Even though the basic term of the Offshore Northwest Java Production Sharing Contract (ONWJ-PSC) does not expire until January 19, 1997, this study points up the necessity for an extension to be granted already in 1989 to avoid a suspension of exploration after 1988; a dearth of new field developments after 1989; a delay in deliveries of domestic gas, for which there is a growing market and a precipitous decline in production and revenues starting 1993. A twenty-year extension of ONWJ -PSC enables continued operation of this 6.3 million acres block through year 2016. The terms of the extension provides competitive economic incentives, and generate to the contractors with expected NPV @12% of $ 248 Million (MM); IROR of 23 % and 0.9 $/$ Investment Efficiency. All financial results were calculated in United States 1988 dollars using a projected US GNP deflator of3.5% p.a. and ARCO's long range planning oil prices.



These economic can be achieved through the following investment in the next 10 years with $ 250 MM for Seismic, Exploration & Delineation; $ 2.2 billion of development capital and annual operating Expense of $ 200 MM. This PSC extension will also require the contractor to pay $ 5 MM non cost recoverable but tax deductible signature bonus; spend at least $ 110 MM of exploration commitment from 1990 through 1999 and relinquish 70% of the present acreage by year 2006. The extension of the production sharing contract with expected exploration success will add to the contractor 150 million barrel of oil equivalent (MMBOE) of entitlement reserves and also add to Indonesian Government Take in the form of PERTAMINA equity share and corporate tax of $ 6 billion.



A stable political environment under President Soeharto, the growing national economic at steady pace, the commitment of government to allow capital repatriation, well-trained and experienced technical operators, benign operating environment, and much above average petrolific basin are the positive leverage justifying the Production Sharing Contract (PSC) extension. However, the marginal reserves in historical discoveries, minute contractor share in net profit under conventional PSC term at 15/85 oil profit split (effectively 9191 split) and 30/70 split in gas profit as compared to PSCs in other countries at 30/70 split, the future political uncertainty, strong military influence in government and high operating costs are the negative factors disfavoring an extension of ONWJ PSC. While quantitative data support an extension to continue operate the contract area, the external factors may hint to some downside to grant a decision of extension.



Reseach Location: Atlantic Richfield Co. (ARCO)

Supervisor: Prf. Dr. Wagiono Ismangil

Accepted on June 1996