Decision-Making Approach in Fiscal Term Change Proposal: Case Study of Java Offshore Production Sharing Contract (PSC) Indonesia

Java Offshore is one of mature oil and gas fields in Indonesia. This working area stretches across West Java Province (Offshore Java). This field has been operation since 1971, with a peak oil production of one hundred seventy-five-thousand-barrel oil per day (175,000 BOPD) in 1984 and four hundred eighty-four million standard cubic feet of gas per day (484 MMSCFD) in 2002. Several big foreign oil companies from the US and Europe have been operating in the Offshore Java working area since the beginning. In 2017, Java Offshore PSC was appointed as operator by Government of Indonesia under Gross Split fiscal scheme, marking it as the inaugural PSC operator in Indonesia to execute this fiscal framework. The subsequent problem for the operator arises while they recalculating economic evaluation utilizing GS framework, as forecast data indicates a negative cashflow commencing in 2025. However, based on company working area resource data, there are still potential significant oil and gas reserves that could be developed until the end of the PSC. Transitioning from GS framework to Cost Recovery model addresses fiscal sustainability for the operator by providing superior cost recovery provisions, reducing tax burdens, and restructuring government-contractor splits in such a way as to enhance profitability for both stakeholders involved. The primary objective of this study is to establish decision-making methodologies to determine which fiscal term is the most suitable for the sustainability of the Java Offshore working area. The project investment decision is based on a strategic perspective utilizing a technical approach and economic evaluation through capital budgeting model indicators, such as Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI). The finding shows that Cost Recovery model is the best option for continue the development of Java Offshore working area as well as create an acceptable return for contractor and fair revenue for Government of Indonesia (GoI). 

Introduction

Indonesia’s oil and gas sector face difficult problem as 2024 comes to an end. The energy self-sufficiency encourage by new elected President Prabowo makes the oil and gas still key support for national energy demands. The transition to new and renewable energy influences investment in upstream oil and gas sectors. The impact is that exploration and exploration activity in oil and gas have experienced a downward trend. The result is the amount of national production is continuing to decline. 2025 annual state budget figures, more than one-million-barrel crude per day should be imported to balance the domestic demand. Meanwhile data from SKK Migas shows 2024 Indonesia’s oil lifting outlook at the end of the year realization only 595 thousand barrels oil per day. Increasing production is not an easy task, considering 70% of oil field production in Indonesia are mature field and there’s no big new oil field discoveries in the recent year. Therefore, the decline in oil lifting is expected to continue. Conversely, the demand for domestic energy is expanding in a rapid growing, stimulated by industrialization in several sectors and economic growth is expected to reach 8%. Government of Indonesia through SKK Migas realized that problem, then several strategic measures were implemented to enhance oil production, such as Enhance Oil Recovery (EOR) technology project implementation in mature field and encourage PSC operator to increase exploration activity.

The oil and gas sectors remain a key pillar of Indonesia’s national economy. However, it faces significant challenges in maintaining its contribution to the state revenue, due to declining production of oil and gas from majority mature oil fields. Policy reform was introduced by the government, including fiscal adjustment and incentives to boost exploration activity and maximizing production from mature fields.

Java Offshore PSC was signed in 2017 under the new regulated Gross Split Fiscal term. The first production of this field is in 1971 by the US big Oil company. The working area stretches across the offshore part of West Java province. The cumulative oil production of 1.3 billion barrels and 3.73 trillion standard cubic feet (TSCF) of gas as of 2023. The oil peaked at 175,000 barrels per day in 1984 and gas production peaked at 484 MMSCFD in 2002.

Based on studies carried out on all active fields, it indicates that despite its mature states, the block area still has development potential, particularly regarding the remaining proven reserves and contingent resources that can be proven through exploration activities so optimizing the monetization of these fields. Since 2017, both oil and gas production has been declining trends, the tendency of declining production for both oil and gas is frequent and natural in mature fields. Anticipatory actions should be taken to tackle this phenomenon, either well maintenance, infill or development drilling, near field development, or drilling an exploratory well. Field development, whether from existing fields or new development fields, is planned to contribute oil and gas production accordance with the timeline. Several programs are carried out to be able to maintain existing and increase production align with the national production target of 1 million barrels of oil per day and 1200 MMSCFD in 2030. The program is:

1. Baseline, which covers production from existing wells that have Field Development approval (2017–2024).

2. Future project includes production enhancements activities from Field Development that don’t have Field Development approval (2025–2036).

