Overview of Oil and Gas Accounting & PSC Accounting Budi Hartono

Agenda Overview of Overview of accounting principle in upstream oil and gas Overview of PSC Accounting Other PSC consideration PSC Accounting vs GAAP Recording PSC Accounting & GAAP – Operator & NonOperator

Overview of Overview of accounting principle in upstream oil and gas

Overview of PSC Accounting

Other PSC consideration

PSC Accounting vs GAAP

Recording PSC Accounting & GAAP – Operator & NonOperator

Accounting Principles in Upstream Oil & Gas Full Cost Method Successful Effort Method

Full Cost Method

Successful Effort Method

Full Cost Method All property acquisition, exploration and development costs, even dry hole costs, are capitalized as oil and gas properties. These costs are amortized using a unit-of-production method based on volumes produced and remaining proved reserves. The net unamortized capitalized costs of oil and gas properties less related deferred income tax MAY NOT exceed a ceiling consisting primarily of a computed present value of projected future cash flows, after income taxes, from the proved reserves.

All property acquisition, exploration and development costs, even dry hole costs, are capitalized as oil and gas properties.

These costs are amortized using a unit-of-production method based on volumes produced and remaining proved reserves.

The net unamortized capitalized costs of oil and gas properties less related deferred income tax MAY NOT exceed a ceiling consisting primarily of a computed present value of projected future cash flows, after income taxes, from the proved reserves.

Successful Effort Method Only the cost of successful efforts is capitalized. Cost of exploratory dry holes, geological and geophysical (G&G) costs in general, delay rentals, and other property carrying costs are expensed. The net unamortized capitalized costs are amortized on unit-of-production method, whereby property acquisition costs are amortized over proved reserves and property development costs are amortized over proved development reserves.

Only the cost of successful efforts is capitalized.

Cost of exploratory dry holes, geological and geophysical (G&G) costs in general, delay rentals, and other property carrying costs are expensed.

The net unamortized capitalized costs are amortized on unit-of-production method, whereby property acquisition costs are amortized over proved reserves and property development costs are amortized over proved development reserves.

Pre Licensing Cost Costs incurred prior signing of agreement such as cash pays for data and information to participate in a new PSC bid. License Cost Costs incurred upon signing of agreement such as signature bonus.

Costs incurred prior signing of agreement such as cash pays for data and information to participate in a new PSC bid.

Acquisition Expenditures Costs incurred to purchase, lease, or otherwise acquire a property (whether unproved or proved). They include the costs of lease bonuses and options to purchase or lease properties, the portion of costs applicable to minerals when land including mineral rights is purchased in fee, brokers' fees, recording fees, legal costs, and other costs incurred in acquiring properties

Costs incurred to purchase, lease, or otherwise acquire a property (whether unproved or proved). They include the costs of lease bonuses and options to purchase or lease properties, the portion of costs applicable to minerals when land including mineral rights is purchased in fee, brokers' fees, recording fees, legal costs, and other costs incurred in acquiring properties

Geological & Geophysical Seismic Information that will help decide (1) whether contractors should be obtained in area of interest (2) whether and where exploratory areas should be drilled.

Information that will help decide (1) whether contractors should be obtained in area of interest (2) whether and where exploratory areas should be drilled.

Exploration Expenditures Exploration involves: identifying areas that may warrant examination and examining specific areas that are considered to have prospects of containing oil and gas reserves, including drilling exploratory wells and exploratory-type stratigraphic test (appraisal) wells. Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after acquiring the property

Exploration involves:

identifying areas that may warrant examination and

examining specific areas that are considered to have prospects of containing oil and gas reserves, including drilling exploratory wells and exploratory-type stratigraphic test (appraisal) wells.

Appraisal drilling Drilling carried out to determine the physical extent, reserves and likely production rate of a field. Accounting for appraisal wells under IFRS tends to be based on whether the field or the reservoir is ultimately determined to be successful and developed, justifying the capitalization of dry appraisal wells in the same field. Under US GAAP, an appraisal well is treated exactly the same as an exploration well and should be written-off if unsuccessful, even the very same field or reservoir is determined to be successful and developed.

