 25% of domestic needs was set at a maximum of 25% of Contractor's share of production of crude oil and/or Contractor's share of production of crude oil and/or natural gas. natural gas.

Subsequently, a Supreme Court decision eliminated Subsequently, a Supreme Court decision eliminated this maximum percentage and required a floor this maximum percentage and required a floor percentage for DMO.percentage for DMO.

State RevenuesState Revenues

Contractors are required to pay state revenues in Contractors are required to pay state revenues in the form of taxes and non-tax revenues. the form of taxes and non-tax revenues.

The taxes consist of state taxes, import duties and The taxes consist of state taxes, import duties and tariffs, regional taxes and other levies. tariffs, regional taxes and other levies.

For most PSCs import duties and tariffs, regional For most PSCs import duties and tariffs, regional taxes and other levies are assumed and/or taxes and other levies are assumed and/or discharged by the Government. discharged by the Government.

The non-tax revenues consist of the state's share The non-tax revenues consist of the state's share in the form of fixed fees and exploration and in the form of fixed fees and exploration and exploitation fees and bonuses.exploitation fees and bonuses.

Settlement of of land UseSettlement of of land Use

Upstream rights do not include land surface rights.Upstream rights do not include land surface rights.

If land is necessary for a project, a Contractor is If land is necessary for a project, a Contractor is required to obtain a right to use such land and required to obtain a right to use such land and obtain relevant land registration and other obtain relevant land registration and other documents. documents.

Consideration for land is based upon the prevailing Consideration for land is based upon the prevailing market value.market value.



A Contractor holding a right of way for a A Contractor holding a right of way for a transmission pipeline must permit other transmission pipeline must permit other Contractors to use its oil and gas transmission Contractors to use its oil and gas transmission pipeline on a technical and economic pipeline on a technical and economic consideration basis, and after consideration of consideration basis, and after consideration of safety and security matters. safety and security matters.

A Contractor that plans to use a right of way can A Contractor that plans to use a right of way can directly negotiate with the Contractor/other party directly negotiate with the Contractor/other party that holds the right of way, and if agreement that holds the right of way, and if agreement between parties cannot be reached, the between parties cannot be reached, the MoEMR/BPMIGAS can be approached for MoEMR/BPMIGAS can be approached for settlement.settlement.

HSE Management and HSE Management and Community DevelopmentCommunity Development

Contractors are required to comply with relevant laws Contractors are required to comply with relevant laws and regulations on occupational safety and health, and regulations on occupational safety and health, management of the natural environment and management of the natural environment and development of local communities.development of local communities.

Contractors are required to provide funds for Contractors are required to provide funds for undertaking any community development programs. undertaking any community development programs. Community development activities should be Community development activities should be conducted in consultation with the Local Government.conducted in consultation with the Local Government.

A Contractor's contribution to community development A Contractor's contribution to community development can be in kind, in the form of physical facilities and can be in kind, in the form of physical facilities and infrastructure, or through empowerment of local infrastructure, or through empowerment of local enterprises and workforce. Expenditures for community enterprises and workforce. Expenditures for community development are usually cost recoverable.development are usually cost recoverable.

Use of Domestic ResourcesUse of Domestic Resources

All goods and equipment purchased by Contractors All goods and equipment purchased by Contractors become the property/assets of the Government. Any become the property/assets of the Government. Any import of goods and equipment requires appropriate import of goods and equipment requires appropriate approvals from the MoEMR, the MoF, and other approvals from the MoEMR, the MoF, and other minister(s) whose area of duties includes trade minister(s) whose area of duties includes trade affairs. affairs.

Goods and equipment, services, technology, and Goods and equipment, services, technology, and engineering and design capabilities can be imported engineering and design capabilities can be imported only if they are not available domestically. Such only if they are not available domestically. Such imports must meet requirements of quality/grade, imports must meet requirements of quality/grade, efficiency of operating costs, guaranteed delivery efficiency of operating costs, guaranteed delivery time and after sales service.time and after sales service.



Management of goods and equipment rests with Management of goods and equipment rests with BPMIGAS. Any excess supp'ly of goods and BPMIGAS. Any excess supp'ly of goods and equipment must be transferred to other Contractors equipment must be transferred to other Contractors within Ihdonesia with appropriate approvals of within Ihdonesia with appropriate approvals of BPMIGAS, the MoEMR and the MoF.BPMIGAS, the MoEMR and the MoF.

BPMIGAS is required to surrender excess goods and BPMIGAS is required to surrender excess goods and equipment to the MoF, if the equipment cannot be used equipment to the MoF, if the equipment cannot be used by another Contractor. Any other use of such goods by another Contractor. Any other use of such goods and equipment, including donation, sale, exchange, and equipment, including donation, sale, exchange, use for capital participation by the State, destruction or use for capital participation by the State, destruction or rental, requires approval of the MoF on the rental, requires approval of the MoF on the recommendation of BPMIGAS/ MoEMR.recommendation of BPMIGAS/ MoEMR.

All goods and equipment used for upstream activities All goods and equipment used for upstream activities must be surrendered to the Government upon must be surrendered to the Government upon termination of the Cooperation Contract.termination of the Cooperation Contract.

ManpowerManpower

Contractors should give preference to Indonesians Contractors should give preference to Indonesians for meeting a work area's manpower needs.for meeting a work area's manpower needs.

Contractors may use foreign manpower for Contractors may use foreign manpower for positions requiring expertise that cannot be met by positions requiring expertise that cannot be met by Indonesian personnel. Indonesian personnel.

