Making CBM work in Indonesia

Peter Godfrey
Vice-President Commercial

Tensions between government and industry

are normal!
Government of Indonesia:
Supportive national energy
policy 3
Beneficial ownership of CBM
resources
Revenue Generation (both
central and regional)
Enhance Domestic Gas Supply
Environmental issues
National interests

BUT CBM IS NOT OIL & GAS

Margin business
It will never be a bonanza!
Need for cost-efficiency & effectiveness
Needs experience & innovation

CBM Operating
Companies / Investors
Return on Investment
Shareholder Value
Track record
Reputation
Competitive forces

The old story what industry needs

Stable and predictable regulation that appropriately balances

investment risks and rewards
Transparency throughout the value chain aimed at facilitating the
complex process of stake-holder contractual negotiations
Continuity, whereby all stake-holders can more clearly make appropriate
commercial decisions that will affect their medium/longer-term investments
Efficiency aimed at accelerating the pace of decision-making whilst at the
same time ensuring that the correct decisions are made both from a
Government and Industry point of view
Managerial Independence and Accountability aimed at promoting a
positive development culture as opposed to a bureaucratic blame
culture
Greater incentivisation for effective development rather than one that is
more like an obstacle race today

What will it take to build a sustainable CBM

industry in Indonesia IndoCBM April 2006 Slide 1
1. ISSUE CBM REGULATION SOON
- SIMPLE AND CLEAR LICENSING SYSTEM
- CLEAR CBM RIGHTS
2. SUPPORTIVE FISCAL REGIME WHICH RECOGNISES RISKS
FACING EARLY DEVELOPERS

- RISKS:
- RESERVES UNCERTAIN
- RESERVES STRANDED / REMOTE AREAS
- TECHNICAL DEVELOPMENT
- DIFFERENT LIFE CYCLE TO TRADITIONAL NATURAL GAS
- UNCERTAIN CAPITAL AND DEVELOPMENT COSTS
- INFRASTRUCTURE LACKING
- MARKET UNDEVELOPED

What will it take to build a sustainable CBM industry in

Indonesia IndoCBM April 2006 Slide 2

3. GOVERNMENT PROMOTION
- TO ATTRACT IN BEST PRACTICE TECHNOLOGY
PROVIDERS / INVESTORS
4. IDENTIFY AND WHERE POSSIBLE ASSIST IN DEVELOPMENT OF
THE MARKET, THE INFRASTUCTURE NEEDED AND ECONOMICALLY
SUSTAINABLE GAS PRICES
MARKET OPTIONS:
e.g.
- ELECTRICITY GENERATION
- SUPPORTING MINE OPERATIONS
- SALES TO THE POWER GRID
- SUPPLY TO NAT GAS PIPELINE SYSTEM
- RAW MATERIAL FOR FERTILISER, METHANOL ETC
- MOTOR FUEL (CNG/GTL)

Oil & Gas v CBM Economics

Oil
&
Gas

CBM

Government Take

2007 IPA recommendations to increase oil

and gas E&P investment
Issues

IPA Recommendations

REGULATORY

Lack of fiscal clarity, consistency and certainty

between PSC, Tax Law and Oil and Gas Law

Regulatory complexity, especially in procurement

REGULATORY

Synchronize and harmonize when preparing new

tax law and implementing regulations

Streamline bureaucracy

DEVELOPMENT

Declining field sizes, rising costs and

uncompetitive investment economics

DEVELOPMENT

Increase marginal field incentive from 20% to

100%

Apply to all fields, not just fully cost recovered

blocks

Implement Brownfield incentives

PSC partitioning for development and

exploration

Fallow discoveries

EXPLORATION

Big potential in frontier basis but low investment

Taxation of exploration investment

Taxation of Farmouts
Gas Risk

EXPLORATION

Revolutionary risk sharing via ring fence removal

Improved profit sharing with progressive terms

Eliminate Royalty non splitable FTP

Totally eliminate VAT and import duties / taxes

etc

Clarity, Certainty and Predictability

Oil linked gas pricing for domestic gas

The Goal: to promote the development of CBM

and attract investment
Establishment of Regulations and Field Rules
Model Contract for CBM
Conflict Resolution Policy and Procedures
Fiscal Regime for CBM
Legal foundation
Production Sharing Contract v Tax and Royalty system

Tender Procedures
Bid Evaluation Criteria
Procurement regulations
Health, Safety, Environment & Security issues
Gas Markets and Prices
Government must value the development of a new energy
resource and environmental benefits etc.

Government needs to recognise that the early investors of CBM

are taking additional risk

Frontier start-up nature of CBM

CBM operator seeks rapid cost recovery to
justify investment and re-investment
Beyond the exploration phase, investment
decisions will be based on:
The market for CBM / ease gas commercialisation
The ability to freely negotiate gas supply agreements
short / medium and longer term
Expectations regarding gas prices
Ability to sell gas at guaranteed or open market prices

Theoretical CBM Fiscal System Comparisons

Australia

Canada

China

India

Indonesia

USA

R/T

R/T

PSC

PSC

PSC

R/T

Individuals

Gov't and
individuals

CUCBM
mandatory foreign
co'y countrparty

Gov't sole
owner

Gov't sole owner

Gov't and
individuals

Yes

Yes

Yes

Yes(3)

25%, or 100% of
no discovery

Yes

Signature Bonuses

0.00%

0.00%

Yes

Yes, $0.3m

Yes, varies each

PSC

0.00%

Production Bonuses

n/a

n/a

n/a

n/a

Yes, varies each

PSC

n/a

10.00%

Sliding scale,
based on type
of gas

Sliding scale, 012.5%

10.00%

0.00%

12.50%

0.00%

0.00%

0.00%

0.00%

10.00%

0.00%

100.00%

100.00%

60.00%

100.00%

80%(1)

AMT

Other Private Royalties

0-2.5%

Federal
Royalties

0.00%

0.00%

0.00%

0.00%

VAT, GST, Duties, PLP's

10.00%

Yes

10.00%

Yes

0.00%

Yes

40-50%

40-50%

38-41%

30-42%

30-33%

42-53%

30.00%

Federal Tax,
21%

30.00%

50.00%

44.00%

Federal Tax,
25-35%

0.00%

State Taxes
12%

Yes, as applicable

Yes, as
applicable

0.00%

State Taxes
5-10%

First call local use

First call
local use

Yes(2)

0.00%

0.00%

51.00%

30% Back-in

50% in JOA's

0.00%

Dominant Fiscal System

Title to CBM
Relinquishment

Royalty
First Tranche Petroleum
Cost Recovery Limit

Avg Contractor Take of Profits

Income Tax Rates ( + BPT)
Local Taxes
Domestic Market Obligation
Maximum Government Participation

Pertamina & MIGAS visit to Arrow facilities in

Australia June 2007