Indonesia's Oil and Gas Contract Flexibility to Encourage Investment

Summary

The Indonesian government's decision to give options for investors to choose the contract for the oil and gas production, between gross split and cost recovery, would be a positive sentiment for the industry. The global research and consultancy institute Wood Mackenzie said the gross split scheme, which took effect in 2017, has cut bureaucracy, increased efficiency and investment, and increased oil and gas production. Wood Mackenzie senior oil economist Nikita Golubchenko said the new scheme is suitable for oil and gas contracts in termination blocks about to expire.

Amid the rising trend of global crude oil prices and significant cost efficiency, the gross split scheme implementation supports working areas that will extend the contract. Investors may renegotiate additional splits required under the scheme. "We have seen project extensions, such as in the Duyung Block and in the East Sepinggan Block," Golubchenko said in a written statement, Thursday (9/17).

However, Golubchenko still found unclear criteria in the regulations, which is on the ministerial discretion that can revise the split, making the gross split scheme unpopular, mostly when oil prices are falling. Although a different range of variable and progressive revenue sharing is available in the gross split contract, investors do not see sufficient returns to offset the increased risk of project and procurement.

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