Who benefits from high oil prices?

By Gamala V Katoppo

The year 2000 is proving to be one of bumper profits for the Indonesian upstream industry, with the Indonesian Crude Price (ICP) expected to average about US$28/bbl. So, who is reaping the rewards of high oil prices? Compared to other nations, Indonesia is counted as one of the toughest nation with its Production Sharing Contract (PSC) fiscal regime currently applicable to producing oil and gas fields.

Briefly about PSC, under this scheme, Pertamina has responsibility for the management of the operation while the contractor is responsible to Pertamina for the execution of the operation. The contractor provides all finance, experience and technical knowledge/skills. That is in theory; in practice, though, management is carried out by the contractor subject to supervision and approvals by Pertamina.

The total oil and/or gas production is then divided between the two according to defined rules and proportion. The rules allow the contractor to recoup its costs plus a proportion for after-tax profit by taking physical delivery of part of the production, while Pertamina takes the rest.

There have been three generations of PSCs. The first generation PSC (1965-1975) allowed a cost recovery of 40 percent of total revenues, while the 60 percent balance thereof, for oil and gas, was shared 65:35 for Pertamina and the contractor respectively. In addition, the contractor supplied Domestic Market Obligation (DMO) at 25 percent of its shareable oil at a price of 20 U.S. cents/bbl. The second and third generation PSCs issued after 1976 removed the earlier cost recovery cap of 40 percent of revenues and confirmed an after-tax equity split of 85:15 for Pertamina and the contractor respectively. The third generation PSC (1988) introduced the concept of First Tranche Petroleum (FTP), where a volume of 20 percent of production, first taken before recovery of operating costs, shared between Pertamina and the contractor.

From 1990 to 1997, the ICP averaged at $19/bbl. In 1998, oil prices plunged dramatically to below $10/bbl, and averaged $12/bbl for that year. However, in March 1999 oil prices started to recover, and by the end of the year the ICP had risen to over $24/bbl. Moving into 2000, and for the remainder of the year, oil prices continued to strengthen and the ICP reached over $30/bbl by June 2000. Despite OPEC raising its production quota three times in an effort to bring more oil to the market. The ICP was at about $33/bbl by September 2000. In light of current market dynamics, the ICP could be confidently estimated to remain high for the remainder of the year, averaging $28/bbl for the whole of 2000.

The strong recovery in the value of the ICP seen in 2000 has clearly generated significant cash windfalls for the upstream oil and gas industry, especially for Indonesia. Crude oil production in Indonesia for this year is expected to reach 1.3 million barrel per day, assuming an average ICP at $28/bbl for the year, Indonesian crude oil revenue alone could reach more than $13 billion, which the Indonesian government enjoys a share of $10 billion, while contractors take the remaining $3 billion.

The Indonesian government budgeted the oil price next year to be in the vicinity of $24/bbl. In the meantime, expected Indonesian crude oil production for 2001 is expected to be about 1.35 million barrels per day. Therefore, using the government oil price assumption for 2001, crude oil revenue for next year is expected to be almost $12 billion, with the government share at about 70 percent or $8.3 billion, while the rest goes to the contractors.

The distribution of this extra cash flow varies, depending on the province and the attractiveness of the fiscal regimes. Indonesia, Malaysia and Brunei with their relatively tough fiscal regimes currently applicable to their producing oil and gas fields, are the ones to most benefit from the current high oil price. In Indonesia, almost 80 percent of the 2000 cash windfall will go to the state.

The writer is Corporate Research and Information Section Head of PT Medco Energi Internasional Tbk.