Oil and Gas Update: Re-introduction of Cost Recovery Production Sharing Contracts

The re-introduction of new or renewed cost recovery based PSCs should promote investment in Indonesia’s oil and gas sector, as it gives the government and investors flexibility to consider different forms of PSCs on a project-by-project basis.

As part of the Indonesian government’s efforts to promote investment in the upstream oil and gas sector, the Minister of Energy and Mineral Resources (MEMR) recently further amended MEMR Regulation No. 8 of 2017 regarding the Gross Split for Production Sharing Contracts (MEMR Regulation 8/2017) to allow the issuance of new or renewed cost recovery production sharing contracts (PSCs).

Previously, MEMR Regulation 8/2017 required all new PSCs, and all PSCs renewed in favour of new contractors, to be awarded by the Indonesian Government under the then new gross revenue split system, which signalled the phasing out of the cost recovery PSC regime in Indonesia.

However, the latest amendment to MEMR Regulation 8/2017 now expressly authorises the MEMR to issue new or renewed PSCs in any of the following forms:

• gross revenue split based PSC;
• cost recovery based PSC; or
• other co-operation schemes.

MEMR Regulation 8/2017 also continues to allow cost recovery based PSCs to be issued for extended PSCs. The MEMR’s decision on the form of any new, renewed or extended PSC will be based on a proposal from the relevant contractor, taking into account the project risk level, investment climate and State benefits.

The 2017 introduction of gross revenue split PSCs was criticised by industry stakeholders for providing insufficient economic certainty and incentives for further exploration and exploitation in the Indonesian oil and gas sector. Accordingly, the re-introduction of new or renewed cost recovery based PSCs should be warmly welcomed, as it should promote further investment in the sector.

In practice, it remains to be seen whether the Indonesian government will continue to favour new gross revenue split PSCs over new cost recovery based PSCs. At the very least, this latest regulatory change gives the MEMR and investors the flexibility to consider these different forms of PSCs on a project-by-project basis.

For more information about Indonesian PSC schemes, please contact Dhani Maulana M Pattinggi, Matthew Goerke or Aditya Rachman.