MAIN PROVISIONS OF INDONESIAN PSC

MAIN PROVISIONS OF INDONESIAN PSC

1.      Scope (Section I)

The management of the PSC lies in the State (under BP Migas, or now is known as SKK Migas). Basically, the State is in charge of making the operational decision which will be conducted through an approval mechanism. In practice, SKK Migas shall be responsible for the operational management in the PSC, while the PSC contractor shall be responsible for the oil operations in accordance with the provisions of the PSC.

2.      Operatorship (Section I)

The PSC Contractor shall appoint one of the holders of the participating interest to be the Operator responsible for conducting oil operations and represent the parties in communicating with SKK Migas. The appointing of the operator and its successor requires prior approval from SKK Migas.

3.      Term of Contract (Section II)

The PSC shall be valid for a maximum term of 30 (thirty) years; including an Exploration Period during the first 6 (six) years which can be extended for a maximum of 4 (four) years provided that the PSC shall expire by the end of the Exploration Period or in the event that no oil or gas is discovered in commercial amounts.

4.      Commerciality of Contract Area (Section II)

The PSC Contractor is given 3 (three) years to plan and submit a POD to SKK Migas. The PSC stipulates the obligation to submit a POD during the Exploration Period.

5.      Limited Commercial Contract Area (Section II)

PSC stipulates that if during the Exploration Period oil is discovered in a field within the vicinity (outside) of the Work Territory and the reservoir includes the field within the Work Territory and according to SKK Migas the field outside can only be commercially produced if produced concurrently with the field within the Work Territory (unitized), and the POD is approved by the Minister of EMR, then the field within the Work Territory shall be regarded as a “Limited Commercial Contract Area”.

6.      Subsequent Petroleum Discovery (Section II)

Any subsequent oil discovery within the Work Territory must be reported to SKK Migas and the Government. A subsequent oil discovery refers to an oil discovery in a different field previously deemed commercial |by the Government. Determining the commercial status of a field is important to the PSC Contractor because the cost recovery shall apply to fields under commercial status.

7.      Relinquishment of Areas (Section III)

The PSC Contractor shall relinquish up to ¼ (a quarter) of the total area coverage of the Work Territory in the initial area in the contract by the end of the first 3 (three) years. However, the percentage of the Work Territory relinquishment above may rise to an additional 15% (fifteen percent) of the initial area in the contract if the PSC Contractor does not complete the activities it is committed to in the initial contract by the end of the first 3 (three) years, which leaves only 60% (sixty percent) of the Work Territory. The purpose of this provision is so that the Contractor will commit to conduct exploration in the initial years of the contract.

8.      Work Program and Budget (Section IV)

An important issue to be noted by the PSC Contractor is that it shall commence oil operations within no more than 6 (six) months after the contract becomes effective. In the event the KKS Contractor is negligent in commencing exploration within the time frame set above, the contractors shall be sanctioned with the termination of the KKS. Contracts shall include details of the work program and budget estimates for the first 3 (three) years (“firm commitment”) of the PSC Contractor. To guarantee the execution of the firm commitment, the PSC Contractor shall submit a performance bond.

9.      Rights And Obligations Of The Parties (Section V)

-          Health, Safety, and Environment

The current PSC Generation states the obligation of the PSC Contractor to conduct oil operations by implementing Health, Safety and Environment (“HSE”) measures in accordance with the prevailing standards in the oil and gas industry. Regarding the environment, the PSC Contractor must now consider the provisions of Law No. 32 of 2009 on Environmental Protection and Management (“Environmental Law”). Article 20 of the Environmental Law states that the definition of environmental pollution shall be measured based on environmental standards. The environmental standards for oil and gas activities have been stipulated in State Minister of Environment Regulation no. 4 of 2007 on Sewage Quality Standards for Businesses and/or Oil and Gas as well as Geothermal Activities which stipulates among others the water quality standard of production sewage in exploration and oil and gas production from on-shore facilities is 40^o Celsius.

