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BPMIGASPMIGASPMIGASPMIGAS Marginal Field Incentive

byby

Benny LubiantaraBenny Lubiantara

Evaluation & Dev. Plan Division, BPMIGASEvaluation & Dev. Plan Division, BPMIGAS

The Executive Agency for Upstream Oil & Gas ActivitiesThe Executive Agency for Upstream Oil & Gas Activities

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BPMIGASPMIGASPMIGASPMIGAS DEFINITION

A marginal field is an oil field located within a producing

block that, under the current PSC terms and conditions, is

not economics to be developed.

Marginal Field is the first field of the Contract Area proposed by

Contractor for development and approved, capable of Crude Oil

production not exceeding 10,000 Barrels daily average projected for

the initial two (2) production years (24 production months).

Old Definition in PSC Contract:


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BPMIGASPMIGASPMIGASPMIGAS Conditions for Marginal Field

Located within a producing block.

Its main product is oil.

The exploration costs for that field has been fully recovered,i.e. no more sunk costs considered.

If calculate based on the current PSC terms and conditionsand other incentive packages that may be applied for thatfield in accordance with laws and regulations, the InternalRate of Return (IRR) is estimated less than 15%.

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BPMIGASPMIGASPMIGASPMIGAS

Working Area / Block

Field "A"

(producing)

Field "B"

(producing)

Undeveloped Field

Marginal Field Candidates


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BPMIGASPMIGASPMIGASPMIGAS Type of Incentive

20% Operating Cost*) recovery up-lift.

Other incentive packages that may be applied for thatfield in accordance with the prevailing PSC, laws andregulations.

*) Under Definition of the PSC, the Operating Cost consist of:1. Current Years Non Capital Costs

2. Current Years Depreciation for Capital Costs

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Marginal Field Incentive

The Mechanism

Incentive is not permanently given and will be evaluated onyearly basis.

The new incentive package is issued in order to improve theeconomics of the field, after receiving the incentive, the IRR ofthe field is expected at least 15%. (The Incentive is ON)

The Incentive will be removed if the actual cumulative IRR hasreached 30% (The Incentive is OFF).

The Incentive will be re- apllied if the actual cumulative IRR inthe followong year has dropped below 15%.


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(15,000)

(10,000)

(5,000)

-

5,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

US$(000)

Net Cash Flo w

IRR = 18.5%

The Concept of IRR Cumulative

88


-40%

-30%

-20%

-10%

0%

10%

20%

2005 2006 2007 2008 2009 2010 2011 2012 2013

IRR Cumulative

(15,000)

(10,000)

(5,000)

-

5,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Net Cash Flo w

IRR = 18.5%


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-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2005 2006 2007 2008 2009 2010 2011 2012 2013

IRR Cumulative if Incen tive no t OFFIRR Cumulative

Incentive OFF

1010

BPMIGASPMIGASPMIGASPMIGAS Most Likely Case

Year

15%

30%

IRR

Cumulative

"On - Off" Mechanism

Incentive "On"

Incentive "Off"

Expected IRR Cumulative Trend if the Incentive is NOT Removed


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Year

15%

30%

IRR

Cumulative


Incentive "On" Incentive "Off"

Incentive "On"Incentive "Off"

Expected IRR Cumulative Trend if Incentive is NOT Removed

Extreme - Case

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BPMIGASPMIGASPMIGASPMIGAS Illutration

Field "A"

(producing)

Field "B"

(producing)

Marginal Field

( Realization)

Marginal Field

( Initial Condition )


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Year

15%

30%

IRR

Cumulative


Incentive always "On"

Always On - Case

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BPMIGASPMIGASPMIGASPMIGAS Procedure

1. PSC could register the candidates for marginal field by submitting the

summary of POD. BPMIGAS will response by sending the written answer nolonger than 10 working days.

2. No longer than 6 months following the registration, PSC should submitcomplete POD (in order to speed-up the process, the draft of AFE proposalneed also to be attached).

3. Registration period is 12 months (25 April 2005 24 April 2006)

Registration & Submission


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1. When submitting the POD, the assumption for oil price isUS$ 25 per barrel.

2. BPMIGAS will approve or not approve the POD proposal bysending the written answer to the PSC no longer than 30days after receiving the POD proposal.

3. PSC should commence the activities no longer than one yearafter POD approved.

Evaluation, Approval & Implementation

Procedure

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4. The commencement of the activies isdeclared if:

Tender Plan is appoved; or

Tender Announced; or

Execution of the Field Development

Procedure

Evaluation, Approval & Implementation


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1. PSC should make the special book account for marginal field.

2. The marginal field insentive is taxable.

Implementing and Reporting

Procedure

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