Capital Budgeting Model and Sensitivity Analysis of the Conventional Oil Production Sharing Contract (PSC) Fiscal Systems: Empirical Evidence from Indonesia

  • Authors

    • Wiwiek Mardawiyah Daryanto
    • Arti Primadona
    • . .
    2018-08-08
    https://doi.org/10.14419/ijet.v7i3.21.17084
  • PSC, cost recovery, capital budgeting model, net present value, internal rate of returns.

  • Abstract

    Oil is a vital commodity that controls the livelihood of people. It is also the main resource of state revenue. The oil industry in Indonesia has started since 1883. However, only 40 percent of the total sedimentary basin in Indonesia has been explored since that time (Ministry of Energy and Mineral Resources of Republic of Indonesia, 2015). Accordingly, the major fields are getting drain, while the domestic consumption of oil is increasing. Low investment is one of the factors that cause the declines of oil production. Working Areas (WA) which had been offered to the potential investors by the Government of Indonesia (GOI) during the period ended September 10, 2015, were unsold, followed by unsuccessful of seven WAs offered in the period from July 18 to October 28, 2016, due to an unattractive terms and conditions of PSC Fiscal Systems in the decreasing of oil price situation currently. Oil business requires high capital, high technology, high risks, long terms commitment, but high returns. Therefore, GOI always depends on the private investor to run exploration and exploitation of oil mining. The purpose of this study is to measure the feasibility of oil industry investment and to examine the attractive terms and conditions of PSC Fiscal Systems. The data were collected from the ten PSC Fiscal Systems which had been started the business since 1968 - 2014. Capital Budgeting Model indicators: Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Weighted Average Cost of Capital (WACC) were used to analyze the data and sensitivity analysis. The finding shows that the attractive terms and conditions of PSC Fiscal Systems are a maximum split of 50 percent for GOI, under controllable Cost Recovery (CR), the oil price of USD 50.00/barrel, and WACC <20%. The authors believe that the findings will be beneficial for GOI and potential oil investors to carry out a fair negotiation, to come up with a win-win solution.

     

     

  • References

    2. lang=X-NONE style='font-size:8.0pt'>
    3. style='mso-spacerun:yes'> ADDIN EN.REFLIST
    4. field-separator'>[1] Tharakan P. Summary of Indonesia's Energy Sector Assessment. 2015.

      [2] Group WB. Doing business 2013: Smarter regulations for small and medium-size enterprises: World Bank Publications; 2012.

      [3] Anthony RN, Hawkins DF, Merchant KA. Accounting: text and cases: McGraw-Hill; 2011.

      [4] Frederer J. Oil Price Volatility and Macroeconomy: A solution to the asymmetry Puzzle. Journal of Macroeconomics. 1996;18(1):1-26.

      [5] Belke A, Orth W, Setzer R. Liquidity and the dynamic pattern of asset price adjustment: A global view. Journal of Banking & Finance. 2010;34(8):1933-45.

      [6] Anzuini A, Lombardi MJ, Pagano P. The impact of monetary policy shocks on commodity prices. 2012.

      [7] Regnier E. Oil and energy price volatility. Energy Economics. 2007;29(3):405-27.

      [8] Lubiantara B. Ekonomi Migas: tinjauan aspek komersial kontrak migas: Gramedia Widiasarana Indonesia; 2012.

      [9] Williamson HF, Daum AR, Klose GC. The American Petroleum Industry: The Age of Illumination, 1859-1899; Vol. 1: Greenwood Publishing Group; 1963.

      [10] Glinz I, Flores I. Capital Budgeting Model for Pemex Exploración y Producción. Сетевое издание «Ðефтегазовое дело». 2006(2).

      [11] Sadvakassov D, Orazgaliyev S. Key factors in attracting foreign direct investments in the oil and gas industry of Kazakhstan. Ðктуальні проблеми економіки. 2015(4):147-54.

      [12] Dunning JH. The eclectic paradigm as an envelope for economic and business theories of MNE activity. International business review. 2000;9(2):163-90.

      [13] Gitman LJ, Chad J. Zutter.(2012). Principle of Managerial Finance. 2012.

      [14] Damodaran A. Investment valuation, 2. Aufl, New York. 2002;817.

      [15] Damodaran A. Total Betas by Sector (for computing private company costs of equity)–US. Damodaran on line. 2016.

      [16] Zutter CJ, Gitman LJ. Principles of Managerial Finance, Brief: Pearson Higher Ed; 2011.

    5. mso-fareast-font-family:Batang;mso-ansi-language:EN-US;mso-fareast-language:
    6. KO;mso-bidi-language:AR-SA'>

  • Downloads

  • How to Cite

    Mardawiyah Daryanto, W., Primadona, A., & ., . (2018). Capital Budgeting Model and Sensitivity Analysis of the Conventional Oil Production Sharing Contract (PSC) Fiscal Systems: Empirical Evidence from Indonesia. International Journal of Engineering & Technology, 7(3.21), 5-9. https://doi.org/10.14419/ijet.v7i3.21.17084

    Received date: 2018-08-08

    Accepted date: 2018-08-08

    Published date: 2018-08-08