-          Abandonment and Restoration Funds (“AARF”)

PSC stipulates that AARF funds are accumulatively deposited in the escrow account. In the previous Generation of the PSCs there was no provision on where the AARF shall be deposited.

-          Transfer of Participating Interest

The consent of SKK Migas and the Government must first be obtained before a transfer of participating interest to both affiliates and non-affiliates. The party to be receiving the transfer of participating interest can only receive the transfer if it currently does not have any participating interest in other PSCs or KKS. Regarding the transfer of participating interest, it should be noted that the PSC Contractor shall have a majority of participating interest (greater than 50%) in the respective PSC within the first 3 (three) years after the PSC becomes effective.

-          Change of Control

SKK Migas and the Government shall be notified and the PSC Contractor shall obtain prior approval from SKK Migas and Government regarding the plans on the change of control whether directly or indirectly on the composition of the participating interest in the PSC.

-          Insurance

During the contract term, the PSC Contractor shall insure all facilities, goods, equipment, supplies, even the oil produced and stored before being submitted. The selection of the insurance company and policy requires approval from SKK Migas. The insurance policy shall also state that SKK Migas is the co-insured party.

10.  First Trance Petroleum (Section VI)

Before the PSC Contractor recovers the operation costs, SKK Migas and the PSC Contractor are entitled to take 20% (twenty percent) of the oil production in the respective years. This provision is known as First Trance Petroleum (“FTP”). The amount of FTP is exempted from the cost recovery and shall be distributed between SKK Migas and the PSC Contractor proportionately to the portion of oil stipulated in the PSC.

11.  Recovery of Operating Costs and Handling of Production (Section VI)

-          Recovery of Operating Costs

The PSC Contractor can recover operational costs from a specific field with approved POD based on oil or gas sales. The operational costs to be recovered consist of exploratory expenditures, overall capital costs and non-capital costs. Operational costs not covered in the ongoing year shall be covered in the upcoming year.

Regarding the remaining oil, after being deducted by the FTP and operational costs, the PSC Contractor is entitled to 35.74% (thirty five point seventy four percent); this production sharing amount is not yet deductible by taxes.

Regarding natural gas, in the event gas is discovered but not in commercial amounts, it shall be burned off by the PSC Contractor. In the event natural gas is discovered in commercial amounts, the production share for the PSC Contractor may be as much as 71.42% (seventy one point forty two percent).

On 20 December 2010, the Government issued Governmental Regulation No. 79 of 2010 on Recoverable Operational Costs and Application of Income Tax in Upstream Oil and Gas Businesses (“Governmental Regulation on Cost Recovery”). Based on Governmental Regulation on Cost Recovery, there are 24 (twenty four) types of operational costs unrecoverable in the calculation of production sharing and income tax.

-          Regarding Handling of Production

Ownership on the shared oil shall be transferred at the point of export (or in Governmental Regulation on PSC referred to as point of lifting). The PSC Contractor is also entitled to export its share of oil.

12.  Consultation and Arbitration (Section XI)

Any dispute shall first be settled by a consensus within 90 (ninety) days after any notification on any such dispute. Disputes unresolved by a consensus shall be settled by arbitration under the provisions of the United Nations Commission on International Trade Law (UNCITRAL) in a location agreed upon by the parties and shall be conducted in English. (The current PSC generation may use BANI as the settlement forum).

In the previous generations of PSCs, provisions on settling disputes were made based on those of the International Chamber of Commerce and the arbitration was in a location agreed upon by the parties and conducted in English.

13.  Termination (Section XIII)

Basically, the PSC Contractor may not request contract termination within the first 3 (three) years. However, any party is entitled to fully terminate the PSC with a written notice 90 (ninety) days in advance if any violations are made by the other party provided that such violation has been proven by arbitration.

14.  Indonesian Participating Interests

As the first POD is approved by the Government, the PSC Contractor shall offer 10% (ten percent) of the participating interest to the region owned company appointed by the regional government of the location of the Work Territory, or national companies appointed by the Minister of EMR. The PSC Contractor shall notify the offering of the participating interest to the regional government or to the Minister of EMR through SKK Migas.