Mark-up practice
Mark-up practice
Several reports on alleged mark-up practices in the
exploration and production (E&P) sector, and the result of a
survey conducted by ReForm, a consultancy company led by
Laksamana Sukardi, have prompted me to describe the general
working mechanism of foreign companies and state oil company
Pertamina in prospecting/producing crude oil.
In the upstream sector, E&P, foreign contractors (KPS), have,
in principle, a standard operating procedure (SOP) from Pertamina
for the implementation of their operations. This SOP requires
that in carrying out their activities, the KPS must take the
"one-door policy", namely BPPKA-Pertamina. This institute
coordinates and monitors KPS in terms of all E&P activities,
which encompass, among others, geophysics, geology, operations,
logistics, finance, environment, laws and human resources.
If the KPS are still at the exploration stage, the expenses,
no matter how large they are, will be borne by the foreign
parties. In implementing the contract, a KPS will always adhere
to a Work Program and Budget (WP&B) signed by both sides. If oil
is found and is declared commercial, all costs incurred in the
exploration activities and also for the field development
activities will be reimbursed by the proceeds from selling the
newly discovered oil. This is known as the recovery of operating
cost (cost recovery). To get an approval of cost recovery, a KPS
will have to go through a long parallel process, namely: (a)
certification must be obtained from a foreign independent
institute (D&M); (b) the size of the oil reserve must be
evaluated and approved of by Pertamina.
If a KPS is already at the production stage, the WP&B put
forward by the KPS must obtain the approval from BPPKA-Pertamina
every year, while reports on oil production output must be made
on a daily basis so that the production kept in storage may be
monitored (including the schedule of lifting and production
allocation for KPS or Pertamina). After WP&B gains approval, the
KPS will itemize the production costs, including those incurred
in the drilling activities, and then the costs will be presented
in the form of Authorization for Expenditure this stage, KPS and
Pertamina "sit together" to evaluate and justify the cost
recovery which will be calculated in future.
The point I wish to emphasize is that, in essence, KPS will
first spend money after WP&B approval. As it is the KPS that
forks out the cash from its own pocket and bears a high risk, it
is against lock that it will mark up its own spending.
On the one hand, Pertamina also has a cost estimate for
on/offshore production and drilling. It is next to impossible for
a KPS to undertake illegal activities because a KPS will always
adopt an open management system and transparency in its relation
with its partners, most of which are multinational companies. On
the other hand, KPS, in undertaking its production, always
implements the SOP, which has as its guideline the American
Petroleum Institute, among others, the technical aspect in the
process and handling of oil production, drilling, safety and
environment, technology and use of chemicals. These elements will
finally be linked with production and operation costs. As for the
goods available linked with the said elements, most of them can
be imported from the U.S. Additionally, it must be noted that a
KPS has a number of obligations to fulfill, such as the provision
of exploration funds, allocating work areas, fulfilling the
domestic demand for oil (domestic market obligations), paying
corporate taxes, taxes on interests, dividends and royalties.
The presence of KPS operating in Indonesia, despite the
possibility of failure in oil prospecting, must be viewed in a
spirit of cooperation on the basis of a mutually beneficial
partnership.
DIRGO D. PURBO
Oil Industry Observer
Jakarta
Several reports on alleged mark-up practices in the
exploration and production (E&P) sector, and the result of a
survey conducted by ReForm, a consultancy company led by
Laksamana Sukardi, have prompted me to describe the general
working mechanism of foreign companies and state oil company
Pertamina in prospecting/producing crude oil.
In the upstream sector, E&P, foreign contractors (KPS), have,
in principle, a standard operating procedure (SOP) from Pertamina
for the implementation of their operations. This SOP requires
that in carrying out their activities, the KPS must take the
"one-door policy", namely BPPKA-Pertamina. This institute
coordinates and monitors KPS in terms of all E&P activities,
which encompass, among others, geophysics, geology, operations,
logistics, finance, environment, laws and human resources.
If the KPS are still at the exploration stage, the expenses,
no matter how large they are, will be borne by the foreign
parties. In implementing the contract, a KPS will always adhere
to a Work Program and Budget (WP&B) signed by both sides. If oil
is found and is declared commercial, all costs incurred in the
exploration activities and also for the field development
activities will be reimbursed by the proceeds from selling the
newly discovered oil. This is known as the recovery of operating
cost (cost recovery). To get an approval of cost recovery, a KPS
will have to go through a long parallel process, namely: (a)
certification must be obtained from a foreign independent
institute (D&M); (b) the size of the oil reserve must be
evaluated and approved of by Pertamina.
If a KPS is already at the production stage, the WP&B put
forward by the KPS must obtain the approval from BPPKA-Pertamina
every year, while reports on oil production output must be made
on a daily basis so that the production kept in storage may be
monitored (including the schedule of lifting and production
allocation for KPS or Pertamina). After WP&B gains approval, the
KPS will itemize the production costs, including those incurred
in the drilling activities, and then the costs will be presented
in the form of Authorization for Expenditure this stage, KPS and
Pertamina "sit together" to evaluate and justify the cost
recovery which will be calculated in future.
The point I wish to emphasize is that, in essence, KPS will
first spend money after WP&B approval. As it is the KPS that
forks out the cash from its own pocket and bears a high risk, it
is against lock that it will mark up its own spending.
On the one hand, Pertamina also has a cost estimate for
on/offshore production and drilling. It is next to impossible for
a KPS to undertake illegal activities because a KPS will always
adopt an open management system and transparency in its relation
with its partners, most of which are multinational companies. On
the other hand, KPS, in undertaking its production, always
implements the SOP, which has as its guideline the American
Petroleum Institute, among others, the technical aspect in the
process and handling of oil production, drilling, safety and
environment, technology and use of chemicals. These elements will
finally be linked with production and operation costs. As for the
goods available linked with the said elements, most of them can
be imported from the U.S. Additionally, it must be noted that a
KPS has a number of obligations to fulfill, such as the provision
of exploration funds, allocating work areas, fulfilling the
domestic demand for oil (domestic market obligations), paying
corporate taxes, taxes on interests, dividends and royalties.
The presence of KPS operating in Indonesia, despite the
possibility of failure in oil prospecting, must be viewed in a
spirit of cooperation on the basis of a mutually beneficial
partnership.
DIRGO D. PURBO
Oil Industry Observer
Jakarta