Drilling carried out to determine the physical extent, reserves and likely production rate of a field.

Accounting for appraisal wells under IFRS tends to be based on whether the field or the reservoir is ultimately determined to be successful and developed, justifying the capitalization of dry appraisal wells in the same field.

Under US GAAP, an appraisal well is treated exactly the same as an exploration well and should be written-off if unsuccessful, even the very same field or reservoir is determined to be successful and developed.

Development Expenditures Development costs are incurred to : Gain access to and prepare well locations for drilling such as clearing ground, draining, road building, gas and power lines; Drill and equip development wells including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly; Acquire, construct and install production facilities such as lease flow lines, separators, production storage tanks, natural gas cycling and processing plants, and central utility and waste disposal system .

Development costs are incurred to :

Gain access to and prepare well locations for drilling such as clearing ground, draining, road building, gas and power lines;

Drill and equip development wells including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly;

Acquire, construct and install production facilities such as lease flow lines, separators, production storage tanks, natural gas cycling and processing plants, and central utility and waste disposal system .

Production Expenditures Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation, and applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities.

Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation, and applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities.

Impairment Impairment Triggers: Obsolescence Physical damage: accidents, fire, natural disasters Technical performance problems (lower production profile) Evidence from internal reporting: worse profit (bigger loss) or cash flow, anticipated loss on disposal, change in long term view of sales prices Lower estimates of physical quantities of petroleum reserves Lower reserves in PSC due to higher prices is not an impairment trigger .

Impairment Triggers:

Obsolescence

Physical damage: accidents, fire, natural disasters

Technical performance problems (lower production profile)

Evidence from internal reporting: worse profit (bigger loss) or cash flow, anticipated loss on disposal, change in long term view of sales prices

Lower estimates of physical quantities of petroleum reserves

Lower reserves in PSC due to higher prices is not an impairment trigger .

Impairment Under IFRS impairment includes license acquisition costs and exploration and appraisal costs Exploration licenses in unproved properties must be assessed periodically (at least annually). If dry hole has been drilled and there are no firm plans for further drilling or appraisal activities, the property would be impaired. Under US GAAP, FAS 121 are applicable for proved properties and related equipment, and facilities whereas unproved properties are subject to the impairment provision FAS 19 (Accounting for Suspended Well Costs).

Under IFRS impairment includes license acquisition costs and exploration and appraisal costs

Exploration licenses in unproved properties must be assessed periodically (at least annually).

If dry hole has been drilled and there are no firm plans for further drilling or appraisal activities, the property would be impaired.

Under US GAAP, FAS 121 are applicable for proved properties and related equipment, and facilities whereas unproved properties are subject to the impairment provision FAS 19 (Accounting for Suspended Well Costs).

Decommissioning Process conducted in accordance with license requirements and relevant legislation and practice to: Plug and abandon wells Dismantle wellhead, production and transport facilities Remediate and restore producing areas

Process conducted in accordance with license requirements and relevant legislation and practice to:

Plug and abandon wells

Dismantle wellhead, production and transport facilities

Remediate and restore producing areas

Decommissioning recognition Decommissioning provisions are recognized when there is Legal obligation Constructive obligation: Establishing a pattern of past practice Publishing policies Making statement to other parties that the company will accept responsibilities Creating a reasonable expectation that the company will act in a certain way.

Decommissioning provisions are recognized when there is

Legal obligation

Constructive obligation:

Establishing a pattern of past practice

Publishing policies

Making statement to other parties that the company will accept responsibilities

Creating a reasonable expectation that the company will act in a certain way.

Decommissioning Obligation Decommissioning costs are typically cost recoverable based on actual cash funding. Most PSCs have decommissioning obligations for the contractor, despite ownership of assets by government. Usually cash funding is required to make sure there will be enough fund to carry out decommissioning activities. Both contractor and government have control over the cash fund.

Decommissioning costs are typically cost recoverable based on actual cash funding.

Most PSCs have decommissioning obligations for the contractor, despite ownership of assets by government.

