18-07-08 Indonesia is considering offering oil companies a new type of oil and gas contract called a "revenue contract" in a bid to simplify monitoring of oil and gas companies operating in the country as well as to speed up the decision-making process for contractors.
The new type of contract could be applied to the upcoming blocks tender, a senior official said, referring to government plans to invite bids for 21 blocks through a regular tender and direct offers in October. Under the proposed contract, contractors can spend whatever they want on exploration without prior government approval as was previously the case, the oil and gas director-general at the energy and mines ministry Luluk Sumiarso said.

But the government will not allow the contractor to recover his costs from selling the oil and the gas produced before splitting the remaining oil with the government. Under the new model, the contractor will be liable for revenue-sharing as soon as the block begins production, he said. Asked how much the production split for the government and contractor under the new system would be, Sumiarso said the split would be tendered together with oil and gas block invitation bid.
"The contractor who gives us the best split will be the winner," he said.

All oil and gas contracts in Indonesia are currently under production sharing contracts, or PSCs, which provide for the contractor to be reimbursed all exploration and production costs in a block once it starts pumping oil or gas. The government and the contractor's production split is typically 85:15 for oil and 70:30 for gas. The new type contract will not affect existing PSCs and will remain in place for all PSCs signed before May 2008.
However, the Indonesian government has revised the cost-recovery system in its existing model PSC to delineate and shift the burden of expenses in the non-producing areas of a block squarely on to the contractor. So, under the new terms, a contractor can only recover expenditure from producing fields rather than the entire block, before splitting the remaining output with the government.

The new system took effect with the five oil and gas exploration contracts Indonesia signed in May, and include Italy's ENI, Malaysia's Genting Oil and Gas, Swedish independent Lundin Petroleum, US company Murphy Oil and a consortium of China's CNOOC and Malaysia's Petronas Carigali.
Separately, Sumiarso said that the proposed revenue-sharing mechanism would make it simple for BP Migas [Indonesia's upstream regulator] to regulate the PSCs "where the cost recovery mechanism is really complicated."

Indonesian authorities in late 2006 found irregularities and mark-ups in some of the cost-recovery figures submitted by the PSCs. The cumulative annual cost recovery figure of PSCs in Indonesia rose by 6 % each year from 1997 to about $ 7.82 bn in 2006, despite the country's dwindling oil output, and in 2007, the figure reached $ 8.5 bn, drawing attention from parliamentarians.
But BP Migas had then argued that the cost recovery amount had gone up because of the rocketing costs of oil industry goods and services over the past years.