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If Indonesia is to attract new investment into the oil and gas sector, these uncertaintiesmust be addressed. The paramount concern should be improving reserve replacement andincreasing production, to provide more energy security to the country as demand continuesto grow with the expansion of the economy, while production stagnates. The next few yearswill be critical, as many PSCs come to the end of their term. Time will tell whether the grosssplit concept is indeed the magic bullet.This publication aims to support investors in navigating the Indonesian oil and gasinvestment climate, and to support the growth of the industry. Readers should note that theregulatory content in this publication is current as at 31 July 2019. Whilst every effort hasbeen made to ensure that all information was accurate at the time of printing, many of thetopics discussed are subject to interpretation, and regulations are changing continuously.As such, this publication should only be viewed as a general guidebook and not as asubstitute for up to date professional advice. As such, we recommend that you contactPwC’s oil and gas specialists (see page 144) as you consider investment opportunities inthe Indonesian oil and gas sector.We hope that you find this publication of interest and of use, and we wish all readerssuccess with their endeavours in the Indonesian oil and gas sector.”Oil and Gas in Indonesia: Investment and Taxation Guide11

1IndustryOverview1.1 IntroductionThe oil and gas industry, both in Indonesia and globally, hasexperienced significant volatility in the last decade. Global geopoliticaland economic considerations play a significant role in driving thesensitivity of oil prices.The development of shale technology has reduced the oil and gasimport dependency of the United States, which was traditionally thebiggest net-oil importer. This has led to oil oversupply, and has beena key factor in falling oil prices in recent years, despite the continuedintervention of the Organisation of the Petroleum Exporting Countries(OPEC) in an attempt to stabilise supply and bring some moderationto global oil prices. Oil prices saw some recovery in 2018, supportedby Venezuela’s decline in oil production, and concerns about sparecapacity in OPEC countries, combined with robust demand from nonOECD (Organisation for Economic Cooperation and Development)countries, particularly China. Meanwhile, gas consumption also rosedue to its increasing share in electricity generation throughout 2018.Some softening of prices has been seen in the first half of 2019, withWest Texas Intermediate (WTI) below US 60/barrel at the end of July.1.2 Indonesian ContextIndonesia has been active in the oil and gas sector for more than 130years, after the first oil discovery in North Sumatra in 1885.A member of OPEC from 1961, Indonesia suspended its membershipin 2009 after years of declining production, rejoined in January 2016,but suspended its membership again in November 2016.According to the BP Statistical Review of World Energy 2019,Indonesia holds proved oil reserves of 3.2 billion barrels at the end of2018.12PwC

Photo source: PwCOil andMiningGas in Indonesia: Investment and Taxation Guide1313

Significant events in the history of Indonesia’s Oil and Gas t commercial oildiscovery inNorth SumatraThe biggestdiscovery beforeWW II (Talang akarField)Government signedfirst PSC in Acehand Indonesiajoined OPECPERTAMINA wasformedOil and Gas lawNo. 22/2001introduced,revoking lawNo. 44PT Pertamina(Persero)establishedList of 17 Negativecost recovery items(Ministerial RegulationNo. 22/2008)GR 79implementingregulations- PMK 256- PMK 257- PMK 258Indonesia brieflyrejoins OPECPertamina becomesholding companyfor oil and gasState-OwnedEnterprises(SOEs)Indonesia withdrewfrom OPEC191219441962197820022004201020132017Standard Oilcommencedexploration inSouth SumateraCaltex Minas largest oil fieldin Southeast AsiadiscoveredPan AmericanOil Company signedthe first contractof work withPertaminaFirst LNG plantentered productionUpstream andDownstream bodiesBP MIGAS andBPH MIGAS wereestablishedGovernmentRegulationNos. 35 & 36Regulation forupstream &downstreambusiness activitiesGR 79 on costrecovery and incometax for upstreamsectorSKK Migasestablishment toreplace BP MigasGross Split PSC isintroducedThe declining oil production and increased consumption have resulted in Indonesia beinga net oil importer since 2004. This factor, along with high oil prices before 2015, led theGovernment to gradually but substantially scale-back the domestic fuel subsidy during2009-2014.Investment in the oil and gas industry in Indonesia was around US 10.9 billion in 2018, asthe rise in oil and gas prices triggered some investment interest from the previous US 10.3billion in 2017, which was the lowest in decades. However, the industry’s contribution to thestate revenue has fallen sharply from 14% in 2014 to 2.8% in 2016, before recovering to4.9% in 2017 and 7.4% in 2018. The Government also set a target of 7.4% for 2019 (referto Chapter 1.5 for details).Oil prices have shown fluctuation since the last quarter of 2018 due to geopolitical issues,while gas prices steadily declined during the first half of 2019 due to mild weather andJapan’s decision to restart its nuclear power reactors. This has not helped Indonesiaredress the problem of a lack of new reserve discoveries and reserve depletion; as theIndonesian upstream regulator, SKK Migas, notes, investment in exploration areas was amere US 122 thousand in 2018, compared to the US 10.92 billion invested in exploitationareas. These factors also contributed to the relinquishment of numerous oil and gasworking areas from the 312 working areas in 2015 to 216 working areas in 2018, thelowest in a decade. The Directorate General of Oil and Gas (DGOG)’s 2018 Annual Reportnotes only 13 new contracts were signed in the last three years, which may in part be aconsequence of investors taking time to consider the change in the contract system fromthe traditional cost-recovery model to the new gross-split methodology. The first 2019oil and gas tender resulted in two new oil and gas working areas, while the second 2019tender with four working areas offered, was still ongoing at the end of July 2019.Aside from the changes in the PSC system, March 2018 also saw the Government revoke18 regulations and 23 requirements for certifications, recommendations, and permits, in anattempt to reduce duplication in certification, shorten bureaucracy and simplify business.The effectiveness of this reform remains to be seen.14PwC