Usually cash funding is required to make sure there will be enough fund to carry out decommissioning activities. Both contractor and government have control over the cash fund.

Full Cost vs Successful Efforts Accounting Production costs Development costs Specific pre-licence, licence acquisition, exploration and appraisal costs General costs prior to acquisition of licence SUCCESSFUL EFFORTS FULL COST Costs

Full Cost vs Successful Efforts Accounting Expensed Expensed Capitalised Capitalised Capitalise initially then write off, unless commercial reserves established Capitalised Expensed Expensed SUCCESSFUL EFFORTS FULL COST Production costs Development costs Specific pre-licence, licence acquisition, exploration and appraisal costs General costs prior to acquisition of licence Costs

Overview of PSC Accounting: Acquisition cost Operating costs Capital expenditures Non-capital expenditures Exploration expenditures Development expenditures Supporting equipment and facilities Depreciation, depletion and amortization Inventory

Acquisition cost

Operating costs

Capital expenditures

Non-capital expenditures

Exploration expenditures

Development expenditures

Supporting equipment and facilities

Depreciation, depletion and amortization

Inventory

PSC Accounting Acquisition cost Acquisition cost is not classified as part of the operating costs as based on the constitution, the ownership of the natural resources stays with the state and is not transferred to the contractors. Signature Bonus IS NOT classified as part of the operating costs (cost recovery) but classified as deductible expense for tax purposes.

Acquisition cost

Acquisition cost is not classified as part of the operating costs as based on the constitution, the ownership of the natural resources stays with the state and is not transferred to the contractors.

Signature Bonus IS NOT classified as part of the operating costs (cost recovery) but classified as deductible expense for tax purposes.

PSC Accounting Operating costs (cost recovery) For any year in which commercial production occurs, operating costs consist of: Current year non-capital costs Current year’s depreciation for capital costs Current year allowed recovery of prior year’s unrecovered operating costs.

Operating costs (cost recovery)

For any year in which commercial production occurs, operating costs consist of:

Current year non-capital costs

Current year’s depreciation for capital costs

Current year allowed recovery of prior year’s unrecovered operating costs.

PSC Accounting Capital cost Expenditures made for items which normally have a useful life beyond the year incurred Non-capital cost Expenditures relating only to current operation, including costs of surveys and the intangible drilling costs of exploratory and development wells.

Capital cost

Expenditures made for items which normally have a useful life beyond the year incurred

Non-capital cost

Expenditures relating only to current operation, including costs of surveys and the intangible drilling costs of exploratory and development wells.

PSC Accounting Exploration expenditures All non-capital and Intangible Drilling Costs (IDC) exploration expenditures are expensed as operating expenditures as incurred, without considering whether they relate to a successful or unsuccessful exploration. Whilst for Tangible Drilling Costs (TDC) exploration, is capitalised for successful exploration and is classified as non-capital for unsuccessful expenditures.

Exploration expenditures

All non-capital and Intangible Drilling Costs (IDC) exploration expenditures are expensed as operating expenditures as incurred, without considering whether they relate to a successful or unsuccessful exploration. Whilst for Tangible Drilling Costs (TDC) exploration, is capitalised for successful exploration and is classified as non-capital for unsuccessful expenditures.

PSC Accounting Development expenditures Upon dry-hole, all expenditures, the IDC and TDC development expenditures, are classified as non-capital and therefore expensed. Upon successful, the IDC development expenditures are still classified as non-capital and therefore expensed, whilst the TDC development are capitalised.

Development expenditures

Upon dry-hole, all expenditures, the IDC and TDC development expenditures, are classified as non-capital and therefore expensed.

Upon successful, the IDC development expenditures are still classified as non-capital and therefore expensed, whilst the TDC development are capitalised.

PSC Accounting Supporting equipment and facilities The treatment is the same as the development costs

Supporting equipment and facilities

The treatment is the same as the development costs

PSC Accounting Depreciation, depletion and amortization (DD&A) DD&A will be calculated beginning the year in which the assets is placed into service. The method used to calculated the DD&A is double declining balance method, whereby in the last year, the residual value is recovered in full and therefore does not consider the amount of reserves

Depreciation, depletion and amortization (DD&A)

DD&A will be calculated beginning the year in which the assets is placed into service. The method used to calculated the DD&A is double declining balance method, whereby in the last year, the residual value is recovered in full and therefore does not consider the amount of reserves

PSC Accounting Inventory The costs of non-capital items purchased for inventory will be recoverable at such time the items have landed in Indonesia.

