Production Sharing Contract

Objectives

 Indonesian Production Sharing Contract

 First Tranche Petroleum (FTP)
 Cost Recovery vs. Gross Split
 Delivery

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PSC = Production Sharing Contract

PSC TERMS

State Company

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Company is a Contractor for the State

 Company is a “contractor”
 SKKMIGAS (State) owns the reserves & equipment
 Fiscal terms negotiated between Company & State
 Company Earns Profit
 equity sharing
 cost recovery

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 Production Sharing Contract

General PSC Features and Obligations……..

SKKMIGAS COMPANY
 Right to manage.  Operates the business.
 Owns all Property / Equipment.  Funds the operation (Capital/Opex)

 Owns Production Net of Cost Recovery  Supplies Domestic Market Obligation

and Contractor Share.  Pays Company and Dividend Taxes.
 Earns 80-90% of Available Profit  Earns revenue through the Cost Recovery
formula.
 Earns a share of production net of Cost
Recovery.
 Earns 10-20% of Available Profit.

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 How COMPANY Makes a Profit

 + Revenue Key
Take-away
 - Costs
 = Taxable Income
 - Taxes
 = Net Earnings
 + Depreciation
 - Tangible Capital This is the basic
 = Cash Flow
formula for any
Business...

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Revenues
Simply...?
 + Revenue
 - Costs
 = Taxable Income
‘Barrels’ x ‘Price’ = Revenue
 - Taxes
 = Net Earnings
 + Depreciation
 - Tangible Capital
 = Cash Flow

Indonesian Crude Price 7

COMPANY Entitlement Barrels
Revenue...Barrels
 Let’s 1st Talk about Barrels
 ...Then, we can review pricing issues

Major Components…
+ Equity Oil

+ Cost Recovery

+ Investment Credit

- Domestic Market Obligation

Company Entitlement Barrels

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Equity Oil
Revenue...Barrels

Net Production
(Gross - Fuel)

80%
20% less
First Tranche Petroleum Cost Recovery
Investment Credit

Sum of two components equal

COMPANY’s
Equity Oil
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First Tranche Petroleum (FTP)
Revenue...Barrels

• Similar to a royalty payment

• Ensures the GOI receives an upfront profit from a

contract area

• The First Tranche Petroleum (FTP) is 20% of net

production

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Example
Data:
No Drivers Field A Field B Total

1 Gross Production Bbls 205,000 300,000 505,000

2 Fuel Bbls 53,000 0 53,000

4 ICP (Indonesia Crude Price) $30/Bbl $34/Bbl -

5 WAP (Weighted Average Price) $25/Bbl $28/Bbl -

6 Tangible Capital (Eligible Inv. Credit) $667,000 $800,000 $1,467,000

7 Intangible Capital $100,000 $120,000 $220,000

8 OPEX $600,000 $1,000,000 $1,600,000

7 Depreciation $300,000 $400,000 $700,000

Assumptions:
• Field A - Production data from PK Non Incentive Area
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• Field B - Production from PK Non Incentive Area
Field A Example

EQUITY OIL

Gross Production: 205,000 Bbls + After FTP

Fuel: 53,000 Bbls FTP x BTE + - Cost Recovery X BTE
Net Production: 152,000 Bbls - Invest. Credit

FTP: 20% x Net Production = 30,400 Bbls

After FTP: 80%x Net Prod = 121,600 Bbls

BTE : Before Tax Equity (PK): 20.51%

EQUITY OIL

+ 121,600 bbls
30,400 bbls x 20.51% + - Cost Recovery X20.51%
- Invest. Credit

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6,235 bbls
Cost Recovery...

