The Net Cash Flows Measurement of the Conventional Oil Production Sharing Contract (psc) Fiscal Systems

Wiwiek Mardawiyah Daryanto 1* Indonesia’s economy has experienced steady growth emerging from the Asian inancial crisis of 1997-1999, averaging stable 5 – 6 % annual growth rate, and the strength of the country’s economy was formerly based on its considerable oil exports (Tharakan, 2015). There are many countries that depend on the income of oil exports such as Iraq, Kuwait, Saudi Arabia, Libya, Angola, Oman, Brunei, Kazakhstan, Russian, and much more (Hazarika, 2016). As a country with a continuity growing INTRODUCTION 1 Copyright © 2017Authors. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. International Journal of Business Studies Vol. 1 No. 1 ( June 2017) 23 economy, a critical component of Indonesia’s future strength will be its ability to harness and manage sustainable sources of energy. The primary body responsible for governing the Indonesia’s energy is the Ministry of Energy and Minerals Resources (MEMR). The MEMR (2015) estimates that domestic demand for energy will rise by around 7 % per year, with electricity demand alone projected to nearly triple between 2010 and 2030. According to National Energy Council (DEN, 2016), electricity consumption/capita was estimated to 2,500 KWh in 2025, and increase to 7,000 in 2050. Based on the Decree of the MEMR no. 35, 2008, the objective of a host government (GOI) is to maximize wealth from its natural resources by encouraging appropriate levels of exploration and development activities. Therefore, GOI should designs and implements PSC iscal systems that: provide a return to the state and to the industry; avoid undue speculation; limit undue administrative burden; provide lexibility; create healthy competition and market ef iciency. Unfortunately, there were seven Working Areas (WA) offered for regular bidding during the period of July 18 to October 28, 2016, but none of the investor interested in the bidding (MEMR, 2016). More attractive incentives in PSC and iscal terms may be needed for both parties to undertake the projects. The seven WAs are: 1) South CPP (On-shore Riau); 2) Oti (Offshore East Kalimantan); 3) Suremana (Makassar Strait); 4) Manakarra Mamuju (Makassar Strait); 5) South East Mandar (Off-shore South Sulawesi); 6) North Aguni (On-shore West Papua); and 7) Kasuri II (Onshore West Papua) (MEMR, 2016). This study is focusing on the oil industry, covering one oil ield under PSC Fiscal System which has been operating in Indonesia since the period of 1998, using the primary data of 2016. The purpose of this study is to measure the yearly net cash lows received by the GOI and the OC under PSC Fiscal Systems during exploitation period for the period of 2016, and to examine the attractiveness of the terms and conditions of the PSC. The indings of the study will be bene icial for GOI and potential oil investors to carry out a fair negotiation, to come up with the win-win solution. The outcome of this study will also facilitate the students and academicians to assess the correlation of variables used in the PSC Fiscal Systems in order that the learning will be more practical and understood to be used in the decision-making process. The study is organized into six sections. Section one captures the introduction, section two highlight the literature review about previous research on the development of oil in Indonesia, PSC iscal systems, and the net cash lows measurement steps under PSC. Section three review the research methodology and research model. Section four discuss the inding and analysis, section ive highlights the limitation and section six captures the conclusion and recommendation. LITERATURE REVIEW The Development of Oil and Gas Industry in Indonesia Today’s oil and gas companies may be involved in four different types of functions or segments: 1. Exploration and production (E&P); 2. Transportation; 3. Re ining and processing; 4. Marketing and distribution. An integrated oil company is one involved in E&P activities as well as at least one of the four segments (Gallun, A.R, et.al, 2000). According to MEMR (2015), 40% of the total basins in Indonesia have been explored and located in Western Indonesia, and the remaining 60 % have not been explored and located in Eastern Indonesia. Those oil ields have been producing since the last decade, and it is getting drain due to over mature of the oil ield. This condition should be balanced by increasing reserve replacement ratio. However, the ratios decreased from 52.2 % in 2012 to 44.42 % in 2013 due to lack of exploration and low discoveries. In the case of oil production, table 1 also shows that the number of crude oil production decreased by 972 thousand barrels of oil equivalents per day in 2007 to 779 thousand barrels of oil equivalents per day in 2015, while the number of natural oil production increased from 7,238 thousand barrels of oil equivalents per day in 2007 to 8,102 thousand barrels of oil equivalents per day in 2015.

