GROSS SPLIT AND INVESTMENT

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©Petroliam Nasional Berhad (PETRONAS) 2017 1

reproduced, stored in a retrieval system or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise) without the permission of the copyright owner.

GROSS SPLIT AND INVESTMENT

Internal

Production and Exploration Block Study Case

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Presentation Outline

Internal

• Objectives

• Overview of Indonesia Current PSC vs Gross Split

• Gross Split Mechanism

• PC Ketapang Study Case

• PC North Madura II Study Case

• Analysis of Result

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1. To increase / maximize government take

2. Encourage PSC operator(s) and service companies to streamline and operate more efficiently (to be cost effective)

3. Eliminate cost recovery sensitive issues

4. Encourage local businesses to compete on big tender(s) of material sourcing

Gross Split Objectives:

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Overview of Indonesia Current PSC vs Gross Split

Source: WoodMac w/modif.

$ 30

Contractor Net Cash Flow:

PSC US$ 15.37 Gross Split US$ 7.8

($ 5.2 )

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Gross Split Mechanism

MR 08/2017 & MR 52/2017

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Both MR 08/2017 and MR 52/2017 have the same base split assumption:

Base Split

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Comparison New Gross Split PSC - Variable Components

Terms MEMR 8/2017 Split MEMR 52/2017 Split Block status 1^st POD

2^nd POD etc.

POFD No POD

5%

0%

1^st POD 2^nd POD No POD

5%

3%

0%

Field Location Onshore

Offshore (0<h≤20m) Offshore (20<h≤50m) Offshore (50<h≤150m) Offshore

(150<h≤1000m) Offshore (≥1000m)

5%

8%

10%

12%

14%

16%

Onshore

Offshore (0<h≤20m) Offshore (20<h≤50m) Offshore

(50<h≤150m) Offshore

(150<h≤1000m) Offshore (≥1000m)

0%

8%

10%

12%

14%

16%

Reservoir Depth ≤2500 m

>2500 m

0 1%

≤2500 m

>2500 m

0 1%

Reservoir Condition Conventional

Non Conventional 0

16% Conventional

Non Conventional 0 16%

Supporting

Infrastructure Well developed

New Frontier 0

2% Well developed

New Frontier Offshore New Frontier Onshore

0 2%

4%

CO2 content <5%

5%≤x<10%

10%≤x<20%

20%≤x<40%

40%≤x<60%

≥60%

0 0,5%

1%

1,5%

2%

4%

<5%

5%≤x<10%

10%≤x<20%

20%≤x<40%

40%≤x<60%

≥60%

0 0,5%

1%

1,5%

2%

4%

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Open

Terms MEMR 8/2017 Split MEMR 52/2017 Split H2S content (%) <100

100≤x<300 300≤x<500

≥500

0 0,5%

0.75%

1%

<100

100≤x<1000 1000≤x<2000 2000≤x<3000 3000≤x<4000

≥4000

0 1%

2%

3%

4%

5%

Oil Specific Gravity (API)

API<25 API>25

1%

0

API<25 API>25

1%

0 Production Phase Primary

Secondary Tertiary

0 3%

5%

Primary Secondary Tertiary

0 6%

10%

Local Content (%) <30

30≤x<50 50≤x<70 70≤x<100

0 % 2%

3%

4%

30≤x<50 50≤x<70 70≤x100

2%

3%

4%

Comparison New Gross Split PSC - Variable

Components

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Open

Terms MEMR 8/2017 Split MEMR 52/2017 Split Oil Prices

(USD/barrel) <40

40≤x<55 55≤x<70 70≤x<85 85≤x<100 100≤x<115

≥115

7.5%

5%

2.5%

0 -2.5%

-5%

7.5%

(85-ICP) x 0.25

Gas Prices

(USD/Mmbtu) - <7

7-10

>10

(7-Gas Price) x 2.5 0

(10-Gas Price) x 2.5 Cumulative Oil and

Gas Production (mmboe)