Revenue...Barrels

+ Revenue

- Costs
+ Equity Oil 
= Taxable Income
+ Cost Recovery
- Taxes
+ Investment Credit
= Net Earnings
- Domestic Market Obligation
+ Depreciation
CPI Entitlement Barrels
- Tangible Capital

= Cash Flow
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Cost Recovery
Revenue...Barrels
Cost Recovery...
Compensation for Co-funded share of
State’s Capital & Operating Expenses

 Cost Recovery*
Compensation in the form of Crude Oil Barrels
Determined by using a year-to-date weighted average for the Indonesian
crude oil marker price (WAP)

*Cost Recovery Includes:

• Operating Expense
• Depreciation
• Intangible Capital
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Cost Recovery made simple

Revenue...Barrels

Cost Recovery Formula:

• Intangible capital
• Operating expense
• Depreciation

Cost Recovery ($) Cost Oil

WAP ($/bbl) Bbls
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Field A Example
EQUITY OIL

Gross Production: 205,000 Bbls + After FTP

Fuel: 53,000 Bbls FTP x BTE + - Cost Recovery X BTE
Net Production: 152,000 Bbls - Invest. Credit

FTP: 20% x Net Production = 30,400 Bbls

After FTP: 80%x Net Prod = 121,600 Bbls

BTE : Before Tax Equity (PK): 20.51%

• Intangible capital = $ 100,000

Cost Recovery = • Operating expense = $ 600,000
• Depreciation = $ 300,000
$ 1,000,000
EQUITY OIL
Cost
Recovery : $1 MM Cost in Bbls Oil: + 121,600 bbls
40,000 Bbls 6,235 bbls + - 40,000 bbls X20.51%
WAP: $25 / Bbl - Invest. Credit
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Investment Credit ...
Revenue...Barrels

+ Revenue

- Costs
+ Equity Oil 
= Taxable Income
+ Cost Recovery 
- Taxes
+ Investment Credit
= Net Earnings
- Domestic Market Obligation
+ Depreciation
Co Entitlement Barrels
- Tangible Capital

= Cash Flow

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 Investment Credit

Definition:
Investment Credit is one of the incentives given by the Government of
Republic of Indonesia to encourage new investment in oil industry for
increasing recoverable reserve.

PSC Clause Sec VI Subsection 1.7

Contractor may recover an investment credit amounting to 15% of the
capital investment cost directly required for developing crude oil
production facilities of each new field out of deduction from gross
production before recovering operating cost, commencing in the earliest
production year before tax deduction (to be paid in advance in such
production year when taken).

Subject of Investment Credit

The investment credit is applied to all capitalized investments (tangible
cost) included in the original development plan approved by 18 GOI
(SKKMIGAS)
Investment Credit Revenue...Barrels

Investment Credit :
 Company incentive for investing in EOR or new primary
recovery projects
 Equates to a % of eligible tangible capital expenditures
 Recovered by Company in ‘barrels’ (similar to cost
recovery mechanism)
 Captured by Company when a project is Put on Injection
(“POI”) of EOR or POP of Primary Field Development

Investment Credit :

PSC-A 15% of eligible tangible capital expenditures

PSC-B 17 % 19
Field A Example EQUITY OIL

Gross Production: 205,000 Bbls + After FTP

Fuel: 53,000 Bbls FTP x BTE + - Cost Recovery X BTE
Net Production: 152,000 Bbls - Invest. Credit

FTP: 20% x Net Production = 30,400 Bbls

After FTP: 80%x Net Prod = 121,600 Bbls

BTE : Before Tax Equity (PK): 20.51% EQUITY OIL

Cost
Cost in Bbls Oil: + 121,600 bbls
Recovery : $1 MM 6,235 bbls + - 40,000 bbls
40,000 Bbls X20.51%
WAP: $25 / Bbl - 4,000 bbls

Tangible capital
Investment Credit: 15% X $667,000 = $100 M

Invest. Credit: $100 M IC in Bbls Oil:

WAP: $25 / Bbl 4,000 Bbls 22,151 bbls
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Domestic Market Obligation ...
Revenue...Barrels