economy, a critical component of Indonesia's future strength will be its ability to harness and manage sustainable sources of energy. The primary body responsible for governing the Indonesia's energy is the Ministry of Energy and Minerals Resources (MEMR). The MEMR (2015) estimates that domestic demand for energy will rise by around 7 % per year, with electricity demand alone projected to nearly triple between 2010 and 2030. According to National Energy Council (DEN, 2016), electricity consumption/capita was estimated to 2,500 KWh in 2025, and increase to 7,000 in 2050.
Based on the Decree of the MEMR no. 35, 2008, the objective of a host government (GOI) is to maximize wealth from its natural resources by encouraging appropriate levels of exploration and development activities. Therefore, GOI should designs and implements PSC iscal systems that: provide a return to the state and to the industry; avoid undue speculation; limit undue administrative burden; provide lexibility; create healthy competition and market ef iciency. Unfortunately, there were seven Working Areas (WA) offered for regular bidding during the period of July 18 to October 28, 2016, but none of the investor interested in the bidding (MEMR, 2016). More attractive incentives in PSC and iscal terms may be needed for both parties to undertake the projects. The seven WAs are: 1) South CPP (On-shore Riau); 2) Oti (Offshore East Kalimantan); 3) Suremana (Makassar Strait); 4) Manakarra Mamuju (Makassar Strait); 5) South East Mandar (Off-shore South Sulawesi); 6) North Aguni (On-shore West Papua); and 7) Kasuri II (Onshore West Papua) (MEMR, 2016).
This study is focusing on the oil industry, covering one oil ield under PSC Fiscal System which has been operating in Indonesia since the period of 1998, using the primary data of 2016. The purpose of this study is to measure the yearly net cash lows received by the GOI and the OC under PSC Fiscal Systems during exploitation period for the period of 2016, and to examine the attractiveness of the terms and conditions of the PSC. The indings of the study will be bene icial for GOI and potential oil investors to carry out a fair negotiation, to come up with the win-win solution. The outcome of this study will also facilitate the students and academicians to assess the correlation of variables used in the PSC Fiscal Systems in order that the learning will be more practical and understood to be used in the decision-making process.
The study is organized into six sections. Section one captures the introduction, section two highlight the literature review about previous research on the development of oil in Indonesia, PSC iscal systems, and the net cash lows measurement steps under PSC. Section three review the research methodology and research model. Section four discuss the inding and analysis, section ive highlights the limitation and section six captures the conclusion and recommendation.

LITERATURE REVIEW
The Development of Oil and Gas Industry in Indonesia Today's oil and gas companies may be involved in four different types of functions or segments: 1. Exploration and production (E&P); 2. Transportation; 3. Re ining and processing; 4. Marketing and distribution. An integrated oil company is one involved in E&P activities as well as at least one of the four segments (Gallun, A.R, et.al, 2000). According to MEMR (2015), 40% of the total basins in Indonesia have been explored and located in Western Indonesia, and the remaining 60 % have not been explored and located in Eastern Indonesia. Those oil ields have been producing since the last decade, and it is getting drain due to over mature of the oil ield. This condition should be balanced by increasing reserve replacement ratio. However, the ratios decreased from 52.2 % in 2012 to 44.42 % in 2013 due to lack of exploration and low discoveries.
In the case of oil production, table 1 also shows that the number of crude oil production decreased by 972 thousand barrels of oil equivalents per day in 2007 to 779 thousand barrels of oil equivalents per day in 2015, while the number of natural oil production increased from 7,238 thousand barrels of oil equivalents per day in 2007 to 8,102 thousand barrels of oil equivalents per day in 2015.
In terms of oil price, the industry experienced signi icant volatility in the global market (Frederer (1996), Beike et al. (2010), Anzuini et al. (2012). Regnier (2007)  In this industry, CNOOC Southeast Sumatera B.V is one of the biggest oil producers in China. In Indonesia, CNOOC ield is located at Southeast Sumatera and divided into three main operation areas: South Business Unit, Central Business Unit, and North Business Unit. The area is part of Sunda and Asri basins with 13,725km2 wide at Latitude 04o30' South -Latitude 06o00' South and Longitude 106o00' East -Longitude 107o00' East. CNOOC has leading petroleum industry in Indonesia and become one of the irst exploration oil and gas PSC for more than three decades. CNOOC PSC is released in September 6th, 1998. The CNOOC SES, Ltd and SKK Migas cooperation is lengthened for 20 years. During the time CNOOC SES, Ltd is the biggest crude oil offshore producer in Indonesia and has giving contribution to the state petroleum industry development during the last 34 years. Its production yielded more than one billion barrels' oil. The Cinta ield, under CNOOC SES is used for the object of the research. (CNOOC SES, 2016).

