Monday, August 01, 2016

13. Paper (2016): PSC Sliding Scale as a Fiscal Model for Marginal Fields in Indonesia

The Production sharing contract (PSC) system has been applied in the oil and gas upstream business in Indonesia since 1966. The contract between the oil and gas companies as contractors and the government as the owner of the country’s oil and gas fields relies on a risk sharing principle. Nevertheless, the companies are actually exposed to further uncertainties, particularly related to risks in exploration activities.

Furthermore, economic analysis needs to be performed once hydrocarbons have been discovered. At this stage, oil and gas companies are faced with investment decisions that have to allow for both the upside and downside of the related risks. In fact, it is now more challenging to find economic levels of hydrocarbon reserves in place. More flexible fiscal terms are therefore required to balance the risk between investors and the government.

This paper demonstrates a model of dynamic fiscal terms that incorporates a risk-balancing principle. The PSC is used as a basic model combined with a sliding scale that is derived from a r-factor (ratio-factor) of company revenue and investment costs. As a result, it concludes that the PSC sliding scale model could be implemented in a way that balances the risks and rewards between government and investors and leads to the development of marginal fields in addition to attracting more oil and gas investment in Indonesia.

Keywords: Fiscal System, Production Sharing Contract (PSC), Sliding Scale, R-Factor, Marginal Fields.

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