The governing manpower laws and regulations The governing manpower laws and regulations should apply to employees of a Contractor. should apply to employees of a Contractor.

Contractors are required to carry out development, Contractors are required to carry out development, education and training programs for Indonesian education and training programs for Indonesian workers.workers.

Transitional ProvisionsTransitional Provisions

PSCs and other contracts related to the PSCs between PSCs and other contracts related to the PSCs between Pertamina and other parties as well as JOA/JOB which pre-Pertamina and other parties as well as JOA/JOB which pre-date Law No. 22 were transferred to BPMIGAS and remain in date Law No. 22 were transferred to BPMIGAS and remain in force until the end of the contracts concerned. The transfer of force until the end of the contracts concerned. The transfer of contracts did not alter the provisions of such contracts. Rights contracts did not alter the provisions of such contracts. Rights and responsibilities in JOA/JOB were transferred to PT and responsibilities in JOA/JOB were transferred to PT Pertamina (Persero).Pertamina (Persero).

Contracts between Pertamina and other parties in the form of Contracts between Pertamina and other parties in the form of TAC and EOR were transferred to PT Pertamina (Persero) and TAC and EOR were transferred to PT Pertamina (Persero) and remain in force until the end of the contracts concerned. When remain in force until the end of the contracts concerned. When the TAC and EOR contract term expires, the contract areas will the TAC and EOR contract term expires, the contract areas will continue to be part of the work areas of Pertamina.continue to be part of the work areas of Pertamina.

PSC AND PSC AND COMMERCIAL TERMSCOMMERCIAL TERMS

Terms of PSCTerms of PSCThe general concept of the PSC is that theThe general concept of the PSC is that theContractors bear all risks and costs of explorationContractors bear all risks and costs of explorationuntil commencement of commercial production. Ifuntil commencement of commercial production. Ifproduction does not proceed, these costs areproduction does not proceed, these costs areunrecoverable; if production does proceed, theunrecoverable; if production does proceed, theContractors receive a share of production to meet costContractors receive a share of production to meet costrecovery, an investment credit and an after tax equityrecovery, an investment credit and an after tax equityinterest of the remaining production.interest of the remaining production.

The PSC between the Contractor and BPMIGAS has theThe PSC between the Contractor and BPMIGAS has thefollowing features:following features:



1.1. Exploration expenses are recoverable only from commercial Exploration expenses are recoverable only from commercial production;production;

2.2. The Contractor is entitled to cost recovery for all allowable The Contractor is entitled to cost recovery for all allowable current costs, including production costs, amortized current costs, including production costs, amortized exploration costs and capital expenditures;exploration costs and capital expenditures;

3.3. The Contractor pays a signature bonus at the time the The Contractor pays a signature bonus at the time the contract is signed, an education bonus and a crude oil contract is signed, an education bonus and a crude oil production bonus later during the term of the contract. The production bonus later during the term of the contract. The crude oil production bonus is determined on a cumulative crude oil production bonus is determined on a cumulative quantity basis. These bonuses are not cost-recoverable from quantity basis. These bonuses are not cost-recoverable from future production. However, they may be tax deductible in future production. However, they may be tax deductible in the calculation of Corporate Income Tax ("CIT");the calculation of Corporate Income Tax ("CIT");

4.4. The Contractor agrees to a work program with a minimum The Contractor agrees to a work program with a minimum amount of exploration expenditure for a certain number of amount of exploration expenditure for a certain number of years;years;



5.5. All equipment, machinery, inventories, materials and All equipment, machinery, inventories, materials and supplies purchased by the Contractor and brought to supplies purchased by the Contractor and brought to Indonesia become the property of BPMIGAS when landed in Indonesia become the property of BPMIGAS when landed in Indonesia. The Contractor has a right to use and retain the Indonesia. The Contractor has a right to use and retain the custody and control of these items during the performance custody and control of these items during the performance of the operation. Although the Contractor has access to of the operation. Although the Contractor has access to exploration, exploitation and geological and geophysical exploration, exploitation and geological and geophysical data, the data remains the property of BPMIGAS;data, the data remains the property of BPMIGAS;

6.6. The entitlement of both parties under the crude oil allocation The entitlement of both parties under the crude oil allocation is a shared profit from production less deduction for recovery is a shared profit from production less deduction for recovery of the Contractor's operating costs. Each party must file and of the Contractor's operating costs. Each party must file and pay its tax obligation separately;pay its tax obligation separately;

7.7. The Contractor bears all risks of exploration; The Contractor bears all risks of exploration; 8.8. Historically, parties were entitled to FTP of 15% (for fields in Historically, parties were entitled to FTP of 15% (for fields in

Eastern Indonesia and some in Western Indonesia pursuant Eastern Indonesia and some in Western Indonesia pursuant to the 1993 incentive package) or 20% (for other fields). to the 1993 incentive package) or 20% (for other fields).



This is calculated before considering any investment This is calculated before considering any investment credit and cost recovery. Recent contracts do not provide credit and cost recovery. Recent contracts do not provide for a sharing of FTP between the Contractor group and for a sharing of FTP between the Contractor group and the Government. The entire FTP (now 10%) accrues to the Government. The entire FTP (now 10%) accrues to the Government;the Government;

9.9. The Contractor is required to sell and supply a share of its The Contractor is required to sell and supply a share of its crude oil production to meet the DMO. The quantity and crude oil production to meet the DMO. The quantity and price of the oil to be sold is stipulated in the agreement. price of the oil to be sold is stipulated in the agreement. New contracts require a gas DMO as refered to in GR No. New contracts require a gas DMO as refered to in GR No. 35;35;

10.10. After commercial production, the Contractor may be After commercial production, the Contractor may be entitled to recover an investment credit ranging from 17% entitled to recover an investment credit ranging from 17% to 55% of capital investment costs incurred in developing to 55% of capital investment costs incurred in developing crude oil production facilities; andcrude oil production facilities; and

11.11. The Contractor is required to surrender the contract area The Contractor is required to surrender the contract area per a schedule specified in the PSC. This is known as the per a schedule specified in the PSC. This is known as the "exclusion of areas"."exclusion of areas".