Production Sharing Contract (PSC) Fiscal Systems
The oil and gas industry is uniquely characterized by: a high level of risk; a long time span before a return on investment is received; a lack of correlation between the magnitude of expenditures and the value of any resulting reserves; a high level of regulation; complex tax rules; specialized inancial accounting rules (Gallun, R.A, et.al, 2000). The most important event in the operations of oil and gas company is the discovery of reserves.   Consequently, estimated reserves quantities are relied upon heavily in oil and gas accounting (Wright, C.J and Gallun, R.A, 2004).
Production sharing is rooted in the Napoleonic era French legal concept of the ownership of minerals, that mineral wealth should not be owned by individuals but by the state for the bene it of all citizens. Indeed, this philosophy is embodied in the 1945 Indonesian Constitution Article 33, which states: All the natural wealth on land and in waters is under the jurisdiction of the State and should be used for the bene it and welfare of the people (Lubiantara, 2013). Unlike most countries, private individuals own most of the surface resources in the United States (Williamson and Daum, 1959).
In the petroleum industry, Indonesia is the pioneer of the PSC, with the irst contract signed in the early and mid-1960s. Indonesia is the standard of comparison for all PSCs ( Johnston, 1994 In the event that the OC which received to develop its irst ield in contract area does not produce petroleum in commercial quantities within a maximum 5 years after the end of the exploration period, the OC shall be obliged to relinquish the contract area to GOI. The basic features common to most PSCs are: irst tranche petroleum (FTP), cost recovery (CR), pro it oil (PO) or Equity to be Split (ETS), domestic market obligation (DMO), and taxes. The inancial issue of PSC is how costs are recovered and pro its divided.
The OC is authorized by SKK Migas and obligated to market all crude oil produced and saved from the contract. OC will recover all operating costs out of the sales proceeds or other dispositions of the required quantity of crude oil equal in value to such operating costs. The OC shall be entitled to take and receive and freely export such crude oil.
According to Sadvakassov, D, Orazgaliyev, S. (2015), key factors in attracting Foreign Direct Investment (FDI) in the oil and gas industry of Kazakhstan emphasize that despite the presence of various motives in transnational corporation's investment decision, FDI to Kazakhstan mainly directed to the resource sector of the economy. According to Dunning (2000), one of the investment motives is "searching for new resources" involving the search for resources not available in a irm's home country, such as mineral, hydrocarbons, agricultural raw material, cheap labor, etc. According to Ferez, Irma G. Et al (2006), the capital budgeting model is a tool to analyze the behavior of Oil Company's investment and its oil potential. This model is an application of Optimization Techniques and it has been employed successfully. According to Primadona, Tjendrasa, K. (2016), a inancial evaluation is conducted to four type of PSCs model system using discounted cash low analysis. And according to Lestari, et.al (2015), PSC bounds the pro it sharing agreement between the government and the oil contractor. PSC scheme explain cost recovery, FTP, DMO, valuation of oil and taxes, based on Presidential Regulation (PR) 79/2010.

The Net Cash Flows Measurement Steps under Production Sharing Contract (PSC)
In order to achieve the purpose of the research, which is to measure the net cash lows of the project under PSC, there are twelve steps should be done. First Step is oil price determination, which is monitored globally and a key economic indicator for governments. According to Johnston (1994), production is shared in kind (barrels), and it is necessary to determine a price to convert oil to dollars in order to calculate cost recovery, taxes, and internal transfer. Effectively since April 1989, the Indonesian Crude Price (ICP) has been determined by the government monthly, based on moving average spot price of a basket of ive internationally traded crudes: Indonesian (Minas), Malaysian (Tapis), Australian (Gippsland), United Arab Emirate (Dubai), and Oman.
Second, Oil Production per year calculation. Oil production generally goes to stock tanks for storage until it is delivered to a buyer. When the oil is sold, it is measured as it is transferred from the storage tanks to either a truck transport or an oil pipeline (Gallun, R.A, et.al, 2000). The oil production per year is derived from daily production of oil multiplied by the number of days in a year. The equation can be expressed as Oil Production per year = Volume or Barrel of Oil per day x 365 day.

