Types of OIL CONTRACTS IN GENERAL

In general, types of Oil Contracts between the state and contractors can be classified into three types:

1.         Concessions

William & Meyers, in the book Oil and Gas Law series, defines a concession as “an agreement (usually from a host government) permitting a foreign petroleum company to prospect for and produce oil in the area subject to the agreement. The terms ordinarily include a time limitation and a provision for royalty to be paid to the government”. In the concession, the contractor owns the gain from the exploration and exploitation without involving the state as the concession grantor.

In Indonesia, concession agreements are no longer used because they would then grant the Mining Rights to the contractor and this contradicts with Article 33 of the 1945 Constitution.

2.         Production Sharing Contracts

PSCs or referred to as Production Sharing Arrangement in other countries, is a contract commonly used in Indonesia to date. The PSC was introduced when the Law 8 of 1971 was enacted, as Article 12 paragraph (1) of the Law 8 of 1971 states that Pertamina may cooperate in other parties in the form of a PSC. Martin & Kramer, in the book Oil and Gas Law, defines PSC as: “a contract for the development of mineral resources under which the contractor’s costs are recoverable each year out of the production but there is a maximum amount of production which can be applied to this contract recovery in any year. In many such contracts, the maximum is 40%. This share of oil produced is referred to as “cost oil.” The balance of the oil (initially 60%) is regarded as “profit oil” and is divided in the net profit royalty ratio-for instance, 55% to the government. After the contractor has recovered its investment, the amount of “cost oil” will drop to cover operating expenses only and the profit oil increases by a corresponding amount”.

3.         Service Contracts

There are 2 (two) forms of service contracts, namely pure-service contract and risk-service contract. Martin & Kramer, in the book Oil and Gas Law, defines pure-service contract as a contract in which the contractor does not bear the risk for exploration and contractor service, and the State shall pay a flat fee. As for a risk-service contract, the Society of Petroleum Engineers stated that a risk service contract is very similar to a PSC with the only difference being in the remuneration received by the contractor i.e. a fee (and not production yield as in a PSC).

Every country has its own discretion in choosing among the types of contracts stated above and some countries may apply more than one model of contract. In Indonesia, Law 8 of 1971 only acknowledged cooperation under PSCs in the past. However, the Oil and Gas Law now allows for forms of oil and gas contracts other than the commonly used PSC, such as a service contract.