Attracting Foreign Investment in Kingdom Calbias Oil and Gas Sector Proposal

Minister of Energy, Kingdom of Calbia

Problem Identification
As emerging country, Kingdom of Calbia has a concern in Economic Development and Anti-
corruption Issues. Within 41.7 million people (growth rate 1.5%) and abundance of Natural Resource,
Kingdom of Calbia has bright prospect to be economic giants in Asia in the future. One of the biggest
potentials of Kingdom of Calbia is Petroleum (Oil and Gas) reserve that reach 14.200 MMBO of proven oil
reserve and 40.2 TCF of proven gas reserve. This condition has positive impact in economic growth of
Kingdom of Calbia by increasing state revenue in 7 consecutive years in early 2000s which mainly come
from petroleum sector.
Although petroleum sector has positive impact in economic development, in the other hand it
lead to another problem due to high dependency in petroleum income. When oil price drop in 2008 and
2014, the national income also dropped due to this dependency. Besides overall national income which
dropped due to this condition, the ratio of petroleum contribution into national income also dropped
significantly (see Appendix 1). If this condition continuously happen, it may lead to the sinking of National
Economic and create national economic disaster in the future.
The oil price drop also lead to exploration activities. Investors unwilling to put their investment
due to the low of revenue that they could get. In the other hand, the new contract scheme that still
debatable also make investors unwilling to put their investment in petroleum sector, especially in
upstream sector, due to contract scheme uncertainty and high investment risk. The corruption issues also
worsen the condition that make investors do not trust to put their investment in this country. The sector
that vulnerable to be corruption field is the block bidding activities and the permits issuing activities that
needs to pass out 177 bureaucracy permits that prone to get bribery activities. It encourage King Samarot
as King of Calbia to found National Anti-corruption Commission to wipe out the corruption.
As a new minister of energy, I see that government need to solve these problem by making
policies that aimed to:
1. Give a certainty in petroleum contract scheme to give the certainty to investors to count their
investment calculation thus investors willing to put their investment into Petroleum Sector in
Kingdom of Calbia.
2. Create an innovation in petroleum fund management policy that give a benefit for both of
government and investors.
3. Put a long term investment to ensure the sustainability of petroleum industries in Kingdom of
Calbia.
4. Optimize the role of National Anti-corruption Commission in petroleum sector.
Proposed Solution
A. Contract Scheme
Kingdom of Calbia needs to change some components of fiscal regime in the petroleum contract to
increase the attractiveness of global investment when the oil price is under US$50.barrel. The components
of royalties must be removed because it will burden the investors. Corporate Income Tax (CIT) in the
recent fiscal regime needs to be decreased because it is 12.86% higher than average CIT of Organization
for Economic Co-operation and Development (OECD) namely 22.14%. Then, for the PRRT, there is no
change because the term is still acceptable. The proposed contract for oil price under US$50/barrel can
be seen in the Figure 1 and the calculation of tax liabilities can be seen in the Figure 2. From the proposed
contract, it can be seen that the PRRT is same, but the CIT is decreased to 25%. Then, the government
take is used for petroleum endowment fund. If the oil price go up above US$50/barrel, the petroleum
contract is still same with fiscal term of PRRT is 35%), CIT is 30%, but the royalties is still removed.

Figure 1. Proposed Contract (Oil Price Under US$50/barrel)

Petroleum Resource Rent Contract (PRRT) is one of oil and gas contract schemes with similar concept
to PSC (Production Sharing Contract), where in this contract scheme there is a clause to replace all
expenses of oil and gas field expenditure, from the exploration phase to the development and closure of
the well. However, there is a substantial difference between the two in terms of return on investment
companies. In the PSC, return on investment is done by dividing the share (split) of oil and gas production,
whereas in PRRT, the return on investment is done by reducing (deducting) GDP from the field with
general expenses and corporate exploration expenditure (General expenditure and exploration
expenditure).

Based on problems described in the text, it is known that the Kingdom of Calbia applies PRRT schemes
to IOC companies that conduct exploration and exploitation of oil and gas resources in the territory of the
kingdom. The tax rate income applied by Calbia Employment is 35% of taxable receipts, with components
of GDP deductions calculated at the beginning of long term bond rate, General Expenditure, Exploration
Expenditure, and Other Exploration Expenditure.

As mentioned above, there are 4 components in the contract scheme that can be adjusted to attract
private investment interest, namely amount of taxable receipt, the rate of return of general expenditure,
the rate of return of exploration expenditure, and long term bond rate. The example of calculation of
PRRT for oil price is above US$50/barrel can be seen in Appendix 2. The example of a PRRT model with a
scheme now applied by Kingdom Calbia can be seen in the Appendix 3. While the model is generated by
increasing the parameter rate exploration expenditure by 5 basis points to increase interest in corporate
exploration can be seen in Appendix 4.

Figure 2. Calculation of Proposed Contract (Oil Price Under US$50/barrel)

B. Allocation of Government oil Take into Petroleum Endowment Fund
An innovation in petroleum fund management is by allocating part of government oil take into
Petroleum Endowment Fund. Ministry of Energy could make a proposal to King of Calbia and parliament
to allocate several percent of government oil take into Petroleum Endowment Fund. This fund managed
by autonomous institution named as Calbian Petroleum Endowment Fund National Committee which
responsible to Minister of Energy of Kingdom of Calbia (see Appendix 5).
The endowment fund could be invested into several productive sector out of petroleum sector to
gain profit by putting them into stock exchange/capital market, bank deposit, bonds, mutual funds, and
trade commodities such as gold and property sector. The profit/capital gains of investment could be
allocated to fund several activities in petroleum sector.
The first allocation is to build online database that provide exploration data for registered
petroleum company. Several data such as geology, seismic, petrophysics, and drilling data could be
acquired by this fund then could be accessed freely by registered company that have put their
commitment into specific work area. This data gives more alternatives to conduct more advanced
exploration and decrease the exploration risk for the investor.
The second allocation is to fund research development in petroleum sector. It can be used to fund
Enhanced Oil Recovery (EOR) research in several mature to over-mature producing wells to maintain
production rate thus wells could produce oil and gas longer. It also could be used to fund research in
unconventional energy development such as shale gas/oil and Coal Bed Methane (CBM). Funding a
research in this sector would make contractors more passionate in developing research both conventional
and unconventional petroleum sector.
The third allocation is to fund human resource development. The endowment fund could be used to
send numerous talents from numerous filed such as geologists, geophysicists, petroleum engineers, and
petrophysicists to join numerous trainings or study petroleum industry in world class university/institute.
They could learn and develop the latest technology in petroleum industry that could be applied in
Kingdom of Calbia when they back to work in Calbian Petroleum Industry.
To minimize the corruption in petroleum sector, Ministry of Energy of Calbia would collaborate to
National Anti-corruption Commission to monitor the petroleum activities from bidding activity, permits
issues, and the management of petroleum fund including petroleum endowment fund. Ministry of Energy
also engage civil society to monitor this sector by making open information system related to petroleum
industry activities via online governments websites. To minimize the corruption in permits issuing,
Ministry of Energy also engage another ministry such as ministry of environment, ministry of transport,
and ministry of trade to cut off the number of permits in order to simplify the procedures and make online
permits issuing system that can be monitored by related ministries, National Anti-corruption Commission,
and open public.
Appendix 1

Revenue Drop
Petroleum Contribution
Oil Price Drop Drop

Appendix 2
Appendix 3

Appendix 4
Appendix 5