Economic evaluation utilizing Gross Split scheme based on production forecast, resulting in negative cashflow starting in 2025. Transition from current fiscal scheme to Cost Recovery model addresses fiscal sustainability for operator by providing superior cost recovery provisions, reducing tax burdens, and restructuring government-contractor split in such a way as to enhance profitability for both stakeholders involved. Fiscal adjustments not only benefit for operator but also could stabilize Indonesia’s oil and gas production target and contribute positive to national economy. This case may also potentially work as a benchmark for similar mature field in Indonesia that have same problems.

Cashflow is an important indicator in capital budgeting model. All capital budgeting decisions should be based on cashflow analysis that are adjusted for time value of money. Evaluation of current Gross Split scheme looking forward 2017 (LF 2017) shows that economic limit for Java Offshore occurs in the end of 2024 and negative cashflow is continuing until 2031. Further evaluation was conducted to evaluate this block utilizing Gross Split and Cost Recovery scheme looking forward 2024. Both scenarios implement baseline and future projects until the end of PSC contract in 2036. The production profile for both scenarios targeting peak oil production of 43.5 thousand barrels per day (43,500 BOPD) in 2031 and peak gas production of 107 million standard cubic feet per day (107 MMSCD) in 2026. The Capital Expenditure (CAPEX) is US$ 3.1 billion and Operating Expenditure is US$ 5.5 billion. Then Financial metric use in this evaluation is Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI).

Sensitivity analysis then utilizes to illustrate and assess the level of confidence associated with the conclusion of an economic evaluation. Several key assumptions are applied covers key economic parameters that are typically volatile or have tendency to deviate from forecast, including:

1. Oil Price,

2. Gas Price,

3. CAPEX,

4. OPEX, and

5. Oil and Gas Lifting Volume.

The next step is performing a probabilistic approach by implementing Montecarlo simulation to the parameter that was tested in the sensitivity analysis. These techniques operate on the principle that by running thousands of trials based on different input probabilities, we can obtain a more comprehensive view of the distribution of possible outcomes. Random numbers are applied by assigning a testing range +/− 10% from the baseline values of each parameter. Utilizing a Visual basic program, Montecarlo simulation was performed with a total of 30,000 trials using randomly assigned values.

The SMART (Simple Multi-Attribute Rating Technique) method is used to develop Decision Analysis (DA) to evaluate two fiscal term options: Gross Split (GS) and Cost Recovery (Cost Rec). SMART is a decision-making method based on quantitatively assessed attributes, each multiplied by the preference weights of decision-maker.

Literature Review

Many researchers have conducted fiscal scheme comparisons applied in Indonesia. The studies cover Indonesia’s New Petroleum Fiscal Regime (Gross Split), impacts and future trends (Yunet al., 2020), evaluation of offshore Project development under two fiscal regimes in Indonesia (Mardianaet al., 2023), valuation of PSC Cost Recovery vs. Gross Split in Indonesia (Rulandariet al., 2018).

Researchers conclude that Gross Split fiscal scheme drives operational efficiency by giving contractor greater autonomy in managing cost, but it needs to introduce incentives in Gross Split PSC to make projects more attractive, especially in complex fields such as deepwater, and unconventional resources (Yunet al., 2020). Rulandari in her paper introduced more flexible fiscal terms in the Gross Split PSC to better balance government revenue with contractor incentives, improve clarity in the split variables and regulatory processes to reduce uncertainties for investors, simplify approval processes and reduce regulatory delays to make the investment process more efficient, offer additional incentives for contractors meeting high domestic content requirements, promoting local industry growth (Rulandariet al., 2018).

