Recovery of Investment Costs During the Cooperation-Contract Transition Period for Upstream Oil-and-Gas Activity

The Ministry of Energy and Mineral Resources has issued Regulation No. 26 of 2017 on the Mechanism for the Recovery of Investment Costs in the Upstream Oil-and-Gas Sector (“Regulation 26/2017”), which sets out a number of mechanisms relating to the reimbursement of investment costs incurred by upstream oil-and-gas contractors (“Contractor”) during the management of working areas for the duration of the cooperation-contract transition period by the government. [1] These mechanisms will apply during the cooperation-contract transition period, which the government may choose to extend (either through the use of the cost-recovery or gross-split schemes). [2] Alternatively the government may choose to discontinue a given cooperation contract.Investment CostsAs a general rule, a Contractor is obliged to maintain equitable production value throughout a given cooperation-contract period. In order to achieve this, the Contractor is required to make the necessary investment within its working area. [3] However, all such investments must first be approved by the government via the Special Task Force for Upstream Oil-and-Gas Business Activities (Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi- ”SKK Migas”). In order to obtain approval, Contractors must submit working and budget plans (for cost-recovery cooperation contracts) or working contracts (for gross-split production-sharing contracts) to SKK Migas. [4] Upon making the relevant investment in their working area, a Contractor will be entitled to recover their investment costs. This recovery will be undertaken by the government during the cooperation-contract period. [5] Cost Recovery in the Event of Cooperation-Contract ExtensionsIf a cooperation contract with a Contractor is extended by the government, then any incomplete recovery may be settled during the cooperation contract’s extension period. Such extensions may either take the form of cost-recovery cooperation contracts or gross-split product-sharing contracts (“PSC”). If the former applies, then the reimbursed investment costs will be classified as operational costs and will be recovered. [6] However, if the latter applies, then the relevant investment costs will count as the Contractor’s PSC take. [7] Note that if a cooperation contract is extended through the use of a gross-split scheme and the government appoints another Contractor to jointly manage the working area with the existing Contractor, then the new Contractor will also be responsible for covering the investment-cost recovery. The recovery value covered by any new Contractor will be calculated proportionally according to the amount of its participating interest in the relevant working area. [8] Cost Recovery in the Event of the Discontinuation of Cooperation ContractsIf the government decides not to extend a cooperation contract with the existing Contractor but is not yet ready to appoint new Contractor, then the Ministry of Energy and Mineral Resources (“Ministry”) may issue a set of specific procedures relating to the recovery of the relevant investment costs. [9] However, if the government has already appointed a new Contractor, then any such recovery will be undertaken by the newly appointed Contractor. [10] The recovery value that needs to be paid by a new Contractor should cover the remaining amount of any investment costs which have not yet been recovered, or other value, as determined by the Ministry (upon the Ministry receiving a recommendation from SKK Migas). This amount must then be verified by SKK Migas and set out in a decision letter which should be sent to the management responsible for the working area in question (surat penetapan pengelolaan wilayah kerja).The amount should also be included in the new cooperation contract. [11] Subsequently, both the new and the existing Contractors should enter into an agreement covering the relevant recovery procedure. [12] Note that any recovery that is undertaken by a new Contractor will be categorized as said Contractor’s take and will not affect the profit-sharing calculation stipulated under the PSC. [13] Any cooperation contract which was signed prior to the issuance of Regulation 26/2017 must be adjusted so as take the abovementioned provisions into account. [14] Regulation 26/2017 has been in force since 30 March 2017._RFS