PSC Commercial ArrangementsPSC Commercial Arrangements

Basic cost-recovery principles are stipulated in the PSCBasic cost-recovery principles are stipulated in the PSCand usually cover the following: n. Current-year capitaland usually cover the following: n. Current-year capitaland non-capital costs;and non-capital costs;1.1. Prior years' unrecovered capital and non-capital costs;Prior years' unrecovered capital and non-capital costs;2.2. Depreciation charges;Depreciation charges;3.3. Bonus payments;Bonus payments;4.4. Unrecovered natural gas or crude oil production;Unrecovered natural gas or crude oil production;5.5. Inventory costs;Inventory costs;6.6. Recovery of interest costs on loans at rates not exceeding Recovery of interest costs on loans at rates not exceeding

prevailing market rates; Home-office overheads charged to the prevailing market rates; Home-office overheads charged to the operation; andoperation; and

7.7. Recovery of premiums on insurance and receipts from insurance Recovery of premiums on insurance and receipts from insurance claims.claims.

Other relevant principles are not stated in the PSC but have beenOther relevant principles are not stated in the PSC but have beendeveloped over time through BPMIGAS (formerly Pertamina)developed over time through BPMIGAS (formerly Pertamina)regulations or in part by Tax Office regulations.regulations or in part by Tax Office regulations.

Equity ShareEquity Share

Sharing of Production - OilSharing of Production - OilCrude production in excess of amounts received for FTp,Crude production in excess of amounts received for FTp,cost recovery and investment credit is allocated to thecost recovery and investment credit is allocated to theGovernment and to the Contractor before the impact ofGovernment and to the Contractor before the impact oftax, adjusted by the domestic supply obligation.tax, adjusted by the domestic supply obligation.Since the concept of the PSC involves the sharing ofSince the concept of the PSC involves the sharing ofoutput, in practical terms the oil to be shared between theoutput, in practical terms the oil to be shared between theGovernment and Contractor is made up of:Government and Contractor is made up of: cost oil;cost oil; investment credit; andinvestment credit; and equity oil.equity oil.



Cost OilCost OilThe Contractor can recover certain defined costs of productionThe Contractor can recover certain defined costs of productionIn terms of oil or gas produced. Expenses allowable for costIn terms of oil or gas produced. Expenses allowable for costRecovery purposes are:Recovery purposes are:a)a) Current-year operating costs, including costs in exploring other Current-year operating costs, including costs in exploring other

sites in the PSC area, intangible drilling costs on exploratory and sites in the PSC area, intangible drilling costs on exploratory and development wells and costs of inventory when landed in development wells and costs of inventory when landed in Indonesia (as distinct from when used). Indonesia (as distinct from when used).

b)b) Depreciation of capital costs at rates of 50%,25%, 12.5% and 10% Depreciation of capital costs at rates of 50%,25%, 12.5% and 10% on the declining balance method for assets put into use or ready on the declining balance method for assets put into use or ready for use for at least one day in the year. Title of the capital goods for use for at least one day in the year. Title of the capital goods passes to the Government on landing in Indonesia, but the passes to the Government on landing in Indonesia, but the Contractor can claim depreciation on those capital items; and Contractor can claim depreciation on those capital items; and

c)c) Un-recouped operating and depreciation costs from previous Un-recouped operating and depreciation costs from previous years. If there is not enough production to recoup costs these may years. If there is not enough production to recoup costs these may be carried forward to the following year with no time limit.be carried forward to the following year with no time limit.



Investment CreditInvestment Credit An investment credit is allowed on direct development and An investment credit is allowed on direct development and

production capital costs incurred on a project-by project basis production capital costs incurred on a project-by project basis as negotiated and approved by BPMIGAS.as negotiated and approved by BPMIGAS.

In recognition of the delays in generating income inherent in In recognition of the delays in generating income inherent in the processes of exploration through to production, the PSCs the processes of exploration through to production, the PSCs offer a credit ranging from 17% to 55% of the capital cost of offer a credit ranging from 17% to 55% of the capital cost of development, transport and production facilities. The second development, transport and production facilities. The second generation PSC allowed a rate of up to 20% for fields that generation PSC allowed a rate of up to 20% for fields that became commercial after 1976. The investment credit must be became commercial after 1976. The investment credit must be taken in oil or gas in the first year of production, but can be taken in oil or gas in the first year of production, but can be carried forward subject to the FTP limitation.carried forward subject to the FTP limitation.

In earlier PSCs, the investment credit was capped in cases In earlier PSCs, the investment credit was capped in cases where the share of total production taken by the Government where the share of total production taken by the Government did not exceed 49%. This condition has been eliminated in did not exceed 49%. This condition has been eliminated in later generation PSCs.later generation PSCs.



Marginal Field IncentivesMarginal Field Incentives

The MoEMR issued Regulation No. 008/2005 on the Marginal Oil The MoEMR issued Regulation No. 008/2005 on the Marginal Oil Field. The regulation provides Contractors with the incentive Field. The regulation provides Contractors with the incentive of an additional cost recovery of 20%. This incentive is similar of an additional cost recovery of 20%. This incentive is similar to an investment credit which is cost recoverable but taxable.to an investment credit which is cost recoverable but taxable.