Indonesia was an active member of OPEC for many years. However, its suspended membership in 2008 due to the decline in oil production. In 2015, Indonesia resumed its membership, indicating a strong commitment to the industry. Indonesia’s oil production started to decline due to limited number of significant new development projects. Increasing production is certainly not easy, considering 70% of oil fields in Indonesia are mature field. Conversely, the demand for domestic energy is rising at a rapid pace triggered by industrialization in many sectors and economic growth.

The 2025 annual state budget’s financial memorandum notes natural gas at 1 million barrels per day (1 MMBOEPD) and oil lifting number at +/− 600 thousand barrels per day. Fig. 1 shows that crude oil imports around 1 million barrels per day and it is equal to US$ 100 million/day just for oil imports. The current high level of oil imports in comparison to the amount of national oil production suggest that Indonesia is already experiencing an energy crisis. The strategy for enhancing production is through increasing exploration and exploitation activity, initially, investors or contractors are afforded the flexibility to choose a Production Sharing Contract scheme that aligns with commercial and technical characteristics of their Oil and Gas fields (Gross Split or Cost Recovery fiscal scheme). A gross Split sharing contract, as defined in article 1 point 18 of Minister of Energy and Mineral Resources Regulation 13/2024 (Kementrian Energi dan Sumber Daya Mineral, 2024), is a type of profit-sharing contract that is used in upstream business activities. It is based on the principles of sharing gross production without a mechanism for recovering the operating cost. At other side, Cost Recovery Production Sharing Contract is a profit-sharing agreement that is accompanied by a mechanism for the recovery of operating costs related to oil and gas activities, which include oil and gas exploration, development, and exploitation activities. The Minister can adjust the Contractor Profit Sharing according to the economics of the projects. States revenues in the form of government entitlement, bonuses, and taxes, while the contractor share is after taxes. Contractor is required to prepare Work Program and Budget (WP&B), prioritize local manpower, and should follow of work safety and environment standard practices. SKK Migas is a government body that regulates and supervises the activity of upstream oil and gas business. Contractors may propose changes to the fiscal scheme, whether from Gross Split to Cost Recovery or vice versa, in accordance with applicable regulations. This regulation replaces the Minister of Energy and Mineral Resources Regulation No. 8 of 2017 and became effective on August 6, 2024.

Fig. 1. Indonesia’s oil production vs. consumption. Source: Ministry of Energy and Mineral Resources.

Indonesia PSC Scheme

The Production Sharing Contract (PSC) model has been the predominant fiscal framework employed in Indonesia’s oil and gas upstream sectors. Indonesia is the pioneer of the Production Sharing Contract (PSC) system in the oil and gas sector, with initial contract establish in the early 1960’s. All oil and gas resources within Indonesia’s designated mining territory are regarded as national assets governed by the states, represented by SKK Migas. The PSC operator shall possess technical competencies, financial capabilities, experience and professional skill requisite for conducting petroleum operations. The PSC delineates the revenue-sharing arrangement between the Government and the PSC contractor. Operating expenses are reimbursed from oil and gas production formulae as stipulated in the PSC clause, and the contractor is entitled to extract and independently manage its oil and gas entitlement. The PSC Cost Recovery model has dominated the fiscal model in the upstream oil and gas industry over the past few decades. Costs occur during the exploration and production phase will be reimbursed by the government in the form of oil revenue sharing when the field starts to production. Although the cost recovery approach guarantees the contractor bears financial risk, the field production should be successful, then the expense will be covered. Cost recovery than limited by expenditure from project approved by the Plan of Development (POD) process inside the designated “ring-fenced” zone to control expenditure. Contractor also has to follow their responsibilities including paying bonuses, Domestic Market Obligation (DMO), and proposed Work Plans (WP&B) to SKK Migas for approval. All assets owned by Contractor are state assets. Cost Recovery PSC also covers the First Trench Petroleum (FTP) system, whereby the government allocates a set percentage–usually 20%-prior to cost recovery. To guarantee resource optimization, contractors have obligations to make relinquishment program to avoid dormant concession areas within the contract requirements.

