CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND POLICY

STATEMENT OF ORIGINALITY

I.D. STUDENT:

090012980

PROGRAMME:

LLM in Mineral Law and Policy

MODULE: Name TITLE OF THE RESEARCH PAPER:

Code CP52009 Mineral and Petroleum Taxation

Comparative Study of Indonesian PSC and Malaysian PSC : Challenges and Solution

ABSTRACT: Malaysia is one of the many countries that adopted Indonesians Product Sharing Contract (PSC) since its second formulation. However, both countries had developed their own version of PSCs according to each States interest within the last thirty decades. These recent years, Indonesian fiscal regime tends to be less investor-friendly than Malaysia. As a result, Malaysia leads in front Indonesia on attracting foreign investment flooding into its oil and gas sector in the last few decades. The most recent case was happened when only five blocks taken by investors from sixteen blocks that were being auctioned by Indonesian government in 2009. Indonesian government took this issue to restructure the Cost Recovery Regulation on Oil and Gas sector. The new regulation meant to attract foreign investment and recover Indonesia position against the neighboring rival country. This leads to the following questions: (i) why Malaysian PSC could be more investor-friendly than Indonesian PSC; and (ii) how the new regulation on Cost Recovery make Indonesian PSC more competitive against Malaysia PSC? The research will employs comparative legal study in Indonesian and Malaysian legislatives with emphasize on Indonesian new Cost Recovery regulation draft. The ruling is supposedly to be enacted in the end

of June 2010. Literature review will strongly supports the research as secondary sources along with other relevant sources. WORD COUNT: 3,667 (including footnotes)

PRESENTED TO: Ariel Bergmann

Prof./Dr/ Mr/Mrs DIRECTOR OF THE MODULE

CONTRACT CONCERNING PLAGIARISM

I, the undersigned, have read the Code of Practice regarding plagiarism contained in the Students' Introductory Handbook. I realise that this Code governs the way in which the Centre for Energy, Petroleum and Mineral Law and Policy regards and treats the issue of plagiarism. I have understood the Code and in particular I am aware of the consequences, which may follow if I breach that code. I also authorise the centre to scan the e-copy of my research paper through the Plagiarism Detection Software to detect plagiarism

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TABLE OF CONTENTS

ABBREVIATION................................................................................................................................................. 4 1. 2. INTRODUCTION........................................................................................................................................ 5 COMPARASION STUDY OF INDONESIAN AND MALAYSIAN PSC .................................................. 7 2.1. 2.2. 3. Indonesian PSC Development..................................................................................................................7 Malaysian PSC Development ................................................................................................................10

WHY MALAYSIAN PSC COULD BE MORE INVESTOR-FRIENDLY THAN INDONESIAN PSC? 12

4. INDONESIAN BREAKTHROUGH SOLUTION THROUGH THE NEW COST RECOVERY REGULATION .................................................................................................................................................. 14 5. CONCLUSION .......................................................................................................................................... 15

BIBLIOGRAPHY .............................................................................................................................................. 16 Primary Sources .................................................................................................................................................16 Secondary Sources ..............................................................................................................................................16 Book ....................................................................................................................................................................16 Thesis/Dissertation .............................................................................................................................................17 Article .................................................................................................................................................................17 Other Sources .....................................................................................................................................................18

Abbreviation IIAPCO NOC PSC IOC DMO FTP SA NPV Independent Indonesia American Petroleum Company National Oil Company Production Sharing Contract International Sharing Contract Domestic Market Obligation First Tranche Petroleum Service Agreement Net Present Value

1.

