Energi Pasir Hitam Indonesia (Ephindo) has decided to postpone an exploration in the Melak Mendung 1 Block in East Kalimantan due to low global oil prices while waiting for the government to implement the regulation on unconventional oil and gas working areas.
Ephindo’s joint venture and PGPA Manager Moshe Rizal Husin said that the government has actually done a lot to help unconventional oil and gas contractors survive amid low oil prices. One example is through the Regulation of the Minister of Energy and Mineral Resources No. 38/2015 regarding unconventional oil and gas blocks.
The problem is that the government has not gone all out to implement this regulation. Many unconventional oil and gas companies have complained about this. He hoped that the government would soon implement the regulation. "We are confident that the regulation can improve the economic value of the fields," he told Katadata, Wednesday (13/4).
This regulation differentiates between the profit-sharing schemes for unconventional oil and gas, such as shale oil and coal-bed methane, and for conventional oil and gas. There are two profit sharing schemes used in unconventional oil and gas contracts: sliding scale and gross split sliding scale. (Read: Government to Prepare Non-Conventional Oil and Gas Roadmap)
The sliding scale scheme uses a progressive profit sharing model based on cumulative production. The higher the production, the greater the government’s share, and vice versa. This scheme still adopts a cost recovery mechanism, although the government has yet to determine the profit sharing allocation.
In contrast, the gross split sliding scale scheme does not use a cost recovery system. This scheme uses a model of gross profit sharing before deduction of operating expenses, based on uses a progressive profit sharing accumulated in one year. The government’s share of profit in conventional oil and gas contracts is typically 80 percent for oil and 70 percent for natural gas.
According to Moshe, the government still needs supporting regulations such as work procedure guidelines to implement the rules. The Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) is supposed to have prepared the guidelines but has not done so until now. In addition, these schemes do not clearly set out the role of SKK Migas, which will be vastly different under the gross split sliding scale scheme where the agency will serve as a supervisory agency. "SKK Migas cannot wash its hands of the matter although it will no longer adopt a cost recovery scheme," he said. (Read: Contractors Propose Moratorium on Exploration Until Oil Prices Back to US$ 50)
Despite suspending its activity, Ephindo still pays general and administrative expenses. The company completed geological and geophysical studies two years ago but has not commenced drilling activities due to the high cost of exploration. Moreover, it is difficult to construct an access road to the working areas because they have to negotiate with palm oil plantations to procure land for the road.
Moshe was reluctant to disclose how much Ephindo had spent during the exploration phase. Nationally, the company has spent more than US$ 700 million since 2008. "So the clearer the regulation, the quicker we can resume our activities," said Moshe.
Head of public relations of SKK Migas Elan Biantoro said that the suspension of exploration activities by Ephindo amid low oil prices comes as no surprise because continuing these activities would result in a loss for the contractor. One option is to wait for oil prices to recover; another is to change the terms and conditions of new contracts for unconventional oil and gas blocks. The legal umbrella (Regulation of the Minister of Energy No. 38/2015) is already in place. "We have the regulation, but the terms and conditions of the profit sharing contract have not changed. It is not a matter for SKK Migas, but the Ministry of Energy," he said.
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