In early 2017, Ministry of Energy and Mineral Resources introduce the new PSC scheme known as “Gross Production Split” without a cost recovery mechanism under regulation No. 08/2017. As mention in Fig. 2 Indonesian PSC Term below, Unlike cost recovery, gross split means that contractors get a pre-determined percentage of gross revenue without submitting cost for approval, therefore removing expense reimbursement.

Fig. 2. Indonesian PSC terms.

Economic Variables

Net Present Value (NPV)

Net Present Value (NPV) is the prevalent metric by major corporations to assess investment projects. NPV is a capital budgeting method that assesses an investment’s worth by estimating the present value of its cash inflows and outflows (Gitman & Zutter, 2015b). The formula for NPV is as follows:

(1) $$\begin{array}{r}NPV={\sum }_{t=0}^n\frac{C{F}_t}{(1+r{)}^t}\end{array}$$

where

CF_t – net cash inflow in any period t

i – discount rate

t – time period; 0 to n

Internal Rate of Return (IRR)

Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0 (when the present value of cash inflows equal to initial investment); it is the rate of return that the firm will earn if it invests in the project and receives the projected cash inflows (Gitman & Zutter, 2015b). The IRR formula is as follows:

(2) $$\begin{array}{r}0={\sum }_{t=0}^n\frac{C{F}_t}{(1+IRR{)}^t}\end{array}$$

where

CF_t – net cash inflow in any period t

i – discount rate

t – time period; 0 to n

IRR is commonly used as the decision criteria of a project.

Profitability Index (PI)

Profitability Index (PI) is the financial metric that is used to evaluate the profitability of investment. It is calculated by dividing future value of cash flows to Initial investment. The PI formula is as follows:

$$\begin{array}{r}PI=\frac{FuturevalueofCashflows}{InitialInvestment}\end{array}$$

(3) $$\begin{array}{r}PI=\frac{NPV+I_o}{I_0}\end{array}$$

where

NPV – net present value

I_o – initial investment

PI > 1 – the project is profitable

PI<1 – the project is not profitable

Methodology

To carry out this study, the steps are: (1) Gathering technical data (production profile forecast, CAPEX, and OPEX) for proposed scenarios; (2) Evaluate economic indicators of current fiscal scheme; (3) Estimate basic assumptions to run economic calculation; (4) Calculating capital budgeting based on PSC scheme for both Gross Split and Cost Recovery looking forward (LF 2024); (5) Conduct sensitivity analysis to determine how different values of independent variables impacting the economic value of the project utilize Tornado Chart and Montecarlo simulation; (6) Decision-making analysis using SMART to evaluate both fiscal option based on prior economic indicator.

Primary and secondary data were employed in this study. The hydrocarbon resources are predicted by simulating estimated production profile data using available geologic and geophysical data, as per reservoir engineering practices. References to the most recent Front End Engineering Design (FEED) and market study are made with respect to the cost of production facilities and engineering design.

Research Design

Research design in Fig. 3 was made to fit the purpose of this research to assess the economic feasibility of the current fiscal scheme of offshore mature oil and gas production field. This framework provides structure and direction for this research to answer the research questions.

Fig. 3. Research design.

The author of this study utilized a qualitative research method. This involved purposeful sampling to select participant or data sources, collecting open ended data such as text or images, and then thoroughly analyzing this information. The findings were presented using figures and tables, and the author provided a personal interpretation of the result (Creswell and Creswell., 2017a).

The first step is to define business issues, the issue that Java Offshore PSC faces to operate mature fields under the existing Gross Split PSC scheme. Then the next step is to determine situation analysis, this step is to identify stakeholders’ involvement and their role in the finding and specifying of the complex issues. Internal and External analysis is conducted to understand the current situation in the organization, both from the inside and from the environment it operates in.