Introduction

Among petroleum agreements that still effective until today, Production Sharing Contract (PSC) is one of the most widely use in oil-producing countries. Pioneered by Indonesia in oil industry in 1966 as the first PSC signed between IIAPCO and Pertamina one of Indonesian NOC at that time1. Indifferent with other rich oil, developing countries with, Indonesia has to balance its political desire with economic interest into a proportional form of contract2. PSC is chosen by the government because it provides compromise for both objectives3,in the same time it gives satisfactory conditions for investment. The PSC emphasizes on mutual interest between the government and IOC as contractor by bound both parties with good faith and mutual goodwill 4. For the governments side, cost recovery would guarantee the governments access for determined share of IOCss production regardless true economic profits are generated.5 While IOCs found PSC a better solution compared with other petroleum agreement since it allow the contractor to discover all Operating Cost from production only if there is a commercial discovery6. Also, PSC provides IOCs an opportunity to enjoy the whole price increases in the world market on their share of the crude7. PSC also proven to be minimizing conflict in several respects related with local resources and investment8.

Johnston, D., How to Evaluate The Fiscal Terms of Oil Contract in Escaping the Resource Curse, (M. Humphreys, et.al. eds, UK, New York : Columbia University Press, 2007), p. 60.

Gao, Zhiguo, International Petroleum Contracts : Current Trends and New Directions, (UK, London : Graham & Trotman, 1994), p.99. Ibid. Ibid., p.100. Johnston, D., op.cit, p. 75. Gao, Zhiguo, op.cit., p. 83.

3 4 5 6 7

Kamaruddin, Moh. Ali, Production Sharing Contract in the Oil Industry, Thesis, (UK, Dundee : CEPLMP University of Dundee, 1980), p. 79.

Fabrikant, R., Oil Discovery and Technical Change in Southeast Asia : Legal Aspect of Production Sharing Contract in the Indonesian Petroleum Industry, Field Report Series No. 3, (ISEAS, October 1987), p. 152-153.

Learning from Indonesian success, PSC then being adopted by numerous countries around the globe9. PSC is respected as it managed to solve cost recovery problematic procedure that has been a significant financial issue in other petroleum agreements along with profit oil split10. After all, the three basic features of PSC are taxes, profit oil, and cost recovery11. Cost recovery could be considered as the only difference between PSC and concessionary system12. Until recent, only Indonesia and Malaysia that genuinely adopted PSC among all countries in ASEAN. Thailand only adopted PSC for the Joint Development Area with Malaysia which commenced in 199013. This fact brings the research conducted particularly to compare Indonesian PSC and Malaysian PSC as two countries in same region with similar petroleum fiscal system. Malaysia has openly confirmed they adopted Indonesian PSC to be implemented into their oil industry with some modifications14. However, Malaysia keep taking the lead on oil industry growth compared with Indonesia during recent years. Indonesia tries to catch up by drafting new cost recovery regulation to provide better investment-climate15. Hence, this leads to the following questions: (i) why Malaysian PSC could be more investor-friendly than Indonesian PSC; and (ii) how the new regulation on Cost Recovery make Indonesian PSC more competitive against Malaysia PSC? The main defect of Indonesias relying on the uncertainty of law and policies which influence the effectiveness of the contract to be exercised. This is what made Malaysia is being considered better than Indonesia regardless Indonesian fiscal policy is far more flexible than Malaysia.
9

Gao, Zhiguo, op.cit., p.103.

10

Bunter, M.A.G., The Promotion and Licensing of the Petroleum Prospective Acreage, (The Netherlands, The Hague : Kluwer Law International, 2002), p.58.

11

Johnston, Daniel, International Petroleum Fiscal Systems and Production Sharing Contracts, (USA, Oklahoma : Penn Well Corporation, 1994), p.72. Ibid. p.42.

12 13

MTJA, About the Malaysia-Thailand Joint Authority (MTJA), at http://www.mtja.org/aboutus.php (last accessed on 5 May, 2010).