+ Revenue

- Costs
+ Equity Oil 
= Taxable Income
+ Cost Recovery 
- Taxes
+ Investment Credit 
= Net Earnings
- Domestic Market Obligation
+ Depreciation
Co Entitlement Barrels
- Tangible Capital

= Cash Flow

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Domestic Market Obligation Revenue...Barrels
 DMO:
Oil Company is obligated to provide Indonesia for domestic consumption
Volume determination based on the lower of two calculations...
 Net production x Co Euity B/T x TIR/TIP
 Net production x Co Equity B/T x 25%

Where,
TIR = Total Indonesian Requirement
TIP = Total Indonesian Production

This is the volume that Company provides to Indonesia…..

DMO = Net Production x Co Equity B/T x 25%
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Field A Example
DMO

Gross Production: 205,000 Bbls

Fuel: 53,000 Bbls
Net Production: 152,000 Bbls

BTE : Before Tax Equity (PK): 20.51%

DMO: 152,000 x 20.51% x 25% = 7,794 Bbls

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COMPANY Entitlement Barrels ...
Revenue...Barrels

+ Revenue

- Costs
+ Equity Oil 
= Taxable Income
+ Cost Recovery 
- Taxes
+ Investment Credit 
= Net Earnings
- Domestic Market Obligation 
+ Depreciation
Co Entitlement Barrels
- Tangible Capital

= Cash Flow

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 Field A Example

Co Entitlement Barrels

+ Equity Oil : 22,151 bbls

+ Cost Recovery : 40,000 bbls

+ Investment Credit : 4,000 bbls

- Domestic Market Obligation : <7,794> bbls

Co Entitlement Barrels : 58,357 bbls

Note :
1. S = Equity Split
2. FTP = First Tranche Petroleum Fuel
PSC FLOW CHART
3. DMO : Domestic Obligation Market

FTP=20%*NP

Gross Production $  Barrel

Net Production Cost Rec. ($)
80%*NP WAP ($/bbl)

Inv. Credit ($)

Cost Recovery
WAP ($/bbl)
Barrel
Inv. Credit

80% NP Co = S*ETS
Equity To
Co =S*FTP Be Split
FTP=20%*NP FTP : 20% NP GOI = (1-S)*ETS (ETS)
GOI=(1-S)*FTP

GOI Co
DMO
Cost Recovery
GOI=(1-S)*FTP
GOI Inv. Credit
Entitlement Oil Co
Equity Oil GOI = (1-S)*ETS
Co Co = S*ETS Entitlement Oil
Equity Oil
Co =S*FTP
DMO
Now let’s talk Price ...

+ Revenue

- Costs

= Taxable Income Barrels x ICP

- Taxes

= Net Earnings

+ Depreciation + Equity Oil

- Tangible Capital + Cost Recovery

+ Investment Credit
= Cash Flow
- Domestic Market Obligation

Co Entitlement Barrels
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Converting Barrels to US Dollars
Revenue...Price

Major Influences:
 Weighted average year-to-date Indonesian crude price (WAP)
 ICP (Indonesian Crude Price)
 Domestic Market Obligation Pricing
• incentive & non-incentive production

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 Price:
WAP vs. ICP
Revenue...Price

Co receives oil payment...

Cost Recovery + Investment Credit
(at WAP)

Co sells its oil...

(at ICP)

IS THE SALE REVENUE THE SAME??