Data gathering includes literature review, technical data from internal firms and industry reports, and primary data from the expert interview. Prior to perform Analysis model approach, general/economic assumptions should be made. Then financial analysis is performed under Gross Split and Cost Recovery model that currently implemented in upstream oil and gas industry. Financial metric indicators such as NPV, IRR and PI then used to identify which scenario gives the best economic advantage for contractors. Sensitivity analysis conducts to identify which parameter gives the most significant impact to the financial analysis output. Decision-making analysis tool, SMART then utilizes to evaluate both scenarios and gives comprehensive analysis to decision makers.

Case Study Description

Current conditions under Gross split fiscal scheme show that economic limit for Java Offshore PSC occurs in 2025. From Fig. 4, Cashflow analysis indicates that negative cashflow starts from 2025 until 2031 with significant values.

Fig. 4. Current contractor cashflow analysis of GS (LF 2017).

To ensure continuity of this block and avoid early operation termination due to economic limit, two scenarios were proposed, (1) Gross Split fiscal scheme looking forward 2024; and (2) Cost Recovery fiscal scheme looking forward 2024. Both scenarios were performed to support production and development sustainability of Java Offshore PSC to give the most economic return for both contractors and government.

Results and Discussion

External and internal environment was performed in this study to identify opportunities and threats that may impact the company’s action and responses. External environment analysis is utilized by PESTLE analysis and Porter’s Five Forces (Porter, 2008c). Internal analysis was performed to develop resources, capabilities and competencies that create strategic alignment within the framework of the firm’s environment (Rothaermel, 2020). Internal environment analysis including resource and capabilities, Resource-Based View and VRIO framework. Strategy formulation can be created by utilizing internal and external analysis, in strategic management, strategy formulation is the process of defining the direction and development plan of an organization to achieve its goal and objectives (Irelandet al., 2011b).

SWOT analysis was performed, SWOT strategic matrix then created based on SWOT analysis (Thompsonet al., 2009). Several strategic directions for Java Offshore PSC highlight from the TOWS analysis. Java Offshore PSC could leverage its experience with Production Sharing Contract (PSC) and strong government support, the company can promote fiscal improvements to attract new investments. Java Offshore comprehensive strategy, utilizing the Diamond Strategy Framework, focuses on competing in mature offshore oil and gas fields (Arena) through partnerships and government collaboration (Vehicle), leveraging its expertise and government support as key differentiators, implementing a phased transition from short-term fiscal changes to longterm diversification (Staging), while ensuring economic success through efficient cost recovery (Economic Logic) and stable cashflow (Hambrick & Fredrickson, 2005b).

Priors performing financial evaluation, general or economic assumption should be set first. The assumptions for initial fiscal scheme (Gross Split Looking Forward 2017) used actual data from 2017 to 2023 (Pertamina Hulu Energi, 2023), and for proposed scenarios: Gross Split and Cost recovery Looking Forward 2024. The assumption are as follows:

• Contractor Split for Gross Split: 72% for Oil and 79.5% for gas

• Contractor Split for Cost Recovery: 20% for Oil and 30% for gas

• Depreciation: Declining Balance (25%, five years)

• Discount rate: 10%

• Corporate income tax: 25% for Gross Split and 22% for Cost Recovery

• Sunk Cost: no sunk cost

• Basic gas price: US$ 7/MMBTU beyond 2024

• Oil Price assumption: US$ 65/bbl beyond 2024

• Base year: 2024

• Economic limit: PSC life (2036)

As discussed earlier, a good monetization strategy consists of a cost-efficient project scenario that can give optimum return for the contractor.

Gross Split Model (LF 2024)

This scenario represents field development under Gross Split model with a looking forward (LF 2024) approach. This means that economic calculations start from 2024 until 2036 (PSC end of life).

Oil and Gas production forecast in Fig. 5 above is based on Baseline and Future project development scenario assumption.

Fig. 5. Oil (above) and Gas (below) production forecast.

Another assumption is the CAPEX and OPEX forecast. Java Offshore PSC commits to maintain existing production through well service activities, reliability and integrity of production facility program. Pipeline Replacement Program, compressor upgrades and upgrades on existing production platform are the examples of the program.