14

Machmud, Tengku Nathan, The Indonesian Sharing Contract:An Investors Perspective , (The Netherlands, The Hague : Kluwer Law International, 2000), p.94. 2009, at

15

ESDM, Pemerintah Siapkan Kebijakan Baru tentang "Cost Recovery", 04 March http://www.esdm.go.id/berita/migas/40-migas/2333-pemerintah-siapkan-kebijakan-baru-tentang-qcostrecoveryq.html (last accessed on 29 April, 2010)

This paper employs comparative study between Indonesian PSC more competitive against Malaysia PSC by using relevant legislatives from both countries as primary resources. The research also supported by literature and electronic sources as secondary and other sources. 2. 2.1. Comparison Study of Indonesian and Malaysian PSC Indonesian PSC Development The history has noted Dr. Ibnu Sutowo as the initiator of the implementation of PSC into oil industry when he designed the system for Indonesias back in 196616. Acted as the President of Indonesian NOC Pertamina17, he had aggressively promoted PSC as the sole petroleum agreement system in Indonesia. Sutowo has observed Indonesias lack of control over the cost and price figure contributes to sense of unfairness on profit split with the IOC over the years18. He came out by introducing the dividing of production instead relies on the profit split19. Indonesian has PSC evolved into three generations: (i) First Generation PSC known as Indonesian 1966 PSC; (ii) Second Generation of PSC known as Indonesian 1976 PSC, and; (iii) Third Generation of PSC which issued on 1978. The last Generation of PSC has its own evolution on 1984, 1988, and 198920. From the first Indonesias Oil and Gas Law i.e. Law No. 44 of 196021 until the most recent Law No.22 of 2001, there is no concrete rights and obligations for foreign companies being stipulated22. Hence, it can be found on the subsequent decrees and regulations. Within this subordinate rulings, model PSCs are being set out in details particularly concerning terms and

16 17

Carlson, Sevinc, Indonesias Oil , (USA, Colorado : Westview Press, 1977), p.17.

Bunter, M.A.G., The Promotion and Licensing of the Petroleum Prospective Acreage, (The Netherlands, The Hague : Kluwer Law International, 2002), p.122.

18

Kamaruddin, Moh. Ali, Production Sharing Contract in the Oil Industry, Thesis, (UK, Dundee : CEPLMP University of Dundee, 1980), p.24. Ibid., p.18.

19 20

Siswanto, Djoko, What Should Indonesian Petroleum Policy Be In The Future, Thesis, (UK, Dundee : CEPLMP University of Dundee, 2002), p.35.

Law of The Republic of Indonesia Number 44 of 1960 regarding Oil and Natural Gas Mining, 1960, State Gazette of The Republic of Indonesia Year 1960 Number 133 (entered into force in1960, unknown date)
22

21

Law of The Republic of Indonesia Number 22 of 2001 regarding Oil and Natural Gas Mining, 23 November 2001, State Gazette of The Republic of Indonesia Year 2001 Number 136 (entered into force 23 November 2001)

conditions for the operations to be carried out by the Contractor23. A PSC carried out between Pertamina and an IOC must be approved by the Minister of Energy and Mineral Resources on behalf of the Government of Indonesia
24

. The PSC could not become effective before the

President of Republic of Indonesia issues presidential approval of the contract to precede the Ministers approval. These approvals serve as prominent legal requirements for the PSCs effectiveness25. Until 1976, the cost recovery was set at the first 40% of annual gross production. Later it was changed on the 1976 PSC model which revised the cost recovery procedure and prolonged IOCs cost recovery period from seven years to 14 years. 26 Indonesian First Generation PSC laid out some strong characteristic features which later adopted worldwide: (i) The title of the hydrocarbon remained with the state27, (ii) Pertamina maintained management control28, (iii) The contractor submitted work programs and budgets for government approval29, (iv) The profit oil split-the amount of oil remaining after allocation of royalty oil and cost oil-was 65 percent/35 percent in favor of Pertamina30, (iv) The contractor bore all the risk of production cost31, (v) The cost recovery limit (the limit to the amount of deduction that can be taken for cost recovery purpose) was 40 percent32, (vi) Taxes paid in lieu (i.e. taxes paid for and on behalf of the IOC by Pertamina)33, (vii) Purchased equipment became

23 24 25 26 27 28

Gao, Zhiguo, op.cit., p. 83. Ibid. Ibid., p. 72. Ibid., p. 83. Johnston, Daniel, op.cit., p. 29.