Third
Step, Gross Revenue (GR) per year calculation. The GR per year is derived from barrel oil production per year, which is the result of the second step, multiplied by the oil price per barrel, which is stated in the irst step. The equation can be expressed as Gross Revenue per year = Oil Production per year x Oil price per barrel.

Fourth
Step, pre-tax and post-tax calculation, charged to both Oil Contractor and State. The amount of production share between the state and the OC which is stated in the PSC document is a pretax sharing, or a pre-tax split. It is also stipulated in the contract that the OC will be charged of income tax based on the prevailing tax regulation. According to Lubiantara (2013), the income tax rate of Indonesia has been decreasing since before 1985, which was 45% to 25% in 2010 as shown in The percent used as the post-tax may appear to be low. It is low because it has been adjusted for the income tax effect (Anthony, et.al, 2011). The effective income tax rate is an integral part of the PSC. Therefore, the rate in a contract does not change. If subsequently the government decides to change the rate, then the new rate applies only to new contracts. The rate in contracts already signed remains the same.
The ifth step is First Tranche Petroleum (FTP) calculation. According to Johnston (1994), with the fourth-generation contracts outlined in the 1988-1989, incentives packages, a new contract feature was introduced, namely FTP. The top left-hand side of igure 1 shows that the irst claim on gross revenue derived from hydrocarbon sales is FTP which is split between the OC and the state. FTP is the oil shared by the parties in PSC before the cost recovery. Usually the FTP shared is between 10% -20% of oil production. The FTP mechanism was applied at the irst time in 1988 for the Indonesian PSC. Currently FTP is 20%. These are the guarantee for the government to get the sharing part. Such FTP for each calendar year is further shared for crude oil between the State and the OC in accordance with the sharing splits.
The sixth step is Cost Recovery (CR) calculation. After FTP, the contractors are allowed to recover their costs plus an investment credit (IC) if any. Cost recovery is the cost that must be recovered by the government for all investment that the contractor has spent on oil production. Cost recovery is the sum of lease operating costs, production taxes, general and administration expenses, and depreciation, depletion, and amortization of capital expenditures. Operating Expenses shall include all expenditures incurred in the abandonment of all exploratory well and the restoration of their drill sites (Johnston, 1994).

The Equation can be expressed as Cost Recovery = Operating Expenses + (Depreciation + Depletion + Amortization) of the Capital Expenditures.
The seventh step is Investment Credit (IC) allocation. According to CNOOC SES (1998), the OC may recover an investment credit (IC) amounting to 17% of the capital investment costs directly required for developing crude oil production facilities of each new ield out of deduction of gross production before recovering operating costs, commencing in the earliest production year or years before tax deduction (to be paid in advance in such production year when taken. Eight Step, Pro it Oil (PO), or Equity to be Split (ETS) calculation. The revenue remaining after FTP and cost recovery is pro it oil (PO) which is split between the state and the OC at different proportions depending on the PSC agreement.

Ninth
Step, Domestic Market Obligation (DMO) calculation. According to CNOOC SES (1998), under the DMO provisions, the contractor is obliged to sell to Indonesia a portion of their oil at less than market price. The DMO applies after ive years from the start of production. In each year after the ifth year of production, the contractors are obliged to sell an amount of the oil to which they are entitled from FTP and Pro it Oil. The amount is calculated irstly by calculating the lower of: a) the total domestic consumption of crude oil in Indonesia divided by the total domestic production of crude oil in Indonesia or b) 25%. Currently, the fraction (a) is signi icantly more than 25%. Therefore, the 25% igure applies. The equation of DMO can be expressed as follows; DMO in barrel=25% x The Contractors' entitlement percentages x oil production per year in barrels. And DMO Fees=DMO in barrels x Oil Price per barrel.