Java Offshore PSC plans to drill a total of 167 new wells, including the development of new fields. Fig. 6. illustrates CAPEX forecast for Java Offshore PSC field development. This development plan is expected to increase the economic viability of Java Offshore working area, increase reserves and resources, in support of national energy security. Total CAPEX for this development estimates around US$ 3.1 billion.

Fig. 6. CAPEX spending-GS (LF 2024).

Total OPEX in this scenario, which uses in GS or Cost Recovery (LF 2024) approach based on production forecast on the development of baseline fields plus future project until 2036 amount to US$ 5.5 billion (as illustrated in Fig. 7). The largest cost component comes from production cost, which is around US$ 4.9 billion, followed by Abandonment and Site Restoration (ASR) cost of US$ 1.5 billion.

Fig. 7. OPEX spending-GS (LF 2024).

It is estimated the executing the project-including baseline and future project in the Java Offshore PSC, with a target of producing cumulative 197 MMBOE oil, will require a total CAPEX and OPEX of US$ 8.6 billion.

As shown in Fig. 8. Contractor cashflow remains negative until 2030 and it begins improving and turn positive in 2031. The contractor finds it challenging to sustain operations based on the cash flow forecast diagram.

Fig. 8. Contractor cashflow-GS model (LF 2024).

Cost Recovery Model (LF 2024)

This scenario represents a development scenario utilizing the Cost Recovery model. The production profile and field development plan, including the implementation of baseline and future project schedules, follow the same as those used in the Gross Split Looking Forward (LF 2024) model above. The values for CAPEX, OPEX, and Gross Revenue are also the same as those used in the Gross Split scenario.

In the Cost Recovery scenario with a Looking Forward (LF 2024) approach, it is estimated that executing the project—including baseline and future projects in the Java Offshore Block, with a target of producing 197 MMBOE of oil—will require a CAPEX of US$ 3.13 billion and an OPEX of US$ 5.5 billion.

In Fig. 9, the cashflow shows improvement compared to the cashflow profile under the Gross Split scheme. The improvement begins in 2029, where the cash flow turns positive. Economic evaluation results in a Net Present Value (NPV) of US$ 295 million, an Internal Rate of Return (IRR) of 17.3%, and a Profitability Index (PI) of 1.38.

Fig. 9. Contractor cashflow-cost recovery (LF 2024).

Table I shows the summary of economic calculation of the two scenarios. Based on economic evaluation it could be seen that Gross Split (LF 2024) scenario results in a Net Present Value (NPV) of US$ -359 million, a profitability Index (PI) of 0.83, and an Internal Rate of Return (IRR) of N/A.

Table I. Summary of Economic Evaluation

Parameter	Unit	GS scheme	Cost rec scheme
Production	MMBOE	197	197
Oil + Condensate	MMBO	155.37	155.37
Gas	BCF	333.9	333.9
Investment
Capex	MILLION US$	3,134	3,134
Opex	MILLION US$	5,055	5,505
Gross revenue	MILLION US$	12,104	12,104
Contractor
NPV@10%	MILLION US$	−359	295
IRR	%	N/A	17.3
PI		0.83	1.38
% Contractor take	%	0.2	5.6
Contractor take	MILLION US$	25	680
Government of Indonesia
% GOI TAKE	%	27.7	23.6
GOI TAKE	MILLION US$	3,662	2,852

Summary of Economic evaluation as shown in Table I suggests that Cost Recovery gives better financial metric of NPV, IRR and PI higher than Gross Split model.

As discussed earlier, a good monetization strategy consists of a cost-efficient project scenario that can give an optimum return for the operator. Two economic parameters that could be used to define the profitability of a project in capital budgeting method are NPV and IRR. In this study, a unique capital budgeting method are used based on Indonesia PSC terms.

For project ranking, commonly IRR is used as one of the important parameters for decision making. The highest the IRR number, the more profitable the project is. From those two scenarios being evaluated, the Cost Recovery scenario gives the highest IRR number, 17.3%. This number also passes the minimum hurdle rate of company to proceed with the development project.