Mikesell, R.F., Petroleum Company Operations and Agreements In The Developing Countries, ( USA, Washington:Resources for the Future Inc, 1984), p. 60. Johnston, Daniel, op.cit. Mikesell, R.F., op.cit. Carlson, Sevinc, op,cit., p.19. Johnston, D., op.cit., p.61. Johnston, D., op.cit.

29 30 31 32 33

property of Pertamina34, (viii) Company entitlement equals cost oil (oil or revenue used to reimburse the contractor for the exploration and development) plus profit oil.35 Indonesian cost recovery evolution under PSC started on 40% during the First Generation of PSC (1966-1976) then changed into 100% on Second Generation of PSC (1976-1978)36. The last scheme is still effective until today37. The first generation arranged remaining production (60%) shall be divided 65:35 between Pertamina (65%) and IIAPCO as the Contractor (35%)38. This arrangement guaranteed Pertamina to earn 39% of the production, known as Pertamina Oil. The Contractor gets 61% of the production, which called as Profit Oil39. However, the arrangement started to critized when the government and oil companies arguing about the windfall profits generated from rising oil price the oil on 1970s40. The government and Contractor negotiated new arrangement which binds the Contractor to accept DMO41. The new arrangement also reduced the Contractors share42. The government then introduced extra incentives for explorations: (i) Investment credit incentives which provide additional allowance for cost recovery of asset value of the new field by taking it from gross production in the earliest production year. This incentive allowed the Contractor to earn 61% of production during the lifespan of the field;(ii) DMO Holiday for the first five years subject to commercial production of particular crude from the new field43. This incentive allowed Contactor to receive price equivalent to export price during the holiday. Unfortunately, the incentives are not warmly welcome by the IOCs particularly investment credit Incentives. T.N. Machmud stated the incentive is often;

34 35 36 37

Johnston, Daniel, op.cit., p.30. Johnston, D., op.cit., p.61. Johnston, Daniel, op.cit., p.79. at

Cahyono, A.D., Lagi, Evita Janji PP Cost Recovery Terbit Juni, 20 April 2010, http://www.majalahtambang.com/detail_berita.php?category=18&newsnr=2638 (last accessed 5 May, 2010) Machmud, Tengku Nathan, op.cit., p. 77. Ibid. Ibid., p. 78. Ibid., p. 78. Ibid., p. 78. Ibid., p. 79.

38 39 40 41 42 43

mistakenly used as a threshold for commerciality44...

Soon after, Indonesian government withdrew the investment credit incentives and later developed FTP. This fiscal instrument is similar to royalty, as Indonesian PSC does not recognize royalty45. FTP is functioned to capture the 40% cost recovery ceiling. FTP is shared between government and the Contractor and subject to tax46. The FTP serves as a cap on the cost recovery. As the consequence, the contractor only allowed to recover its operating costs from the remaining 80% of the annual production after being deducted by FTP.47 However, the global situation has changed and there was slowdown in the industry. Pertamina take over by introducing some incentives packages to stimulate the industry by design different arrangements for oil and gas sector.48 2.2. Malaysian PSC Development Malaysia develops its oil industry a decade after they enacted the Petroleum Mining Act in 196649. After enacted The Petroleum Development Act and Petroleum Regulation in 197450, Malaysia start looked upon Indonesia to learn effective model of PSC. Soon after Malaysia adopted Indonesian 1976 PSC with appropriate modification 51. The Petroleum Development Act then being amended in 1977 to accommodate the changes after being amended in 197552. Petroleum Regulation also being in 1975 and 1981 to act as supplementary regulation for the Act. Like Indonesian basic petroleum law, neither the The Petroleum Development Act nor

44 45 46 47 48 49

Ibid., p. 79. Johnston, D., op.cit., p. 78. Gao, Zhiguo, op.cit., p.84. Gao, Zhiguo, op.cit. Machmud, Tengku Nathan, op.cit., p. 80.

