Gross Split Production Sharing Contracts: Commercial Insights from Indonesia’s MEMR Regulation No. 13 of 2024

In a decisive move to streamline Indonesia's upstream oil and gas sector, the Minister of Energy and Mineral Resources (“MEMR”) issued Regulation No. 13 of 2024 (“MEMR Reg 13/2024”), introducing a revised framework for Gross Split Production Sharing Contracts (“Gross Split PSC”).

MEMR Reg 13/2024 alters the commercial landscape for oil and gas upstream companies operating in Indonesia, with an emphasis on efficiency, reduced bureaucracy, and enhancing flexibility in profit-sharing arrangements with an adjusted base split to favor contractors.

MEMR Reg 13/2024 replaces MEMR Regulation No. 8 of 2017 (“MEMR Reg 8/2017”).

Streamlined and Flexible Structure

In the Gross Split PSC framework, production sharing contractors incur their operational and capital expenses upfront, without a cost-recovery mechanism. They benefit from a gross production sharing model where their share of production is allocated based on predetermined percentages, allowing for a more direct correlation between production levels and profit potential.

This structure eliminates the complex reimbursement process typical of cost-recovery models, streamlining administrative processes. As a result, oil and gas upstream companies can bypass extensive cost-recovery claims, significantly reducing bureaucratic requirements and expediting project timelines. This reduction in bureaucratic oversight is expected to accelerate project timelines, providing contractors with enhanced flexibility and efficiency.

The new MEMR Reg 13/2024 provides a more detailed Gross Split PSC scheme for conventional and non-conventional oil and gas activities. However, MEMR Reg 13/2024 maintains flexibility for production sharing contractors to request the conversion of the forms of their PSCs between Gross Split PSC and cost-recovery PSC, allowing upstream oil and gas companies to adapt their contracts based on their financial and project performance needs.

For cost-recovery contracts signed prior to the stipulation of MEMR Reg 12/2024, conversions may be requested under certain circumstances.

Gross Split Calculation: Base Split and Adjustments

The base split serves as the starting point for determining the production share between the State and contractors. Under MEMR 13/2024, the base split has been adjusted in favor of contractors and operates in alignment with the guidelines set out in MEMR Decision No. 230.K/MG.01/MEM.M/2024 on Guidelines for the Implementation and Components of Gross-Split, Profit-Sharing Contracts, applying to both conventional and non-conventional oil and gas projects. For crude oil, the base split allocates 53% for the State and 47% for contractors. For natural gas, the split is 51% for the State and 49% for contractors.

For conventional oil and gas projects, these allocations are further refined through adjustments based on variable and progressive components. Previously, under MEMR Reg 8/2017, the components used in determining the split involved up to 13 factors. MEMR Reg 13/2024 reduces these to three key variable components: reserve size, field location, and infrastructure availability. Similarly, the progressive components have been streamlined from three to two, which adjust the split based on oil and gas prices, so the profit-sharing arrangement is responsive to changing economic conditions.

Meanwhile, non-conventional oil and gas projects are placed under a fixed variable component with a production split of 46% for contractors, providing clarity and predictability for projects that involve the specific challenges of non-conventional resource extraction.

The aim of this new system is to ensure the contract accurately reflects the technical and economic realities of the project, allowing for a fair distribution of revenue between the State and contractors.

Incentives for Additional Profit-Sharing 

MEMR Reg 13/2024 incorporates a framework for granting additional profit-sharing percentages to upstream oil and gas contractors.

In the event a field commercialization calculation does not achieve the economic value of a project, the MEMR may grant additional profit-sharing percentages to the contractor. And if the field commercialization calculation surpasses the reasonable economic value of the project, the MEMR may grant additional profit-sharing percentages to the State.

The additional profit-sharing percentages may be granted by the MEMR during the following periods: (i) approval and/or amendment of Plan of Development I (“POD I”); (ii) approval and/or amendment of subsequent POD; and/or (iii) stipulation of PSC extension or management of expiring PSCs.  The additional percentages will be stipulated by the MEMR by considering the recommendation of SKK Migas, the Special Task Force for Upstream Oil and Gas Business Activities.

Conclusion

MEMR Reg 13/2024 signifies an advancement in enhancing the competitiveness of Indonesia’s oil and gas sector. By refining the gross split mechanism and providing greater flexibility in contract terms, this regulation seeks to equip upstream oil and gas companies with essential tools to maximize profitability while navigating industry challenges. This regulation is expected to promote a more dynamic and fair distribution of revenue, adaptable to changing field conditions.

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