Indonesian Oil Production and Consumption1800Thousand Barrels per 16002000800ConsumptionSource:*Oil Production and Consumption 2000-2005: BP Statistical Review of World Energy 2011*Oil Production and Consumption 2006-2017: SKK Migas, Ministry of Energy and Mineral Resources (MoEMR), Fitch Connect - Business MonitorInternational*Oil Production and Consumption 2018 : DGOG, BP Statistical Review of World Energy 2019Indonesia is ranked 11th in terms of global gas production, with proven reserves of 96trillion cubic feet (TCF) in 2018. On a reserve basis, Indonesia ranks 13th in the world andthe second in the Asia-Pacific region (following China). Indonesia’s relevance in seaborneLiquefied Natural Gas (LNG) is more critical.Indonesia’s gas industry is being pressured by more competitive LNG markets, newpipeline exports, and increasing domestic gas demand. Indonesia’s natural gas productionmarket share actually decreased in recent years (from 2.6% of the world’s marketedproduction of natural gas in 2010, to 1.9% in 2018) coupled with a declining global LNGmarket share particularly due to new LNG production coming on-line in Qatar and Australia.After announcing its 2006 policy to realign natural gas production to domestic needs,Indonesia dropped from the ranks of the world’s largest exporters of LNG in 2005 to theworld’s seventh largest exporter in 2018, behind Qatar, Australia, Malaysia, US, Nigeria, andRussia.Indonesia’s existing LNG facilities are based in Bontang in East Kalimantan, Tangguh inWest Papua and Donggi Senoro in Sulawesi. Arun LNG, which was one of the world’s firstLNG facilities and one of the biggest LNG exporters in the 1990s, has been converted into astorage and re-gasification terminal due to declining gas reserves. Additionally, Abadi LNG andSengkang LNG facilities are currently being constructed. The Abadi LNG contractors recentlysigned Heads of Agreement with SKK Migas and revised its Plan of Development (PoD) in June2019. Meanwhile, the Sengkang LNG Project has temporarily been halted by the Governmentsince April 2018 due to the absence of a “borrow-and-use” permit for forest area (IPPKH - IzinPinjam Pakai Kawasan Hutan) for construction in a mangrove forest reserve area.Oil and Gas in Indonesia: Investment and Taxation Guide15

World’s Top LNG Exporters 2018QatarAustraliaNigeriaMalaysiaUnited States of AmericaRussiaIndonesiaTrinidad & .8%6.8%22.0%7.1%Source: EIA/BMI 30 April 20197.4%Share of World Gas rwayOmanQatarRussiaSaudi ArabiaUnited Arab EmiratesUnited StatesVietnam0%5%10%ConsumptionSource: Fitch Connect - Business Monitor International16PwCProduction15%Reserves20%25%