Law of Kingdom of Malaysia Number 95 Year 1966 regarding Petroleum Mining, 1966, (entered into force in 1 December 1966 for West Malaysia and 8 November 1969 for East Malaysia). Law of Kingdom of Malaysia Number 144 Year 1974 regarding Petroleum Development, 1974, (entered into force in 1974, unknown date), Art.3.
51 52 50

Machmud, Tengku Nathan, op.cit., p.94. Law of Kingdom of Malaysia Number 144 Year 1974, op.cit.

10

Petroleum Regulation has determined the type of petroleum agreement that Malaysian NOC (Petronas) is expected to conclude with IOC53. Later on, Malaysian introduced PSC model in 1985 to replace the prior model54. In 1993, Malaysia designed deepwater model that significantly points out two things as follow: (i), with respect to specific deepwater terms applicable to areas with water depths of 200m-1000m and areas of water depths in excess of 1000m; and (ii) an increase in the duration of the PSC period or term55. Since then, all exploration seemed to be aimed at the offshore, though Petronas insisted they managed to get the foreign IOCs to do explorations onshore56. Less than a decade after, Malaysia introduced Revenue-over-Cost PSC in 1997 to promote cost effectiveness and reinvestment57. The 1997 R/C PSC is promoted as a self-adjusting formula of cumulative cost / revenue to administer incentives for developing small oil and gas field discoveries58. One significant difference from Indonesian PSC whereas Malaysia maintains the royalty clause 10% from gross production of oil59. The existence of royalty in Malaysian PSC meant for settling cash payment to the Federal and State Government60 Under Malaysian PSC, Royalty and cost recovery were taken off the top. While the remaining 70% of the production is divided 70:30, with the smaller share going to the Contractor61. All costs are considered as recoverable in so far as they are related to Petroleum Operations62. Petronas stated that contractors are fully aware of this requirement and disputed

53 54

Law of Kingdom of Malaysia Number 95 Year 196, Art.8. History, at

CCOP-EPF, Malaysia : Exploration/Development http://www.ccop.or.th/epf/malaysia/malay_explor.html (last accessed on 7 May 2010) Machmud, Tengku Nathan, op.cit, p.94. Machmud, Tengku Nathan, op.cit.

55 56 57

Petronas, Evolution of Malaysia PSC, at http://www.ccop.or.th/projects/PPM/Case_Study_Phillipines_files/4th_Workshop/PRESENTATIONS/Malaysia_Pr esentation.pdf (last accessed on 4 May, 2010)
58 59 60 61 62

CCOP-EPF, Malaysia : Exploration/Development History, op.cit. Machmud, Tengku Nathan, op.cit., p.98. Law of Kingdom of Malaysia Number 144 Year 1974, op.cit., Art.4. Machmud, Tengku Nathan, op.cit, p.98. Ibid.

11

cost are resolved through consultation63. Malaysian Government changed the Cost recovery ceiling to 50% under the 1985 PSC just for increase it to 75% for the deepwater PSC later on64. Malaysia once considers to opt out from PSC during the 1980s. But as PETRONAS bound by the most-favored nations clauseunder Malaysian PSC, pressures from ESSO and SHELL prohibit the option to be follow up until today.65 3. Why Malaysian PSC Could Be More Investor-Friendly than Indonesian PSC? There are many reasons why Malaysian current PSC becomes more investor friendly than Indonesian current PSC. This paper will discussed the vital five issues. First, there are numerous small oil fields in Indonesia while Indonesian fiscal system does not provide a satisfactory rate of return for the particular scale66. Evidently speaking, Pertamina is unwilling to cover the high share of for developing marginal fields67. While R/C PSC as the newest Malaysian PSC facilitates what is lack of Indonesian PSC: (i) environmental-awareness E&P; and (ii) small field E&P68. Therefore, Contractor could expect full cooperation from Malaysian NOC to adjust on cumulative cost arise from developing marginal oil field. Second, Indonesia owns big country risk69 . On the other hand, Malaysia is acknowledged as country with high-quality public management, also without particularly difficult extraction problems.70 Third, total cost recovery that being introduced on 198271 has caused internal conflicts in Indonesia which result to politic instability. Indonesian 100% cost recovery is considered
63 64 65 66 67 68