<1 1-10 10-20 20-50 50-150

>150

5%

4%

3%

2%

1%

0%

<30

30≤x<60 60≤x<90 90≤x<125 125≤x<175

≥175

10%

9%

8%

6%

4%

0%

Comparison New Gross Split PSC - Progressive

Components

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PC Ketapang Study Case

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Bukit Tua Phase I

Unit Value

Production:

Total Oil

Production MMBO 20.56

Total Gas

Production BSCF 33.65

Total Volume

Production MMBOE 26.17

Expenditures:

CAPEX USD Mill Gross 645

OPEX USD Mill Gross 792

Total

Expenditures

USD Mill Gross

1,436

Assumptions

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Result BT POD (BT Ph. 1)

Unit PSC Gross Split MR

8/2017

Gross Split MR

52/2017 Remarks

Revenue USD Mil

Gross 1,179 100% 1,179 100% 1,179 100%

Contractor Share USD Mil

Gross 989 84% 465 39% 544 46%

Government Share (excl. tax)

USD Mil

Gross 154 13% 348 30% 207 18%

Tax USD Mil

Gross 36 3% 366 31% 427 36%

Contractor Share

[email protected]% USD Mil

Gross 44 454 531

Contractor PIR

@8.5% % 0.07 0.71 0.82

Payback Period Years - - - - - -

Up until end of production life, no

payback on investment

Unrecovered Costs USD Mil 492 971 892

Gross Split

Unrecovered Cost

= negative figure from net contractor share minus total expenditure

Assumptions:

1. Economic calculation Full Cycle discounted 2017

2. Production Volume for BT Phase I as per 2018 P4R Submission 3. Oil price as per KPBI 2018, gas price as per existing GSA

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Comparison of Contractor Split in Bukit Tua POD (BT Ph. 1)

Open

Cont.’s Split Cont.’s

Split = + +

Base Split

Progressiv e Split

Variable Split

Base Split

Base Split Variable Split Variable

Split

Progressive Split

*Assume Price as per 2018 KPBI, Oil = USD 47, Gas = USD 5.73

Gross Split MEMR 08/2017

Oil 43%

Gas 48%

Block

Status 5%

Field Locat. 12%

Local

Contnt 3%

Tax Tax -

Cum. Prod 2%

Price Oil* 5%

Price Gas n/a

Rate 44%

Cont.’s Split Cont.’s

Split = Base + +

Split

Progressiv e Split

Variable Split

Base Split

Base Split Variable Split Variable

Split Progressive Split

Progressive Split

Oil 43%

Gas 48%

Block

Status 5%

Field Locat. 12%

Local

Contnt 3%

Tax Tax -

Cum. Prod 10%

Price Oil* 10%

Price Gas* 3%

Rate 44%

Gross Split MEMR 52/2017

Total = 39%

Total = 46%

PSC Method:

Total Contractor Share

84%

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Bukit Tua Phase II (as per approved POFD)

Unit Value

Production:

Total Oil

Total Gas

Total Volume

Expenditures:

CAPEX USD Mill Gross 513

Total

Expenditures

1,034

Assumptions

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Result BT POFD (BT Ph.2)

Unit PSC Gross Split MR

8/2017

Gross Split MR

52/2017 Remarks

Revenue USD Mill

Gross 1,777 100% 1,777 100% 1,777 100%

Contractor Share USD Mil

Gross 1,491 84% 625 35% 755 43%

Government Share (excl. tax)

USD Mil

Gross 233 13% 661 37% 429 24%

Tax USD Mil

Gross 54 3% 491 28% 593 33%

Contractor Share

[email protected]% USD Mil

Gross 48 412 501

Contractor PIR

@8.5% % 0.09 0.80 0.98

Payback Period Years 12 12 12

Unrecovered Costs USD Mil 106 410 280

Gross Split

Unrecovered Cost

= negative figure from net contractor share minus total expenditure

Assumptions:

1. Economic calculation LookForward 2017

2. Production volume for BT Phase II as per approved POFD Bukit Tua Phase II 3. Oil price as per approved POFD Bukit Tua Phase II, gas price as per existing GSA