Oilfields entitled to the incentive must meet the followingOilfields entitled to the incentive must meet the followingcriteria:criteria:a)a) be located in the production working area; andbe located in the production working area; andb)b) have an estimated rate of return based on the terms and have an estimated rate of return based on the terms and

condition in the PSC and other prevailing incentive package condition in the PSC and other prevailing incentive package regulations; of less than 15%.regulations; of less than 15%.



Interest RecoveryInterest Recovery

• Interest recovery is part of cost recovery. It is one of the Interest recovery is part of cost recovery. It is one of the incentives or allowance facilities on capital expenditures incentives or allowance facilities on capital expenditures for certain projects as approved by BPMIGAS. Interest for certain projects as approved by BPMIGAS. Interest recovery is applicable until the capital costs of such recovery is applicable until the capital costs of such projects have been fully depreciated. projects have been fully depreciated.

• Interest paid is subject to withholding tax ("WHT") with Interest paid is subject to withholding tax ("WHT") with some relief possibly granted under various tax treaties. some relief possibly granted under various tax treaties. As a precaution, most PSC Contractors gross up the As a precaution, most PSC Contractors gross up the interest charged to reflect any WHT implications. Please interest charged to reflect any WHT implications. Please refer to Section E of this Chapter where we have refer to Section E of this Chapter where we have commented further on this matter.commented further on this matter.



Management and Head Office OverheadsManagement and Head Office Overheads The Contractor has exclusive authority to conduct the oil and The Contractor has exclusive authority to conduct the oil and

gas operations in the area and is responsible to BPMIGAS for gas operations in the area and is responsible to BPMIGAS for the conduct of those operations. In practice, BPMIGAS the conduct of those operations. In practice, BPMIGAS exercises considerable control through its obligation to exercises considerable control through its obligation to approve the Contractor's annual work programs, budgets and approve the Contractor's annual work programs, budgets and manpower plans.manpower plans.

Some general and administrative costs (other than direct Some general and administrative costs (other than direct charges) related to head office overheads can be allocated to charges) related to head office overheads can be allocated to the PSC operation, based on a methodology approved by the PSC operation, based on a methodology approved by BPMIGAS. This overhead allocation methodology must be BPMIGAS. This overhead allocation methodology must be applied consistently and is subject to periodic review and audit applied consistently and is subject to periodic review and audit by BPMIGAS. Some PSC arrangements cap this overhead at by BPMIGAS. Some PSC arrangements cap this overhead at a flat 2% of total PSC operating costs. For producing PSCs, a flat 2% of total PSC operating costs. For producing PSCs, BPMIGAS will, often on an annual basis, travel abroad to audit BPMIGAS will, often on an annual basis, travel abroad to audit head office costs. Again, please refer to Section E of this head office costs. Again, please refer to Section E of this Chapter where we have commented further on this matter.Chapter where we have commented further on this matter.



FTPFTP

Under pre Law No. 22 contracts, Contractors and the Government Under pre Law No. 22 contracts, Contractors and the Government were entitled to take a quantity of petroleum equal to 20% of the were entitled to take a quantity of petroleum equal to 20% of the production of each year before any deduction for recovery of production of each year before any deduction for recovery of operating costs, to be split according to their respective equity shares operating costs, to be split according to their respective equity shares as stated in the contracts.as stated in the contracts.

Post Law No. 22 contracts, the Government is entitled to take the Post Law No. 22 contracts, the Government is entitled to take the entire FTP, with no sharing with the Contractor group.entire FTP, with no sharing with the Contractor group.

For later generation contracts only, the FTP of 20% or 15% of For later generation contracts only, the FTP of 20% or 15% of production might be considered to be a component of equity oil. Cost production might be considered to be a component of equity oil. Cost recovery and any investment credit in the current year are therefore recovery and any investment credit in the current year are therefore limited to a maximum of 80 to 85 percent of production.limited to a maximum of 80 to 85 percent of production.

Although FTP is arguably considered equity oil, an industry issue Although FTP is arguably considered equity oil, an industry issue exists over whether the Contractor's share of HP is taxable particularly exists over whether the Contractor's share of HP is taxable particularly if the Contractor has carried-forward un-recovered costs.if the Contractor has carried-forward un-recovered costs.



DMODMO

According to the terms of the PSC, after commercial productionAccording to the terms of the PSC, after commercial productioncommences, the Contractor should fulfill its obligation to supply thecommences, the Contractor should fulfill its obligation to supply thedomestic market in Indonesia. The crude oil DMO for each year isdomestic market in Indonesia. The crude oil DMO for each year iscalculated on the lesser of the following points:calculated on the lesser of the following points:a)a) 25% of the Contractor's standard pre-tax share or its participating interest 25% of the Contractor's standard pre-tax share or its participating interest

share of the total quantity of crude oil produced from the contract area; orshare of the total quantity of crude oil produced from the contract area; orb)b) the results of multiplying the Contractor's standard share of crude oil the results of multiplying the Contractor's standard share of crude oil

produced from the contract area (either 62.50%,26.79%,28.85% or produced from the contract area (either 62.50%,26.79%,28.85% or 34.09% - as described above) by a fraction which the numerator is the 34.09% - as described above) by a fraction which the numerator is the total quantity of crude oil to be supplied and the denominator is the entire total quantity of crude oil to be supplied and the denominator is the entire Indonesian production of crude oil of all petroleum companies for the PSC Indonesian production of crude oil of all petroleum companies for the PSC area, multiplied by the Contractor's standard share.area, multiplied by the Contractor's standard share.