Ibid. Ibid. Kamaruddin, Moh. Ali, op.cit, p.80. Mikesell, R.F., op.cit, p. 67. Ibid.

Petronas, Evolution of Malaysia PSC, at http://www.ccop.or.th/projects/PPM/Case_Study_Phillipines_files/4th_Workshop/PRESENTATIONS/Malaysia_Pr esentation.pdf (last accessed on 4 May, 2010)
69

Hausmann, Ricardo and Roberto Rigobon, An Alternative Intepretation of The Resource Curse in Fiscal Policy Formulation and Implementation in Oil-Producing Countries , (J.M.Davies, et.al. eds, United States, Washington DC : IMF, 2003), p. 39.
70

Stiglitz, J.E., What is the Role of the State in Escaping the Resource Curse, (M. Humphreys, et.al. eds, UK, New York : Columbia University Press, 2007), p.44. Mikesell, R.F., op.cit.

71

12

beyond the average standard around the world which revolved around 30-50%72. House of Representative started to complaint the weight burdened into the government expenditure for years73. Eventhough the government keep insisting that the no-limit policy is not an issue74. On the other hand, Malaysia set the limit into 80% for cost recovery75. Fourth, transparency issue76. While Indonesia never set of standard costs and controlable cost to control the budget of PSCs activities and accounting control towards the activities of the NOC and the Contractor until now77, Malaysia put emphasis on the transparency of information between the Contractor with Petronas by rewarding Petronas legal entitle of all original data resulting from petroleum operations belong to the other party78. This negligence act conducted by Indonesia opens the opportunity of corruption inside Pertamina79. Last and most important, certainty of law. Uncertainty of law in Indonesia generated from lack of harmonization between the rulings with the agreement clauses, misinterpretation of regulations, missing guidelines, and unexpected changes on the contracts substantances itself80. The last issue is the enactment of cost recovery regulation which has been postpone since 2009 while the industry could not develop without a certain ruling on that fiscal issue81. As Malaysian already set the cost recovery limit long before, this issue is not arise among contractors in Malaysia.

72

Siswanto, Djoko, What Should Indonesian Petroleum Policy Be In The Future, Thesis, (UK, Dundee : CEPLMP University of Dundee, 2002), p.52. Agustus 2007, at accessed on 10 2009, at

73

Bisnis Indonesia, DPR Minta Penurunan Cost Recovery Migas, 22 http://www.zulkieflimansyah.com/in/dpr-minta-penurunan-cost-recovery-migas.html (last May,2010)

74

Trust, Susahnya Menekan Cost Recovery, 10 Agustus http://www.pajakonline.com/engine/artikel/art.php?artid=6265 (last accessed on 10 May,2010). Siswanto, Djoko, op.cit, p.41. Stiglitz, J.E., op.cit., p.44. Siswanto, Djoko, op.cit.

75 76 77 78

Krishnan, A., The Legal Regime of Petroleum Development in Malaysia, Thesis, (UK, Dundee : CEPLMP University of Dundee, 1985), p.210. Siswanto, Djoko, op.cit., p.42.

79 80

Hasan, A. Madjedi, Kontrak Minyak dan Gas Bumi Berazas Keadilan dan Kepastian Hukum , (Indonesia, Jakarta : PT Fikahati Aneska, 2008), p.325. Cahyono, A.D., op.cit.

81

13

4.