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Comparison of Contractor Split in Bukit Tua POFD (BT Ph. 2)

Open

Cont.’s Split

Cont.’s Split = + +

Base Split

Progressiv e Split

Variable Split

Base Split

Base Split Variable Split Variable Split Progressive Split Progressive Split

Gross Split MEMR 08/2017

Oil 43%

Gas 48%

Block

Status 0%

Field Locat. 12%

Local

Contnt 3%

Tax (44%)

-

Cum. Prod 2%

Price Oil* 5%

Price Gas n/a

Rate 44%

Cont.’s Split

Cont.’s Split = Base + +

Split

Progressiv e Split

Variable Split

Base Split

Base Split Variable Split Variable Split Progressive Split Progressive Split

Oil 43%

Gas 48%

Block

Status 3%

Field Locat. 12%

Local

Contnt 3%

Tax Tax

-

Cum. Prod 9%

Price Oil* 10%

Price Gas* 3%

Rate 44%

Gross Split MEMR 52/2017

Total = 35%

Total = 43%

PSC Method:

Total Contractor Share

84%

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PC North Madura II Study

Case

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PC North Madura II

Unit Value

Production:

Total Oil

Total Gas

Total Volume

Expenditures:

CAPEX USD Mill Gross 1,887

Total

Expenditures

2,485

Assumptions

*assumption per data input AEDIP 2016, actual exploration drilling cost and input provided on NMII exploration overview during subsurface workshop

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Contractor Split of PC North Madura II

Open

Base Split

Progressiv e Split

Cont.’s Split Cont.’s

Split = Base + +

Split

Progressiv e Split

Variable Split

Base Split

Base Split Variable Split Variable

Split Progressive Split

Progressive Split

Oil 43%

Gas 48%

Block

Status 5%

Field Locat. 10%

Local

Contnt 2%

Tax Tax -

Cum. Prod 0%

Price Oil* 0%

Price Gas* 0%

Rate 44%

Gross Split MEMR 52/2017

Total = 51.62%

PSC Method:

Total Contractor Share

48.22%

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Conclusion

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Government:

1. Contradiction with Indonesian Constitution Art. 33(3) – lack of supervisory role

2. Despite the obligation of WP&B submission still remain, SKK Migas will only review the work program not the budgetary detail. Its powers are limited only to guiding and monitoring PSC Contractor’s commitment towards work program.

Contractor:

1. Higher investment risk 2. Asset ownership

3. Delay in Profit

Oil & Gas Services Companies:

3. PSC contractor will seek and pursue the lowest goods and services, through various sources. This could harm local Indonesian companies for unable to compete with international supplier.

4. Low percentage of variable split in local content also discouraging contractors to procure locally, under the consideration that contractor can get better goods and services from abroad.

Gross Split, despite of its promise of better profit and less complication, will create new concerns and significant

unanswered matters to stakeholders

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Thank you

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Backup

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PRODUCTION SHARING CONTRACT

Royalty

Net Cash Flow State/Govt.

Profit Share

(equals) (less)

State/Governmen t

Cash Flow Revenue

Opex

Capex

Net Cash Flow

(equals)

(less)

Project Cash Flow

Tax

Net Cash Flow Cost Recovery

Contr.

Profit Share

(less)

(equals) (less)

Profit Share

(equals)

(less)

Contractor’s Cash Flow

Royalty

source: Principle of Petroleum Economics – Fundamentals of Concept of Economic Evaluation in PETRONAS

Upstream

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Indonesia Current PSC Management

Cost = $40

Government Take = $51 Contractor Take = $ 9

*Net Govt. Take

= 85%

$10

Royalty

@10%

Govt.

Profit Share

@70%

$6

$35

Tax

@40%

Governmen t Take =

$51 Cost Recovery

Ceiling @50%

= $40 $40

Contractor Take

= $9 $9

Example: Revenue = $100 Cost = $ 40