Applied Chemical Engineering

Profit share dynamics in oil and gas industry: Assessing the effects of oil price, production volume, and cost recovery on government and contractor entitlement

Dody Susanto

Department of Chemical Engineering, Faculty of Engineering, Universitas Indonesia, Kampus Baru UI. Depok 16242. Indonesia

Asep Handaya Saputra

Department of Chemical Engineering, Faculty of Engineering, Universitas Indonesia, Kampus Baru UI. Depok 16242. Indonesia

Andy Noorsaman Sommeng

Department of Chemical Engineering, Faculty of Engineering, Universitas Indonesia, Kampus Baru UI. Depok 16242. Indonesia

DOI: https://doi.org/10.59429/ace.v9i1.5890

Keywords: contractor entitlement; cost recovery; crude oil lifting; government entitlement; production-sharing contract; profit sharing; over lifting

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Abstract

This study focuses on how to optimize the crude oil lifting management within the framework of production-sharing contracts (PSC) on XYZ working area in Indonesia, emphasizing the critical role of cost recovery in ensuring financial sustainability and equitable profit distribution between the government and contractors. Crude oil lifting, defined as the extraction of oil from the reservoir and sales to buyer according to their respective entitlement, must be strategically managed to minimize the over-lifting or under-lifting gap, each of which could lead to significant financial consequences. Over-lifting, where the contractor extracts more than their fair share, reduces the oil available to the government, while under-lifting, where the contractor extracts less than their entitled share, delays cost recovery and affects the contractor’s financial position. In this study, the lifting volume is 47,2 Million Bbls, with a cost recovery value of 221,5 thousand USD. The base profit sharing is 46.4% for the government and 53.6% for the contractor, with the FTP (First Tranche Petroleum) set at 20% and the Domestic Market Obligation (DMO) at 25%. The study evaluates the impact of oil price fluctuations (ranging from 20 USD to 100 USD per barrel) and changes in lifting volume (from 20,000 Bbls to 100,000 Bbls) on profit-sharing dynamics. Revenue generated at a price of 20 USD per barrel amounts to 943,5 Million USD, with an Estimated Taxable Base (ETBS) of 533,4 Million USD, and the government entitlement at 48.9%, while the contractor’s entitlement is 51.1%. The findings suggest that fluctuations in oil prices and lifting volumes significantly influence profit-sharing arrangements, with the government’s share increasing as oil prices rise. This study proposes strategies to optimize lifting volumes by projecting the Government entitlement to guide the government lifting volume, so getting the minimum over-lifting or under-lifting gap between contractor's and Government, ultimately enhancing decision-making, fostering better stakeholder collaboration, and ensuring the long-term financial health of oilfield projects under PSC agreements.

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