Publications

What should a country do to encourage petroleum exploration amidst diminishing resources? Indonesia has been a net oil importer since 2004 and suspended its OPEC membership in 2008, as the result of exhausted petroleum resources within existing fields. To increase petroleum production, Indonesia must encourage investors to take on the risk of exploring more marginal fields and frontier areas. Exploration and development of marginal fields and frontier areas are big challenges for the industry. Meanwhile, a production sharing contract (“PSC”) is a contract between the government and the contractor which enables the contractor to take the risk of exploration. Often the fiscal components of PSCs are regressive in nature and discourage the contractor (or potential contractor) to take the risk of exploring marginal fields and frontier areas. These regressive fiscal components are backed by laws, regulations and existing policies that will be dissected and analyzed in this paper. In particular, this paper will discuss each of the fiscal components of Indonesian PSCs, including the application of the "ring fence" concept in Indonesian PSCs in accordance with petroleum taxation principles, and analyze whether or how these components act as an incentive or disincentive to investors. This paper will ultimately discuss and argue that Indonesia can raise its petroleum production by consolidating its fiscal and company law regimes as an incentive for investors.