1.3 Resources, Reserves and ProductionIndonesia has a diversity of geological basins that continue to offer sizeable potential foroil and gas exploitation. Indonesia has 60 sedimentary basins, including 36 in WesternIndonesia that have already been thoroughly explored. Fourteen of these are producing oiland gas. In under-explored areas of Eastern Indonesia, 39 tertiary and pre-tertiary basinsshow rich promise in hydrocarbons.About 75% of exploration and production is located in Western Indonesia. The four oilproducing regions are Sumatra, the Java Sea, East Kalimantan and Natuna. The three maingas-producing regions are East Kalimantan, South Sumatra and Natuna.Indonesia’s crude oil production declined over the last decade due to the natural maturationof producing oil fields combined with a slower reserve replacement rate and decreasedexploration and investment. During 2018, Indonesia’s crude oil production was about 772thousand barrels of oil per day (MBOPD), a slight reduction from 804 MBOPD in 2017. Thedaily oil lifting target in 2019 is 775 MBOPD, a slight reduction from the 800 MBOPD inthe previous year, while the gas production target in 2019 is equivalent to 1,250 thousandbarrels of oil equivalent per day (MBOEPD). However, with few significant oil discoveries inWestern Indonesia in the last ten years, Indonesia still relies upon the mature oil fields thatcontinue to decline in production.Further demonstrating the importance of gas, Indonesia’s gas production represents 60%of total oil and gas production in the country. This portion is estimated to increase to 70%in 2020 and 86% in 2050. However, as with oil, the gas reserves are predicted, slowly butsurely, to decline: current proven reserves are estimated at 96 TCF, following the depletionof some major fields, e.g. the gas-rich Mahakam block.In order to boost production, the Government declared several new upstream oil and gasstrategic projects e.g. the Jangkrik field development, Tangguh Train-3, the IndonesiaDeepwater Development Project and Inpex’s Abadi field development. From theseprojects, only the Jangkrik Floating Production Unit (FPU) has entered production sinceMay 2017, with production capacity of above 600 million standard cubic feet per day ofgas (MMSCFD). SKK Migas also notes the availability of a minimum of 42 oil and gas mainprojects in Indonesia until 2027, which is expected to require US 43.3 billion in investment.Moreover, SKK Migas also notes ten potential areas for giant discovery following the findingof 2 TCF of potential gas reserves in the Sakakemang working area in South Sumatera.SKK Migas plans to obtain additional investors for potential working areas throughdisclosing data needed by investors and holding roadshows in many countries.Oil and Gas in Indonesia: Investment and Taxation Guide17

Key Indicators - Indonesia’s oil and gas 57,2517,5357,512ReservesOil 8135.55Gas de oil(MBOPD)Natural gas(MMSCFD)New contractssigned*Source:Reserves of oil and gas are obtained from DGOG, MoEMR2007-2012 Crude Oil and Natural Gas Production: BP Statistical Review of World Energy2013-2015 Crude Oil and Natural Gas Production: SKK Migas Annual Report 2013-20152016 Crude Oil and Natural Gas Production: Press release of MoEMR on CNN Indonesia2017-2018 Crude Oil and Natural Gas Production: SKK Migas Annual Report 2017-2018New contracts signed: MoEMR, SKK Migas Annual ReportIndonesian Oil and Gas Production Profile (MBOEPD)Peak 19771800PwCPlateau PhasePeak 1995Declined1200100010-12%Build-up Phase1400GASDeclined 9801978197619741972197019680Source: SKK Migas Annual Report 201818Dominated by Gas16001966Thousand Barrels of Oil Equivalent per day (MBOEPD)Dominated by Oil

Most oil and gas production is carried out by international contractors under PSCarrangements. The major crude oil and natural gas producers (as PSC operators) as of 2018were as follows:Major Oil Producers 2018Other14.62%PetroChina International Jabung Ltd.1.92%Petronas Carigali (Ketapang) Ltd.1.94%Medco E&P Natuna2.35%Chevron Indonesia28.68%Pertamina Hulu Energi ONWJ3.79%Pertamina Hulu Energi OSES3.97%Pertamina Hulu Mahakam5.56%Pertamina EP10.27%Mobil Cepu Ltd.26.90%Source: PwC AnalysisMajor Gas Producers 2018Other17.64%BP Berau16.87%Medco E&P Natuna2.54%Kangean Energy Indonesia2.65%ConocoPhillips (Grissik)13.17%PetroChina International Jabung2.77%Premier Oil Indonesia3.50%JOB Pertamina-Medco Tomori Sulawesi4.61%Eni Muara Bakau10.45%Pertamina Hulu Mahakam13.04%Pertamina EP12.76%Source: PwC AnalysisIndonesian exploration activities were also hit by the oil price shock: the number ofexploratory wells drastically decreased from 64 in 2014 to 35 in 2015. The numberrecovered to 43 in 2016. The number of exploration wells drilled then decreased to 21 in2018 from 38 in 2017, while 15 wildcat and delineation wells were drilled in 2018, similar to16 in 2017. The seismic testing done in the exploration working areas was also lacking, withonly 387 km of 2D seismic done in 2018 compared to the 3,274 km of 2D seismic testingand 3,952 km2 of 3D seismic testing done throughout 2017.Oil and Gas in Indonesia: Investment and Taxation Guide19