Indonesian Breakthrough Solution Through The New Cost Recovery Regulation In the PSC, Cost recovery is consist of operating costs, exploration and development

costs, interest on financing, unrecovered costs carried over from previous years, current year depreciation and amortization, and investment credit82.The majority of the recoverable costs is reflected by Operating costs83. Indonesias rate of depreciation permitted under the current cost recovery procedure is considered as moderate based on empirical analyses84. However, Indonesian PSCs cost recovery has no limit85. Ideally, The higher the limit of production allowed for cost recovery the better for the investor in terms of reducing the payback period and increasing the NPV of a project86. By having total cost recovery provision, the industry is depending on the BP Migas on cost recovery ceiling every year87. BP Migas is an Indonesian government agency to regulate oil industry. This provisions tends to uncertainty for the accounting. Indonesia tries to create better investment condition by drafting new cost recovery regulation since 2009. The new regulation would provide: (i) Assume and discharge provisions of which cost could be reimbursed without going through cost recovery mechanism88; (ii) all indirect taxes will be counted as part of operational cost; (iii) farm in-farm out transactions and uplift is counted as final tax; and (iv) Contractor has to paid its own income tax89. Minister of Energy and Mineral Resouces Darwin Zahedy Saleh believes these provisions will give legal certainty and attract more investment. However, the Government keep postpone to issue the

82 83 84 85 86

Johnston, Daniel, op.cit., p. 57. Ibid. Gao, Zhiguo, op.cit., p.84-85. Johnston, Daniel, op,cit.

Schreck, M.A.G., The Taxation Problem and The Promotion of Petroleum Investment, Thesis (UK, Dundee : CEPLMP - University of Dundee, 1996), p.57.

87

Wahyuni, Nurseffi Dwi, Realisasi Cost Recovery Tetap Tergantung BP Migas, 18 February 2010, at http://us.detikfinance.com/read/2010/02/18/172346/1302354/4/realisasi-cost-recovery-tetap-tergantung-bp-migas (last accessed 1 May, 2010)
88 89

Ibid.

Kompas, RPP "Cost Recovery" Perhatikan 10 Prinsip, 18 February 2010, at http://bisniskeuangan.kompas.com/read/2010/02/18/17354881/RPP.Cost.Recovery.Perhatikan.10.Prinsip (last accessed 1 May, 2010)

14

regulation until today. Last official announcement stated the ruling will be enacted on June 201090. 5. Conclusion PSC has become an established petroleum system throughout generations and faces some alterations. It stands as strong contractual system against concession system and the upcoming other contractual arrangements. As far as it concerned, PSC has proven to serve as a dynamic instrument to adapt into the host countries objective without neglecting the IOCs interests. However, PSC is not perfect. Some of its weak points such as cost recovery caused internal problematic within the Host State.Thus, influence the foreign investment. Based on the study, Indonesian system is efficient for maximizing output than a system with royalties, but it is less effective than a hybrid system like what Malaysia designed.. Ideally, flexibility in fiscal regime will create accommodative conditions to attract IOCs to invest in the host State91. Eventhough Indonesia is obviously more flexible than Malaysia, especially on the cost recovery procedure. Indonesia is left behind Malaysia because non-economic factors. The main problem in Indonesia are uncertainty of law, lack of transparency, corruption, frigid towards marginal field E&P, uncertainty in cost recovery ceiling, and lack of standards that should be set bylaw. NOCs supports towards marginal field E&P should be concerned by the Indonesia as it has been highly appreciated by Malaysia. In the future, the trend of developing small field will expand and contractors need more adjustable fiscal regime to recover the cost of this explorations. For now, it is obvious that contractor would find difficulties to obtain permission from Indonesia to develop such fields without support from Pertamina.

90

Cahyono, A.D., Lagi, Evita Janji PP Cost Recovery Terbit Juni, 20 April 2010, http://www.majalahtambang.com/detail_berita.php?category=18&newsnr=2638 (last accessed 5 May, 2010)

at

91

Schreck, M.A.G., The Taxation Problem and The Promotion of Petroleum Investment, Thesis (UK, Dundee : CEPLMP - University of Dundee, 1996), p.59.