Inventory

The costs of non-capital items purchased for inventory will be recoverable at such time the items have landed in Indonesia.

Other PSC Considerations First Tranche Petroleum Domestic Market Obligation Investment Credit Cost recovery Flow of PSC

First Tranche Petroleum

Domestic Market Obligation

Investment Credit

Cost recovery

Flow of PSC

First Tranche Petroleum 20 Percent of current year production or certain amount refers to contract Split between government and contractor Based on PSC’s sharing percentage FTP is taxable income

20 Percent of current year production or certain amount refers to contract

Split between government and contractor

Based on PSC’s sharing percentage

FTP is taxable income

DMO (Domestic Market Obligation) A contractor has to surrender a part (25%) of its production for domestic market DMO fees received by a contractor: - The first 5 years production, fee is average ICP - After 5 years, fee is USD .20/bbls or 10% of average ICP (pack II), 15% of average ICP (pack III)

A contractor has to surrender a part (25%) of its production for domestic market

DMO fees received by a contractor:

- The first 5 years production, fee is

average ICP

- After 5 years, fee is USD .20/bbls or 10%

of average ICP (pack II), 15% of average

ICP (pack III)

Investment Credit Investment credit is an additional allowance when a contractor invests in a new field Applicable mainly for oil investment, gas is on pack II (deep sea) and pack III (pre-tertiary) Rate investment credit is: - 20% of direct investment amount (if tax rate is 56%) - 17% of direct investment amount (if tax rate is 48 %) - 127%, 142% (oil); 55%, 110% and 125% (gas) in deep sea and pre tertiary areas.

Investment credit is an additional allowance when a contractor invests in a new field

Applicable mainly for oil investment, gas is on pack II (deep sea) and pack III (pre-tertiary)

Rate investment credit is:

- 20% of direct investment amount (if tax rate

is 56%)

- 17% of direct investment amount (if tax rate

is 48 %)

- 127%, 142% (oil); 55%, 110% and 125% (gas)

in deep sea and pre tertiary areas.

Cost Recovery Current year – non capital costs Inventories will be recoverable at the time when landed in Indonesia Current year’s depreciation for capital cost Declining balance method, yearly, grouping per PSC Current year’s allowed recovery of prior year’s un-recovered operating costs

Current year – non capital costs

Inventories will be recoverable at the time when landed in Indonesia

Current year’s depreciation for capital cost

Declining balance method, yearly, grouping per PSC

Current year’s allowed recovery of prior year’s un-recovered operating costs

Cost Recovery (continued) Operating cash directly associated with production of natural gas will be directly chargeable against natural gas revenues Other costs: - Overhead allocation, should be consistent and approved by BP Migas (generally max 2% of operating costs) - Interest recovery, has to be approved by BP Migas

Operating cash directly associated with production of natural gas will be directly chargeable against natural gas revenues

Other costs:

- Overhead allocation, should be consistent

and approved by BP Migas (generally max

2% of operating costs)

- Interest recovery, has to be approved by BP Migas

Compensation and Production Bonus Signature bonus, when getting the PSC Production bonus, after reaching certain production volume Unrecovered cost but tax deductible

Signature bonus, when getting the PSC

Production bonus, after reaching certain production volume

Unrecovered cost but tax deductible

FLOW OF PSC

PSC Accounting vs GAAP (*) it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably. Expense Capitalize Capitalize Expense Capitalize Capitalize Expense Expense Capitalize Exploration expenditures: Dry hole Successful: - IDC - TDC Capitalize as long as meet with IFRS assets recognition criteria* Capitalize Expense Acquisition cost IFRS US GAAP PSC

(*)

it is probable that future economic benefits associated with the item will flow to the entity; and

the cost of the item can be measured reliably.