In general practice, the Contractor is required to supply 25% of totalIn general practice, the Contractor is required to supply 25% of totalOil production from the contract area to the domestic market inOil production from the contract area to the domestic market inIndonesia out of its equity share of production. It is understood thatIndonesia out of its equity share of production. It is understood thatthe oil DMO is satisfied from equity oil exclusive of FTP. the oil DMO is satisfied from equity oil exclusive of FTP.



Valuation of oilValuation of oil To determine the sharing of production, and for tax purposes, oil is To determine the sharing of production, and for tax purposes, oil is

valued on the basis of a basket of average Indonesian Crude Prices valued on the basis of a basket of average Indonesian Crude Prices ("ICP") published by Asian Petroleum Price Index ("APPI") (20%), ("ICP") published by Asian Petroleum Price Index ("APPI") (20%), RIM (40%) and Platt's RIM (40%) and Platt's 1%)' 1%)' The value is calculated monthly by The value is calculated monthly by BPMIGAS. Under a PSC, the Contractor receives oil or in-kind BPMIGAS. Under a PSC, the Contractor receives oil or in-kind product for settlement of its costs and share of equity. This makes it product for settlement of its costs and share of equity. This makes it necessary to determine a price to convert oil to US dollars in order to necessary to determine a price to convert oil to US dollars in order to calculate cost recovery, taxes and other fiscal item such as under / calculate cost recovery, taxes and other fiscal item such as under / overlifting. In the past, the ICP was determined monthly by overlifting. In the past, the ICP was determined monthly by BPMIGAS / Pertamina based on moving average spot price of BPMIGAS / Pertamina based on moving average spot price of basket of a number of internationally traded crudes. basket of a number of internationally traded crudes.

Monthly tax calculations are based on ICP and actual Contractor Monthly tax calculations are based on ICP and actual Contractor liftings. The actual year-end annual PSC Contractor entitlement (cost liftings. The actual year-end annual PSC Contractor entitlement (cost plus equity barrels) is based on the average ICP for the year. The plus equity barrels) is based on the average ICP for the year. The average ICP during the respective year is known as Weighted average ICP during the respective year is known as Weighted Average Price or WAP.Average Price or WAP.



Sharing of Production - GasSharing of Production - Gas The provisions for the sharing of gas production are similar to The provisions for the sharing of gas production are similar to

those for oil as explained above except for equity splits and those for oil as explained above except for equity splits and DMO. When a PSC produces both oil and gas, production DMO. When a PSC produces both oil and gas, production costs will be allocated against each according to the proportion costs will be allocated against each according to the proportion of production in value terms in the year or another means of of production in value terms in the year or another means of allocation as approved by BPMIGAS. The costs of each allocation as approved by BPMIGAS. The costs of each category that are not recouped can either be carried forward to category that are not recouped can either be carried forward to the following year or relieved against the production of the the following year or relieved against the production of the other category in the same year only.other category in the same year only.

The main difference between oil and gas PSCs relates to the The main difference between oil and gas PSCs relates to the equity split. The majority of PSCs are based on an oil 85/15 equity split. The majority of PSCs are based on an oil 85/15 after-tax split. For gas, the after-tax split is usually 70/30 for the after-tax split. For gas, the after-tax split is usually 70/30 for the Government and the Contractor respectively, although some Government and the Contractor respectively, although some older PSCs are based on an after-tax split of 65/35. After the older PSCs are based on an after-tax split of 65/35. After the 1995 incentive package, Eastern Province gas Contractors use 1995 incentive package, Eastern Province gas Contractors use an after-tax split of 60/40.an after-tax split of 60/40.



Domestic Gas PricingDomestic Gas Pricing

Gas pricing in domestic supply contracts is make up through negotiations Gas pricing in domestic supply contracts is make up through negotiations on a field-by-field basis among BPMIGAS, buyers and individual producers on a field-by-field basis among BPMIGAS, buyers and individual producers based based

on the economics of a particular gas field's development. Historically, all on the economics of a particular gas field's development. Historically, all domestic gas had to be sold to Pertamina under a gas supply agreement. domestic gas had to be sold to Pertamina under a gas supply agreement. Pertamina then in turn sold the gas to the end-user (e.g. State Electricity Pertamina then in turn sold the gas to the end-user (e.g. State Electricity Company ("PLN") and PGN). Prices were fixed for a designated supply for Company ("PLN") and PGN). Prices were fixed for a designated supply for the duration of the contract.the duration of the contract.

Under Law No. 22, individual producers can sell directly to end users with Under Law No. 22, individual producers can sell directly to end users with contract terms and conditions negotiated directly between the producer contract terms and conditions negotiated directly between the producer and buyer (with assistance from BPMIGAS).and buyer (with assistance from BPMIGAS).

Take-or-pay arrangements have been negotiated in some circumstances. Take-or-pay arrangements have been negotiated in some circumstances. Although this concept has long been accepted, the Government, buyers Although this concept has long been accepted, the Government, buyers and PSC Contractors have not fully determined the complete ramifications and PSC Contractors have not fully determined the complete ramifications of such an arrangement from a tax, accounting (revenue recognition) and of such an arrangement from a tax, accounting (revenue recognition) and reporting perspective.reporting perspective.