15

Bibliography Primary Sources Law of The Republic of Indonesia Number 22 of 2001 regarding Oil and Natural Gas Mining, 23 November 2001, State Gazette of The Republic of Indonesia Year 2001 Number 136 (entered into force 23 November 2001) Law of The Republic of Indonesia Number 44 of 1960 regarding Oil and Natural Gas Mining, 1960, State Gazette of The Republic of Indonesia Year 1960 Number 133 (entered into force in1960, unknown date) Law of Kingdom of Malaysia Number 144 Year 1974 regarding Petroleum Development, 1974, (entered into force in 1974, unknown date) Law of Kingdom of Malaysia Number 95 Year 1966 regarding Petroleum Mining, 1966,

(entered into force in 1 December 1966 for West Malaysia and 8 November 1969 for East Malaysia) Secondary Sources Book Hasan, A. Madjedi, Kontrak Minyak dan Gas Bumi Berazas Keadilan dan Kepastian Hukum , (Indonesia, Jakarta : PT Fikahati Aneska, 2008) Machmud, Tengku Nathan, The Indonesian Sharing Contract:An Investors Perspective , (The Netherlands, The Hague : Kluwer Law International, 2000) Carlson, Sevinc, Indonesias Oil , (USA, Colorado : Westview Press, 1977) Fabrikant, R., Oil Discovery and Technical Change in Southeast Asia : Legal Aspect of Production Sharing Contract in the Indonesian Petroleum Industry, Field Report Series No. 3, (ISEAS, October 1987) Johnston, Daniel, International Exploration, Economics, Risk, and Contract Analysis, (USA, Oklahoma : Penn Well Corporation, 2003) Johnston, Daniel, International Petroleum Fiscal Systems and Production Sharing Contracts, (USA, Oklahoma : Penn Well Corporation, 1994)
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Mikesell, R.F., Petroleum Company Operations and Agreements In The Developing Countries, ( USA, Washington:Resources for the Future Inc, 1984) Bunter, M.A.G., The Promotion and Licensing of the Petroleum Prospective Acreage, (The Netherlands, The Hague : Kluwer Law International, 2002) Gao, Zhiguo, International Petroleum Contracts : Current Trends and New Directions, (UK, London : Graham & Trotman, 1994) Thesis/Dissertation Bond, J.R., Oil and The Policy Process : The Causes and Effects Of The Oil Depletion Allowance, Thesis, (USA, Michigan : University Microfilms International, 1979). Krishnan, A., The Legal Regime of Petroleum Development in Malaysia, Thesis, (UK, Dundee : CEPLMP - University of Dundee, 1985) Kamaruddin, Moh. Ali, Production Sharing Contract in the Oil Industry, Thesis, (UK, Dundee : CEPLMP - University of Dundee, 1980) Siswanto, Djoko, What Should Indonesian Petroleum Policy Be In The Future, Thesis, (UK, Dundee : CEPLMP - University of Dundee, 2002) Schreck, M.A.G., The Taxation Problem and The Promotion of Petroleum Investment, Thesis (UK, Dundee : CEPLMP - University of Dundee, 1996) Article Davis, J. et.al., Fiscal Challenges in Oil-Producing Countries : An Overview in Fiscal Policy Formulation and Implementation in Oil-Producing Countries , (J.M.Davies, et.al. eds, United States, Washington DC : IMF, 2003), p.3. Hausmann, Ricardo and Roberto Rigobon, An Alternative Intepretation of The Resource Curse in Fiscal Policy Formulation and Implementation in Oil-Producing Countries ,

(J.M.Davies, et.al. eds, United States, Washington DC : IMF, 2003), p. 39. Brosio, Griorgio, Oil Revenue and Fiscal Federalism in Fiscal Policy Formulation and

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