Govt welcomes shift to gross split deals

Italian energy company Eni S.p.A and Australian energy company Energy World Corporation (EWC) have amended their production sharing contracts (PSC) from cost recovery to gross split, much to the government’s delight. 

Eni S.p.A

  Eni’s East Sepinggan block offshore of Kalimantan and EWC’s Sengkang block in South Sulawesi, both gas rich, are the latest blocks for which the PSC have been amended into gross split schemes.

Energy and Mineral Resources Deputy Minister Arcandra Tahar couldn’t hide his happiness as the two companies signed their contracts.

“Today, we witness a good start,” said Arcandra, who had long defended the policy. “I’ve received so many letters, reviews and criticisms saying that the gross split [scheme] failed to attract investors [...] In the future, I hope that we speak based on data, not your own perception.”

Eni S.p.A

As of Tuesday, almost two years after the scheme was introduced in January 2017, contracts involving more than 30 oil and gas blocks have been altered to gross split, including the latest with Eni and EWC. Eni S.p.A inked an amendment of its PSC in"the East Sepinggan block changing from cost recovery to gross split with the aim of speeding up the development of its project in the Merakes gas field, especially over issues regarding cost calculation. Its contract is due' in 2042.

Energy Equity Epic Sengkang Pty. Ltd.

EWC, through its subsidiary Energy Equity Epic Sengkang Pty. Ltd. (EEES), signed a similar contract amendment for its Sengkang block, also due in 2042. Eni Indonesia managing director Fabrizio Trilli told the press that amending its contract to gross split was a win-win solution for them in order to achieve better gas production in the block.

Working Area Gross Split

“[With gross split] we are Free to perform in any activity [in the block] and it will guarantee a better result both for us and the government on gas production,” he said. 

Arcandra Tahar

Previously, deputy minister Arcandra said the Italian firm decided to amend its PSC to avoid a prolonged discussion with the government over costs on its gas project' in the Merakes field as required by the cost recovery scheme, in which the government is obliged to reimburse some of the company’s investments.

“They have also committed to increase their local content requirement in the project, through which, if it reaches 30 to 50 percent, we will reward them with an additional 2 percent stake in the split of production,” Arcandra said. 

EWC chief executive officer Stewart Elliott also expounded on the benefits of a gross split scheme to the press. He said he believes it would eliminate the possibility of vendors marking up prices that must later be reimbursed by the government. ”

“Because of that [possibility of a markup], the government needs to watch it carefully and it will take a lot of time, which later leads to inefficiency. Therefore, I think it’s a tremendous step for Indonesia to improve efficiency” he after attending the signing event.

The gross split scheme has been widely criticized and was named one of the things that made Indonesia to be considered one of the 10 most unattractive jurisdictions in the world in terms of oil and gas, according to a 2017 Global Petroleum Survey conducted by the Canadian Fraser Institute think tank.

“Indonesia’s gross split contracts discourage investment at a time of constrained capital and exploration,” the survey stated.

The survey studied 97 countries with participants such as managers and executives in the upstream petroleum industry, ranging from CEOs, consultants and economists to lawyers. In May the institute presented its latest survey during the 42“ Indonesian Petroleum Convention and Exhibition held by the Indonesian Petroleum Association (IPA). 

     Not long after, the ministry sent a letter to the association, circulated to the press, in which it expressed its “disappointment” with the IPA’s decision to involve the institute as one of the speakers in the event.

The ministry countered the Fraser Institute’s survey, saying that it was unfair as it still included taxes during exploration.

“Exploration activities have been exempt from any taxes until the first oil discovery,” the ministry said in its statement, referring to Government Regulation No. 53/2017 on taxes for gross split contracts.

Jakarta Post, Page-13, Friday, Dec 14, 2018