ISSUES IN UPSTREAM ISSUES IN UPSTREAM SECTORSECTOR

Abandonment CostsAbandonment Costs

BPMIGAS has included an abandonment clause in the BPMIGAS has included an abandonment clause in the PSC agreements signed since 1995, which provides PSC agreements signed since 1995, which provides that the PSC Contrators must include in their budgets that the PSC Contrators must include in their budgets provisions for clearing, cleaning and restoring the site provisions for clearing, cleaning and restoring the site upon completion of work, As those funds set aside for upon completion of work, As those funds set aside for abandonment and site restoration are cost recoverable abandonment and site restoration are cost recoverable and tax deductible. Unused funds at the end of the and tax deductible. Unused funds at the end of the contract will be transferred to BPMIGAS.contract will be transferred to BPMIGAS.

For PSCs which do not progress to development stage, For PSCs which do not progress to development stage, any costs incurred are considered sunk costs.any costs incurred are considered sunk costs.

Carry arrangementsCarry arrangements

Terms of a PSC may require private participants to match Terms of a PSC may require private participants to match BPMIGAS' sunk cost and further provide funds to finance BPMIGAS' sunk cost and further provide funds to finance BPMIGAS' participating share of all expenditures until BPMIGAS' participating share of all expenditures until commercial production commences. These are known as commercial production commences. These are known as carry arrangements.carry arrangements.

After commercial production commences, BPMIGAS will After commercial production commences, BPMIGAS will repay the funds provided up to the date of commercial repay the funds provided up to the date of commercial production plus an uplift (similar to interest) of 50%, production plus an uplift (similar to interest) of 50%, generally, which will be repaid from the Government's generally, which will be repaid from the Government's 'equity entitlement.'equity entitlement.

In a nutshell, the Contractor bears the risk when exploration In a nutshell, the Contractor bears the risk when exploration turns out to be a dry hole, whilst the carry arrangements turns out to be a dry hole, whilst the carry arrangements formally provide for a repayment from BPMIGAS only out of formally provide for a repayment from BPMIGAS only out of future production. Should the PSC turn out to be producing, future production. Should the PSC turn out to be producing, the uplift provided to a Contractor in a carry arrangement the uplift provided to a Contractor in a carry arrangement could be considered taxable income for the Contractor.could be considered taxable income for the Contractor.

Head office costsHead office costs

Pursuant to the relevant PSC, 'administrative costs of a Pursuant to the relevant PSC, 'administrative costs of a "head office" can generally be allocated to a PSC "head office" can generally be allocated to a PSC operation for cost recovery purposes. The allocation operation for cost recovery purposes. The allocation should be based on a methodology approved by BP-should be based on a methodology approved by BP-Migas and applied consistently. The allocation is Migas and applied consistently. The allocation is subject to review and audit by BPMIGAS. Most PSC subject to review and audit by BPMIGAS. Most PSC arrangements cap this allocation at a flat 2% of annual arrangements cap this allocation at a flat 2% of annual operating costs.operating costs.

Due to uniformity, a tax deduction has also been Due to uniformity, a tax deduction has also been available. Allocations above the permitted cost available. Allocations above the permitted cost recovery have not been tax deductible.recovery have not been tax deductible.



These allocations technically also create WHT and These allocations technically also create WHT and VAT liabilities (i.e. as cross border "payments"), VAT liabilities (i.e. as cross border "payments"), Pursuant to MoF Letter No. S-605 of November 29, Pursuant to MoF Letter No. S-605 of November 29, 1998, the Government indicated that it would 1998, the Government indicated that it would implement arrangements to "bear" these taxes on implement arrangements to "bear" these taxes on behalf of PSC entities. On this basis, many PSC behalf of PSC entities. On this basis, many PSC entities have historically treated these allocations as entities have historically treated these allocations as exempt from WHT and VAT.exempt from WHT and VAT.

However, MoF Letter No; S-605 was arguably never However, MoF Letter No; S-605 was arguably never fully implemented and so has never actually provided a fully implemented and so has never actually provided a technical tax exemption. The ITO is known to have technical tax exemption. The ITO is known to have focused on head office costs in tax audits. The focused on head office costs in tax audits. The potential for taxes to be assessed in this area remains potential for taxes to be assessed in this area remains a major industry concern.a major industry concern.

Interest recoveryInterest recovery

A PSC entity is generally not allowed cost recovery for A PSC entity is generally not allowed cost recovery for interest and associated financial costs.interest and associated financial costs.

Subject to specific approval, Contractors may be Subject to specific approval, Contractors may be granted interest recovery facilities attached to specific granted interest recovery facilities attached to specific projects. This facility should be pre-approved and projects. This facility should be pre-approved and included in the PoD,included in the PoD,

The interest recovery entitlement will generally The interest recovery entitlement will generally reference the pool of approved but un-depreciated reference the pool of approved but un-depreciated capital costs, at the end of an agreed "period" of time. capital costs, at the end of an agreed "period" of time. This period might be monthly, quarterly or annually (as This period might be monthly, quarterly or annually (as negotiated). The "loan" attracting the relevant interest negotiated). The "loan" attracting the relevant interest is generally deemed to be equal to the capital spending is generally deemed to be equal to the capital spending on the project. on the project.



Depreciation of the spending is treated as a repayment Depreciation of the spending is treated as a repayment of the loan. Consequently, the "interest" in question of the loan. Consequently, the "interest" in question may not be interest in a technical sense. may not be interest in a technical sense.

BPKP and Pertamina have historically been of the view BPKP and Pertamina have historically been of the view that oil/gas taken as interest recovery is deductible but that oil/gas taken as interest recovery is deductible but also subject to tax (i.e. through an interest WHT also subject to tax (i.e. through an interest WHT obligation).obligation).