USUALLY NOT! 29
 0
10
20
30
40
50
60
Jan
Fe
Ma

2002
Apr
Ma
Jun
Jul
Au
Se
Oct
No
De
Jan
Fe
Duri Crude Oil

Ma

2003
Apr
Ma
WAP vs ICP DC

Jun
Jul
Au
Se
Oct

ICP
No
De
Jan
Fe
Ma
Apr

2004
Ma
Jun
WAP

Jul

30
Au
Se
Oct
No
De
Jan
Fe
Ma
Apr
Ma
2005

Jun
Jul
Au
Se
Oct
No
De
Revenue…Price
WAP

WAP CALCULATION
Month Lifting (Bbl) ICP Bbl*ICP WAP
Jan 200,000 $ 25.00 5,000,000 $ 25.00
Feb 205,000 $ 22.60 4,633,000
405,000 9,633,000 $ 23.79
Mar 196,000 $ 19.20 3,763,200
601,000 13,396,200 $ 22.29
Apr 212,000 $ 21.30 4,515,600
813,000 17,911,800 $ 22.03

Lifting Oil*ICP)
WAP =
Lifting Oil
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Revenues...easy!

+ Revenue

- Costs NOW YOU KNOW

= Taxable Income
HOW TO DETERMINE
OIL REVENUE
- Taxes

= Net Earnings

+ Depreciation LET’S NOW LOOK

AT COSTS
- Tangible Capital

= Cash Flow

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Cost Structure

Costs
Two Basic Types of Costs...

Operating Expenditures
– Routine day to day operating & maintenance expenses

Capital Expenditures
– Investments to develop or replace major assets

For financial calculations, Capital is further defined as

being ‘tangible’ or ‘intangible’

This difference is significant in determining net income

and cash flow because...
Cost Terms Under PSC
Cost Recovery : All expenses incurred by Contractor that will be
reimbursed by BP Migas in term of crude oil
valued at yearly weighted average price (WAP).

OPEX : Periodically occurring expenditures necessary to

(OEB) maintain production.

CAPEX : One time cost (non recurring) usually incurred at

(CEB) the beginning of a project and have a long term
use to the owner (= Investment).

Non Shareable : Expenditures incurred that cannot be recovered

Cost by contractor. Accordingly, this type of
expenditures will be directly charged (deducted)
from Shareholders' Equity account.
Example : expenditures for HELP, Yayasan C&T,
etc.

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 More about Cost Structure
Costs

...Intangible capital is “expensed” in the current year

(like operating expenses) but Tangible capital
must be Depreciated over time.

Depreciation:
In Summary then, COMPANY
Accounting process of PSC cost structure is divided
“expensing” tangible costs into 3 components...
over their useful economic
life.

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Capital versus Expense

 What items are…...

Capitalized
Expensed

What is the PSC

Financial Impact?
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 Cost Recovery Structure Costs

EXPENDITURES
OPERATING CAPITAL
EXPENDITURES EXPENDITURES

Salary, Wages & Benefit

Training EXPLORATION &
Travel DEVELOPMENT
Contract Services
Rental / Lease
Materials & Supplies INTANGIBLE TANGIBLE
Fuel & Lubricants
Utilities
Technology Supports
SHE Expenses FIXED ASSETS
Food & Beverages
Miscellaneous
Rig Usage DEPRECIATION
Helicopter Usage
Power / Electricity
Camp & Community
Etc.

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COST RECOVERY
 Revenue less Costs = Taxable Income

+ Revenue

- Costs NOW YOU KNOW

HOW TO DETERMINE
= Taxable Income REVENUE
AND COSTS
- Taxes

= Net Earnings THE DIFFERENCE IS

TAXABLE INCOME
+ Depreciation
STILL NOT YET
- Tangible Capital TO PROFIT, HOWEVER!
= Cash Flow

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 Taxable Income less Taxes = Net Earnings

+ Revenue

- Costs
“Book” measure of
= Taxable Income
Profitability
- Taxes

= Net Earnings

+ Depreciation Variance
- Tangible Capital
“Cash” Out flow and
Cash In flow
= Cash Flow

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 That’s how COMPANY makes $$$$

+ Revenue NOW YOU KNOW

HOW TO CALCULATE
- Costs
NET EARNINGS
= Taxable Income AND
- Taxes NET CASH FLOW

= Net Earnings

+ Depreciation

- Tangible Capital

= Cash Flow

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