Coalbed Methane Development in Indonesia: Design and Economic Analysis of Upstream Petroleum Fiscal Policy

Elijah Acquah-Andoh; Herdi PUTRA; Augustine Ifelebuegu; Andrews Owusu

doi:10.1016/j.enpol.2019.04.035

Coalbed Methane Development in Indonesia: Design and Economic Analysis of Upstream Petroleum Fiscal Policy

Elijah Acquah-Andoh
, Herdi PUTRA
, Augustine Ifelebuegu
, Andrews Owusu

BKPM – Indonesia Investment Coordinating Board

Research output: Contribution to journal › Article › peer-review

21 Citations (Scopus)

389 Downloads (Pure)

Abstract

Due to increasing demand for natural gas in Indonesia, the Government now promotes exploration for coalbed methane (CBM). Currently, Indonesia has 453 trillion cubic feet (TCF) of CBM reserves. However, CBM development in the country is still in the exploration phase, with significant under-investment. To attract investors, a tailored Production Sharing Contracts (PSC) regime is required. Based on a combination of Factor Analysis (FA), Discounted Cash Flows (DCF) and Parameter Sensitivity Analysis, the research explores an optimal scenario of a company’s share of revenue that optimised CBM development contracts. We find that a combination of 5 years straight line depreciation (SLD), 5% First Tranche Petroleum (FTP), 78% Contractor Share (CS) and 35% income tax best spreads the risk of CBM development and exploitation between the government and the contractor. This combination is a more suitable PSC regime for developing CBM in an early stage of the industry. Therefore, the Government must cede some taxes during exploration to incentivise CBM development. Three PSCs regimes are thus required to fully develop and exploit CBM, including exploration, transitional and exploitation phase PSCs which better match contractor risks and returns and ensure reasonable certainty of contractor cost recovery.

Original language	English
Pages (from-to)	155-167
Number of pages	13
Journal	Energy Policy
Volume	131
Early online date	11 May 2019
DOIs	https://doi.org/10.1016/j.enpol.2019.04.035
Publication status	Published - Aug 2019

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in Energy Policy. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Energy Policy, 131, (2019) DOI: 10.1016/j.enpol.2019.04.035

© 2019, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

Coalbed methane
Development contracts
Investments
Natural gas
Production sharing contracts
Unconventional

ASJC Scopus subject areas

General Energy
Management, Monitoring, Policy and Law

Access to Document

10.1016/j.enpol.2019.04.035

Post-PrintAccepted author manuscript, 1.65 MBLicence: CC BY-NC-ND

Cite this

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title = "Coalbed Methane Development in Indonesia: Design and Economic Analysis of Upstream Petroleum Fiscal Policy",

abstract = "Due to increasing demand for natural gas in Indonesia, the Government now promotes exploration for coalbed methane (CBM). Currently, Indonesia has 453 trillion cubic feet (TCF) of CBM reserves. However, CBM development in the country is still in the exploration phase, with significant under-investment. To attract investors, a tailored Production Sharing Contracts (PSC) regime is required. Based on a combination of Factor Analysis (FA), Discounted Cash Flows (DCF) and Parameter Sensitivity Analysis, the research explores an optimal scenario of a company{\textquoteright}s share of revenue that optimised CBM development contracts. We find that a combination of 5 years straight line depreciation (SLD), 5\% First Tranche Petroleum (FTP), 78\% Contractor Share (CS) and 35\% income tax best spreads the risk of CBM development and exploitation between the government and the contractor. This combination is a more suitable PSC regime for developing CBM in an early stage of the industry. Therefore, the Government must cede some taxes during exploration to incentivise CBM development. Three PSCs regimes are thus required to fully develop and exploit CBM, including exploration, transitional and exploitation phase PSCs which better match contractor risks and returns and ensure reasonable certainty of contractor cost recovery.",

keywords = "Coalbed methane, Development contracts, Investments, Natural gas, Production sharing contracts, Unconventional",

author = "Elijah Acquah-Andoh and Herdi PUTRA and Augustine Ifelebuegu and Andrews Owusu",

note = "NOTICE: this is the author{\textquoteright}s version of a work that was accepted for publication in Energy Policy. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Energy Policy, 131, (2019) DOI: 10.1016/j.enpol.2019.04.035 {\textcopyright} 2019, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/ ",

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AU - Owusu, Andrews

N1 - NOTICE: this is the author’s version of a work that was accepted for publication in Energy Policy. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Energy Policy, 131, (2019) DOI: 10.1016/j.enpol.2019.04.035 © 2019, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/

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N2 - Due to increasing demand for natural gas in Indonesia, the Government now promotes exploration for coalbed methane (CBM). Currently, Indonesia has 453 trillion cubic feet (TCF) of CBM reserves. However, CBM development in the country is still in the exploration phase, with significant under-investment. To attract investors, a tailored Production Sharing Contracts (PSC) regime is required. Based on a combination of Factor Analysis (FA), Discounted Cash Flows (DCF) and Parameter Sensitivity Analysis, the research explores an optimal scenario of a company’s share of revenue that optimised CBM development contracts. We find that a combination of 5 years straight line depreciation (SLD), 5% First Tranche Petroleum (FTP), 78% Contractor Share (CS) and 35% income tax best spreads the risk of CBM development and exploitation between the government and the contractor. This combination is a more suitable PSC regime for developing CBM in an early stage of the industry. Therefore, the Government must cede some taxes during exploration to incentivise CBM development. Three PSCs regimes are thus required to fully develop and exploit CBM, including exploration, transitional and exploitation phase PSCs which better match contractor risks and returns and ensure reasonable certainty of contractor cost recovery.

AB - Due to increasing demand for natural gas in Indonesia, the Government now promotes exploration for coalbed methane (CBM). Currently, Indonesia has 453 trillion cubic feet (TCF) of CBM reserves. However, CBM development in the country is still in the exploration phase, with significant under-investment. To attract investors, a tailored Production Sharing Contracts (PSC) regime is required. Based on a combination of Factor Analysis (FA), Discounted Cash Flows (DCF) and Parameter Sensitivity Analysis, the research explores an optimal scenario of a company’s share of revenue that optimised CBM development contracts. We find that a combination of 5 years straight line depreciation (SLD), 5% First Tranche Petroleum (FTP), 78% Contractor Share (CS) and 35% income tax best spreads the risk of CBM development and exploitation between the government and the contractor. This combination is a more suitable PSC regime for developing CBM in an early stage of the industry. Therefore, the Government must cede some taxes during exploration to incentivise CBM development. Three PSCs regimes are thus required to fully develop and exploit CBM, including exploration, transitional and exploitation phase PSCs which better match contractor risks and returns and ensure reasonable certainty of contractor cost recovery.

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JO - Energy Policy

JF - Energy Policy

ER -

Coalbed Methane Development in Indonesia: Design and Economic Analysis of Upstream Petroleum Fiscal Policy

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

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