Pertamina typically allowed a gross up for Indonesian Pertamina typically allowed a gross up for Indonesian WHT at the rate of 20%. Some PSC entities have been WHT at the rate of 20%. Some PSC entities have been successful in reducing this rate via a tax treaty. This is successful in reducing this rate via a tax treaty. This is even though the "interest"may not satisfy the relevant even though the "interest"may not satisfy the relevant treaty definitiontreaty definition

Investment creditsInvestment credits

An investment credit is provided to a PSC entity as an An investment credit is provided to a PSC entity as an incentive for developing certain capital intensive incentive for developing certain capital intensive facilities, including pipelines and terminal facilities.facilities, including pipelines and terminal facilities.

The credit entitles a PSC entity to take additional The credit entitles a PSC entity to take additional production without an associated cost. An investment production without an associated cost. An investment credit has therefore traditionally been treated as credit has therefore traditionally been treated as taxable.taxable.

More difficult questions have arisen in regard to the More difficult questions have arisen in regard to the timing of investment credit claims. For instance, an timing of investment credit claims. For instance, an investment credit should generally be claimed in the investment credit should generally be claimed in the first year of production, and any balance should be first year of production, and any balance should be carried forward (although there are sometimes carried forward (although there are sometimes restrictions on carry forward).restrictions on carry forward).

Applicable to oil and/or gas, the facility is for specific Applicable to oil and/or gas, the facility is for specific pre-approved developments only. pre-approved developments only.

Annuity/Royalty ObligationsAnnuity/Royalty Obligations

Some contracts require that annuity/royalty payments Some contracts require that annuity/royalty payments be made to another party due to their ownership or be made to another party due to their ownership or other rights to certain seismic data, etc.other rights to certain seismic data, etc.

Legal and other disputes may arise from unclear Legal and other disputes may arise from unclear agreements or uncertain bases for calculating the agreements or uncertain bases for calculating the obligation.obligation.

As such, unknown financial obligations may emerge As such, unknown financial obligations may emerge from the above issue. from the above issue.

Cost recoverability/tax deductibility of these amounts Cost recoverability/tax deductibility of these amounts cannot be assumed.cannot be assumed.

WHTobligations may also arise.WHTobligations may also arise.

Take or PayTake or Pay

A gas supply agreement may include provisions for a A gas supply agreement may include provisions for a minimum quantity of gas to be taken by buyers on a minimum quantity of gas to be taken by buyers on a take-or-pay basis. If buyers take less than the take-or-pay basis. If buyers take less than the committed quantity of gas under the agreement, they committed quantity of gas under the agreement, they must still pay an amount (as agreed in the agreement) must still pay an amount (as agreed in the agreement) in relation to the shortfall.in relation to the shortfall.

Take-or-pay liabilities may arise, if buyers have taken Take-or-pay liabilities may arise, if buyers have taken less than the committed quantity of gas under the less than the committed quantity of gas under the agreements. The shortfall in the gas taken by buyers, if agreements. The shortfall in the gas taken by buyers, if any, results in a take-or-pay liabilities positions for any, results in a take-or-pay liabilities positions for make-up gas to be delivered to buyers in the future. make-up gas to be delivered to buyers in the future.

Regional and National Regional and National ParticipationParticipation

Under Law No. 22 after a PoD has been approved for a Under Law No. 22 after a PoD has been approved for a field that is producing for the first time within a given field that is producing for the first time within a given Work Area (i.e. a PSC) the Contractor is required to Work Area (i.e. a PSC) the Contractor is required to offer a 10% Working Interest to a BUMD.offer a 10% Working Interest to a BUMD.

If the BUMD does not take up the offer, the Contractor If the BUMD does not take up the offer, the Contractor is required to offer it to a , national company. is required to offer it to a , national company.

Land rightsLand rights

Historically, BPMIGAS (formerly Pertamina) took a central Historically, BPMIGAS (formerly Pertamina) took a central role in acquiring surface rights for oil and gas develqpment.role in acquiring surface rights for oil and gas develqpment.

This, however, changed as new law requires the Contractor This, however, changed as new law requires the Contractor group to obtain relevant land rights in accordance with the group to obtain relevant land rights in accordance with the applicable local land laws and regulations.applicable local land laws and regulations.

Entitlement to the contract area under the PSCs does not Entitlement to the contract area under the PSCs does not include any rights to land surface.include any rights to land surface.

The process of obtaining appropriate land rights for the The process of obtaining appropriate land rights for the acreage may well be very time consuming and acreage may well be very time consuming and cumbersome.cumbersome.

Investors should consider whether any infrastructure on land Investors should consider whether any infrastructure on land acquired generates either (a) a liability for land and building acquired generates either (a) a liability for land and building duty on acquisition or (b) annual land and building tax duty on acquisition or (b) annual land and building tax liability. liability.

"Net Back to Field" "Net Back to Field" ArrangementsArrangements

Contractor calculations for transactions involving Contractor calculations for transactions involving Trus&e{)r similar arrangements (e.g. for piped Trus&e{)r similar arrangements (e.g. for piped gas/LNG, etc.) typically commence with a revenue gas/LNG, etc.) typically commence with a revenue figure which has been netted against certain post-lifting figure which has been netted against certain post-lifting costs (e.g. trustee, shipping, pipeline transportation, costs (e.g. trustee, shipping, pipeline transportation, etc.). Once again, this follows the uniformity principle etc.). Once again, this follows the uniformity principle which generally disallows cost recovery on spending which generally disallows cost recovery on spending past the point of the hydrocarbon lifting.past the point of the hydrocarbon lifting.

