Coalbed Methane Development in Indonesia : Design and Economic Analysis of Upstream Petroleum Fiscal Policy

Due to increasing demand for natural gas in Indonesia, the Government now promotes exploration for coalbed methane (CBM). Currently, Indonesia has 453 trillion cubic feet (TCF) of CBM reserves. However, CBM development in the country is still in the exploration phase, with significant under-investment. To attract investors, a tailored Production Sharing Contracts (PSC) regime is required. Based on a combination of Factor Analysis (FA), Discounted Cash Flows (DCF) and Parameter Sensitivity Analysis, the research explores an optimal scenario of a company’s share of revenue that optimised CBM development contracts. We find that a combination of 5 years straight line depreciation (SLD), 5% First Tranche Petroleum (FTP), 78% Contractor Share (CS) and 35% income tax best spreads the risk of CBM development and exploitation between the government and the contractor. This combination is a more suitable PSC regime for developing CBM in an early stage of the industry. Therefore, the Government must cede some taxes during exploration to incentivise CBM development. Three PSCs regimes are thus required to fully develop and exploit CBM, including exploration, transitional and exploitation phase PSCs which better match contractor risks and returns and ensure reasonable certainty of contractor cost recovery