RESEARCH METHODOLOGY
Based on the ideas mentioned above, the study adopted a model from Lubiantara (2013) as shown in Figure 1. It illustrates the general way in which the after tax net cash lows for both state and contractor shares are derived.
The primary data used for calculation is collected from the Cinta ield. The ield was founded in 2nd September 1970 by CNOOC SES and was producing since 10th September 1971. The ield has 21 production platforms with 3 processing platforms. Currently total active well is around 350 wells with total productions about 35,000 barrels oil per day (BOPD) (CNOOC SES, 2016). Table 3 shows the economic parameters for the calculation. Table 4 provides the results which calculates a step by step in Net Cash Flow measurement based on the data expressed in the table 3.

RESULTS AND DISCUSSIONS
F i g u re 2 s h ows t h e s u m m a r y o f t h e N C F measurement which is done through the twelve steps above. The GR of 2016 is US$ 702,625,000 (100%). The total of NCF is US$ 264,936,000 (37.71% of the GR). The NCF of the GOI is US$ 248,909,168.107,or 35.43% of the GR. On the other hand, the NCF of the OC is US$ 16,026,831.893, or only 2.28% of the GR. In terms of CR of 2016, which was incurred of US$ 437,689,000.00 of the year, is very signi icant percentage of the GR, or 62.29%. Therefore, it is very important to manage the CR ef iciently and effectively from both parties. It is better if there is a limitation of the CR in the PSC. Moreover, with the volatility of oil prices that tends to decrease in recent years.

LIMITATIONS AND FUTURE INDICATIONS
This study has expanded the literature about conventional oil PSC iscal systems in the real working world only in 2016. In near future, it is suggested to carry out research with many companies in the oil industry to get more generalizes result. Since the focus is on one industry, it is worth to explore it on a wider scale and ind out if different company yields the same result. In addition, the study only focuses on inancial aspects. Therefore, the research would be better if also includes the non-monetary considerations, such as legal, operational, political, and administration. It is also suggested to carry out a similar research for other industries, such as mining, gas, geothermal, or estates industry.   State=US$ 50,670,153.1875 -US$ 5,067,015.31875=US$ 45,603,137.8687 9 Income Tax Expenses of the Oil Contractor = (US$ 40,536,122.55+US$ 35,887,603,137.8687) x 48% =US$ 14,793,998.6703 NCF of Oil Contractor=US$ 40,536,122.55+US$ 35,887,603,793,998.6703 = US$ 16,026,831.89 NCF of State=US$ 99,988,877.45+US$ 88,523,154.118+US$ 45,603,137.8687+US$ 14,793,998.6703 =US$ 248,909,168

CONCLUSION AND RECOMMENDATION
This study is focusing on the oil industry, covering one oil ield under PSC Fiscal System which has been operating in Indonesia since the period of 1998, using the primary data of 2016. The purpose of this study is to measure the yearly net cash lows received by the GOI and the OC under PSC Fiscal Systems during the exploitation period of 2016, and to examine the attractiveness of the terms and conditions of the PSC.
The inding shows that from 100% Gross Revenue (GR) of the oil ield in 2016; 35.43% of it is allocated to the GOI, and only 2.28% to the OC. Meanwhile, the CR for the year is 62.29% of the GR. Therefore, it is needed to manage the CR ef iciently and effectively of both parties. It is recommended to limit the CR. Moreover, with the oil price that tends to decrease. The study will be also bene icial for GOI and potential OCs to carry out a fair negotiation.
The indings of the study will be bene icial for GOI and potential oil investors to carry out a fair negotiation, to come up with the win-win solution.
Since the percentage of the CR is more than 60% of the GR, it is recommended to manage the CR ef iciently and effectively. The GOI through the Executive Agency for Upstream Oil and Gas Business Activities in Indonesia (SKK Migas) have to play stronger role in controlling the expenditures.
Oil business requires high capital, high technology, high risks, long-term commitment, but may be high returns. However, the GOI should think deeply how to invite the investors to participate in the business. The GOI may change the terms and conditions of the current PSC iscal systems in order to attract the investors, but still favorable for the GOI. It is suggested that in the long run, the GOI should substitute the oil with other energy, such as renewable energy: geothermal, wind, biomass, hydro, solar PV, and micro-hydro. The country should not always depend on oil forever, it should transform from non-renewable energy to renewable. The outcome of this study will also facilitate the students and academicians to assess the correlation of variables used in the PSC Fiscal Systems in order that the learning will be more practical and understood to be used in the decisionmaking process.