Net back to field costs are generally also treated as Net back to field costs are generally also treated as being outside of a PSC entity's WHT and VAT being outside of a PSC entity's WHT and VAT obligations. obligations.

Sole risk operationsSole risk operations

Typically, all costs and liabilities of conducting an exclusive Typically, all costs and liabilities of conducting an exclusive ("sole risk") operation for drilling, completing and equipping ("sole risk") operation for drilling, completing and equipping the sole risk wells are borne by "the Sole Risk Party". The the sole risk wells are borne by "the Sole Risk Party". The Sole Risk Party indemnifies the Non-Sole Risk Parties from Sole Risk Party indemnifies the Non-Sole Risk Parties from all costs and liabilities relating to the sole risk operation.all costs and liabilities relating to the sole risk operation.

Should the sole risk operation result in commercial Should the sole risk operation result in commercial discovery, the Non-Sole Risk Parties have historically been discovery, the Non-Sole Risk Parties have historically been given option to participate in the operation. If the Non-Sole given option to participate in the operation. If the Non-Sole Risk Parties agree to exercise their option to participate in Risk Parties agree to exercise their option to participate in the sole risk wells when the wells are declared commercial, the sole risk wells when the wells are declared commercial, the Non-Sole Risk Party pays to the Sole Risk Party a lump the Non-Sole Risk Party pays to the Sole Risk Party a lump sum amount which typically can be paid either through sum amount which typically can be paid either through "Cash Premium" or "In-Kind Premium" to cover for past "Cash Premium" or "In-Kind Premium" to cover for past costs incurred as well as reward for risk taken.costs incurred as well as reward for risk taken.

It is not clear whether these premiums should be treated as It is not clear whether these premiums should be treated as taxable liftings income or ordinary income. taxable liftings income or ordinary income.

UnitizationsUnitizations Unitization is a concept whereby the parties to two or Unitization is a concept whereby the parties to two or

more PSCs agree to jointly undertake the E&P more PSCs agree to jointly undertake the E&P operations on defined acreage (which typically operations on defined acreage (which typically overlaps between the respective PSCs), and share overlaps between the respective PSCs), and share the risks and rewards from such activity in an agreed the risks and rewards from such activity in an agreed proportion.proportion.

Some typical issues to concider under a unitization Some typical issues to concider under a unitization arranggement include;arranggement include;

a)a) Re-determination of costs/revenues;Re-determination of costs/revenues;b)b) Maintenances of separate records;Maintenances of separate records;c)c) Ring-fencing;Ring-fencing;d)d) Audits;andAudits;ande)e) Impact on the overall economics of the PSCs.Impact on the overall economics of the PSCs.

Transfer of PSC interestsTransfer of PSC interests

GeneralGeneral Historically, transfers of PSC interests have not been Historically, transfers of PSC interests have not been

taxed. This has been irrespective of whether the taxed. This has been irrespective of whether the transfer was:transfer was:

a)a) via a direct transfer of a PSC interest (i.e. as an "asset via a direct transfer of a PSC interest (i.e. as an "asset sale");sale");

b)b) as a partial assignment such as a farm-out; oras a partial assignment such as a farm-out; orc)c) via a sale in the shares of a PSC holding entity (i.e. as via a sale in the shares of a PSC holding entity (i.e. as

a "share sale").a "share sale"). The ITO is however, now reviewing this area. Whilst The ITO is however, now reviewing this area. Whilst

the existing tax law could probably tax many transfers, the existing tax law could probably tax many transfers, proposed amendments to the law will specifically proposed amendments to the law will specifically target PSC transfers.target PSC transfers.



Existing Tax LawExisting Tax Law An interest in an Indonesia PSC probably constitutes an An interest in an Indonesia PSC probably constitutes an

intangible asset for Indonesian Income Tax purposes. Taxable intangible asset for Indonesian Income Tax purposes. Taxable income can include gains from the sale of intangible assets. As income can include gains from the sale of intangible assets. As such, any gain made on an "asset sale" could technically be such, any gain made on an "asset sale" could technically be taxable. A tax treaty will typically not prohibit this.taxable. A tax treaty will typically not prohibit this.

One reason historically cited for there being no tax on One reason historically cited for there being no tax on transfers, is the operation of the uniformity principle. That is, transfers, is the operation of the uniformity principle. That is, Indonesia should only tax a seller on a PSC "gain" if the Indonesia should only tax a seller on a PSC "gain" if the consideration in excess of unrecovered costs is cost consideration in excess of unrecovered costs is cost recoverable (and so tax deductible) to the buyer. As this recoverable (and so tax deductible) to the buyer. As this excess is not cost recoverable under uniformity, then the gain excess is not cost recoverable under uniformity, then the gain should not be taxed.should not be taxed.

Where a transfer is via a share sale, then the Indonesian Where a transfer is via a share sale, then the Indonesian Income Tax will only apply if there is a "sale of assets in Income Tax will only apply if there is a "sale of assets in Indonesia" within the meaning of the Income Tax Law. Indonesia" within the meaning of the Income Tax Law. Pursuant to MoF Decree No. 434 of August 24, 1999, these Pursuant to MoF Decree No. 434 of August 24, 1999, these "assets" are currently restricted to shares in Indonesia "assets" are currently restricted to shares in Indonesia incorporated companies.incorporated companies.

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Kebijakan Migas - 0412 s2

Documents

natural resources contained

head office overheads

upstream business activities

sole risk wells

exploit natural resources

upstream activities guidance

psc arrangements cap

cost recovery purposes