LONDON – Indonesia’s decision to offer a choice between gross split and cost recovery for new licences is a positive step, according to Wood Mackenzie.
In 2017 the government announced new gross split terms to production-sharing contracts in an attempt to lessen bureaucracy and improve efficiency in the upstream industry, the aim being to boost investment and oil and gas production.
Under these new terms the government awarded 22 blocks, with $1.2 billion of investment commitments, said to be the highest in a decade.
Wood Mackenzie senior petroleum economist Nikita Golubchenko said that the gross split terms were most effective for contracts about to expire.
“Higher oil prices, significant cost efficiencies, and lesser bureaucratic approvals play in favor of gross split terms for license extensions. As project risk parameters are lower than in exploration blocks, investors may negotiate additional splits necessary to reach hurdle rates.
However, the gross split terms have proven to be less popular in the current low oil price environment, as investors do not see sufficient upside to offset increased project and procurement risks.
In recognition of the need for further change, Indonesia’s government reintroduced a cost recovery scheme with proposals for additional incentives.
Wood Mackenzie research analyst Lionel Sumner explained: “One benefit of cost recovery is the ability to offer some reward for risks associated with frontier developments. This is important as it could encourage exploration to mitigate Indonesia’s declining production.”
Golubchenko added: “Indonesia offers a range of different opportunities. Maximizing these opportunities require a flexible fiscal approach to match investor reward with opportunity risk.”
Wood Mackenzie’s Upstream Competitive Index ranks Indonesia 134 out of 145 regimes for fiscal attractiveness under gross split terms. This improves to 125 with cost recovery, but more improvements are needed, the consultant claimed.