Empirical evidence, commercial performance and extended risk analysis of Indonesian petroleum production sharing contracts

Abstract

Since the introduction of the petroleum Production Sharing Contract (PSC) system by the Indonesian government in the 1960s, this system has been considered a model for other petroleum-producing nations to emulate. Unfortunately, with the continual decline in performance displayed by this partnership, its capability as an attractive partnership system has been questioned. This thesis proposes three main factors contributing towards the dismal performance of the Indonesian PSC arrangement: the commercial viability of the petroleum Exploration & Production (E&P) industry, the PSC as a system and the negative perception of the investment climate in Indonesia itself. Employing the cash flow analysis and the risk analyses using the Monte Carlo simulation technique and Analytic Hierarchy Process (AHP) in the Benefit-Cost-Risk framework, the research concludes that the commercial capability and productivity of the Indonesian PSC have declined in recent years. The Monte Carlo simulation shows that the tax consolidation approach proposed for the frontier areas has not contributed effectively in consolidating the production partnership system, whilst enhancement of several PSC variables as incentives are required and should be offered based on its production rate profile. The result of AHP analysis points to the need to consider the application of the Modern Royalty and Tax system as an alternative to the PSC system. This study strongly suggests the role of foreign direct investment climate in Indonesia as the critical factor in improving the Indonesian PSC system as an attractive mode in managing Indonesia’s growing petroleum E&P industry.