Key Indicators - Indonesia’s oil and gas industry exploration activitiesIndicator20172018Workover wells drilled760628Development wells drilled20027816152D Seismic (km)1,0796813D Seismic (km2)1,3304,0032D Seismic (km)3,2743873D Seismic (km2)3,95203821Activities in Exploitation Working AreasWildcat/delineation wells drilledActivities in Exploration Working AreasExploration well drilledSource: SKK Migas Annual Report 2018With Coal Bed Methane (CBM) reserves of 453 TCF, Indonesia ranks 6th in the world. TheCBM reserves are estimated to be larger than the natural gas reserves. The first CBMcontract was signed in 2008, and by the end of 2015 there were 46 CBM cooperationcontracts in place. Indonesia’s shale gas reserves are estimated to be 574 TCF. However,the development of CBM and Shale Gas in Indonesia has not been significant to date. Bythe end of 2018, SKK Migas notes there are 37 CBM and Shale Gas blocks remaining, withfive blocks in the process of being terminated and returned to the Government.Photo source: PT Saka Energi Indonesia20PwC

1.4 Downstream SectorAlthough the market was formally liberalised in 2001, Pertamina and its subsidiariescontinue to dominate most of the downstream sector. Whilst Pertamina’s retail monopolyfor petroleum products ended in July 2004 when the first licences for the retail sale ofpetroleum products were granted to Shell and Petronas, Pertamina remains the dominantdistributor of fuel products because of its network. However, aiming to stabilise the statebudget, the Government is trying to reduce the fuel (gasoline) subsidy, limiting gasoline’sdistribution and sales in developing regions, and replacing it with non-subsidised fuelssuch as Pertalite, Pertamax and Pertamina Dex. As a consequence, to promote more equalaccess to and distribution of affordable fuel, the Government prioritises gasoline sales forthe least developed regions and imposes the “One-fuel” price policy.The reduction in subsidised fuel sales has attracted several multinationals to enter theIndonesian non-subsidised fuel distribution market. Shell, ExxonMobil, Total and BP are allmaking investments in this sub-sector.For industrial fuels, Pertamina is still the dominant player but other foreign and local playershave increased their market share by importing industrial fuels.Pertamina also owns and operates seven of the country’s nine oil refineries (the eighthis owned by a private entity, while the ninth is owned by the Research and DevelopmentAgency of the MoEMR). The combined installed capacity of the country’s refineries isonly 1.1 million barrels per day, which means that Indonesia imports significant amountsof refined products to meet demand. To deal with this situation, Pertamina (with theGovernment) has been expanding investment opportunities. Several refinery expansionprograms are planned under the Refinery Development Master Plan (RDMP) and NewGrass Root Refinery (NGRR) programs, including, among others, Cilacap, Dumai, Balongan,Balikpapan (RDMP), Tuban and Bontang (NGRR). Additionally, plans for several newprivate-investment refineries are under discussion, among others the Musi Banyuasin,Batam and Bojonegara refineries.As the Indonesian economy continues to grow, the local demand for fuel will continueto outpace the country’s refinery capacity and the production of crude oil and naturalgas. Furthermore, the recently issued Ministry of Finance (MoF) Regulation No. 150/2018regarding tax holiday incentives for eighteen industries also covers the oil and gasrefinery industry, and the China One Belt One Road initiative is another opportunity forthe downstream sector to attract more foreign investment related to fuel import activities,including receiving, storage and bunkering, and distribution network infrastructure.Oil and Gas in Indonesia: Investment and Taxation Guide21

1.5 Contribution to the EconomyIndonesia spent decades relying on the oil and gas sector’s contribution to economicgrowth. However, in recent years, the oil and gas sector’s contribution to state revenues hasdecreased significantly along with the decline in reserves and production. Thus, the staterevenue from the oil and gas industry decreased by almost 80% from Rp 216 trillion in 2014(14% of state revenues) to Rp 44 trillion in 2016 (2.8% of state revenues), before rising oilprices improved the contribution of the oil and gas sector in 2017 and 2018. The MoF notesthe realisation of non-tax oil and gas state income of Rp 143 trillion in 2018, which was178% of the Rp 80.3 trillion target set in the 2018 state budget.YearState RevenueOil and Gas Revenue(Rp Trillion)% of 614.88%201099215315.42%20111,20519316.02%2012

BBC Bare-boat charter BI Bank Indonesia BiK Benefits in Kind BKPM Badan Koordinasi Penanaman Modal (Indonesia’s Investment Coordinating Board) BP Migas Badan Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi (Oil and Gas Upstream Business Activities Operational Agency), now SKK M