PSC Accounting vs GAAP A dry appraisal could still be carried forward in the Balance Sheet, provided that the intend to drill more wells or to develop the field still exists. Unsuccessful exploratory wells drilled to delineate a potential reservoir are expensed A dry appraisal could still be carried forward in the Balance Sheet, provided that the intend to drill more wells or to develop the field still exists. Appraisal drilling IFRS US GAAP PSC

PSC Accounting vs GAAP Not specified. Capitalized as long as meet with IFRS assets recognition criteria Not specified. Capitalized as long as meet with IFRS assets recognition criteria Capitalize Capitalize Capitalize Expense Expense Capitalize Development expenditures Dry hole Successful: - IDC - TDC Capitalize Capitalize Capitalize Supporting equipment and facilities IFRS US GAAP PSC

PSC Accounting vs GAAP Accrual basis based on the discounted present value of the expected expenditures required to settle the obligation Accrual basis based on the discounted present value of the expected expenditures required to settle the obligation Cash basis (pay as you go) Big table liabilities / severance Expensed/impaired upon identified Expensed/impaired upon identified Write off upon approved by BPMIGAS Obsolete inventory or assets Expensed as consumed Expensed as consumed Expensed upon receipt Non-capital inventory Not specified, to be allocated over useful life, reflecting consumption of assets’ benefits Unit of production Double decline DD&A of capital costs IFRS US GAAP PSC

PSC Accounting vs GAAP Accrual basis - based on the discounted present value of the expected expenditures required to settle the obligation. The provision should be provided as soon as the decommissioning obligation is created, which is normally when the facility is constructed and the damage that needs to be restored is done. Accrual basis - based on the discounted present value of the expected expenditures required to settle the obligation. The provision should be provided in the period in which it is incurred if a reasonable estimate of fair value can be made, or as soon as a reasonable estimate of fair value can be made. Cash basis. New recent PSC contract – accrual basis, but no further guidance issued yet by BPMIGAS. Abandonment / decommissioning liabilities IFRS US GAAP PSC

PSC Accounting vs GAAP The same as US GAAP, except that an impairment loss (downward revaluation) may be offset against revaluation surpluses to the extent that it relates to the same asset; any uncovered deficit is recorded to the income statement. All impairments are recognised in the income statement. Written off assets upon agreement from BPMIGAS Impairment IFRS US GAAP PSC

Recording PSC Accounting & GAAP (Operator) General industry practice use the JV book and Corporate book JV Book represent the recording of the transaction in the level of joint venture transaction (such as cash call request, cash call receipt, joint venture expenditures). Corporate Book represents the recording of transaction in the level of corporate as a separate entity. Consist of: joint venture transaction (multiplied by its shares) transaction which only incurred in corporate level (corporate adjustment) such as revenue, DD&A, deferred tax and other GAAP adjustment.

General industry practice use the JV book and Corporate book

JV Book

represent the recording of the transaction in the level of joint venture transaction (such as cash call request, cash call receipt, joint venture expenditures).

Corporate Book

represents the recording of transaction in the level of corporate as a separate entity. Consist of:

joint venture transaction (multiplied by its shares)

transaction which only incurred in corporate level (corporate adjustment) such as revenue, DD&A, deferred tax and other GAAP adjustment.

Recording Joint Interest Transactions (Nonoperator) General industry practice use the proportionate consolidation method of accounting. Under proportionate consolidation, each owner picks up its proportionate share of each assets, liability, revenue and expense item in accordance with its own account classification. The principal source document is the monthly Joint Interest Billing (JIB) from the operator. The JIB do not coincide with GAAP or income tax accounting. The recording of Joint Interest Transactions of NonOperator will be detailed in Cash Call section

General industry practice use the proportionate consolidation method of accounting.

Under proportionate consolidation, each owner picks up its proportionate share of each assets, liability, revenue and expense item in accordance with its own account classification.

The principal source document is the monthly Joint Interest Billing (JIB) from the operator.

The JIB do not coincide with GAAP or income tax accounting.

Question & Answer Session

Question & Answer Session