Sensitivity Analysis

Sensitivity analysis is used to illustrate the level of confidence associated with the conclusion of an economic evaluation. This process is carried out by applying key assumptions within the evaluation and observing their impact on the results. In model-based economic evaluation, this includes exploring a range of values for several input parameters, as well as structural assumptions regarding how those parameters are combined within the model. The sensitivity analysis conducted in this study covers several key economic parameters that are typically volatile or have tendency to deviate from forecast, including:

1. Oil price,

2. Gas price,

3. Capital Expenditure (CAPEX),

4. Operating Expenditure (OPEX), and

5. Oil and gas lifting volumes.

The result and summary of the sensitivity analysis can be seen in Figs. 10 and 11. Each parameter was tested for sensitivity by applying ±10% variation from the baseline values.

Fig. 10. Tornado chart for GS scheme.

Fig. 11. Tornado chart for cost rec scheme.

Based on sensitivity analysis, parameters that have the most significant impact are lifting oil and gas both for Gross Split and Cost Rec scenario. 10% decrease in oil lifting and gas number could impact on NPV by decreasing from US$ - 359 million to US$ -838 million for GS case (133% absolute deviation on NPV). And for Cost Recovery scenario, 10% decrease in oil lifting and gas number could impact on NPV by decreasing from US$ 295 million to US$ 149 million (49.4% absolute deviation on NPV).

Gross split model result the parameter ranked from most to least impact on NPV is: (1) Oil and gas lifting; (2) Indonesian Crude Price/ICP;(3) OPEX;(4) CAPEX, and (5) Gas price. Meanwhile, for the Cost Recovery scheme, the most to least impact parameter on NPV is: (1) Oil and gas lifting;(2) CAPEX;(3) ICP;(4) OPEX, and (5) Gas price. Tornado chart shows that Gross Split is more sensitive than Cost Recovery for all parameters tested.

The next step in conducting the economic analysis is to apply a Monte Carlo simulation to the parameters that were tested in the sensitivity analysis. Monte Carlo simulation is a statistical method used to analyze uncertainty in calculations or modeling by performing repeated simulations using random numbers. This technique operates on the principle that by running thousands to millions of trials based on different input probabilities, we can obtain a more comprehensive view of the distribution of possible outcomes. In this test, for both the Gross Split and Cost Recovery schemes, the five parameters used in the previous sensitivity analysis serve as inputs for the Monte Carlo simulation. Random numbers are applied by assigning a testing range of minus 10% to plus 10% from the baseline values of each parameter.

Using a Visual Basic program in Microsoft Excel, the Monte Carlo simulation was performed with a total of 30,000 trials using randomly assigned values.

In Figs. 12 and 13, after conducting a probabilistic analysis using Monte Carlo simulation on the five parameters—based on the sensitivity analysis results and applying a random range of −10% to +10% from each parameter’s baseline value—the probability of NPV > 0 for the Gross Split scheme is 12.15%, as shown by the cumulative distribution curve.

Fig. 12. Normal distribution of gross split model.

Fig. 13. Cumulative distribution of gross split model.

In Figs. 14 and 15, after conducting a probabilistic analysis using Monte Carlo simulation on the cumulative normal distribution analysis on the five parameters, it is shown that the probability of NPV > 0, assuming fluctuations in the five parameters tested in the sensitivity analysis within a ±10% range, is 98% for Cost Recovery. This means that if there is a 10% fluctuation in the five input parameters over the period from 2024 to 2036 (end of the PSC contract), the likelihood of achieving a positive NPV is 98%.

Fig. 14. Normal distribution of cost recovery model.

Fig. 15. Cumulative distribution of cost recovery model.

Decision Making Analysis (SMART)

The SMART (Simple Multi-Attribute Rating Technique) method is used to develop a Decision Analysis (DA) to evaluate two fiscal options: Gross Split (GS) vs. Cost Recovery (CR). SMART is a decision-making method based on quantitatively assessed attributes, each multiplied by the preference weights of the decision-maker.

There are six steps in the SMART method: (1). Identify the decision-maker–in this case, Government Regulator Body, (2) Identify the alternative courses of action–in this case, Gross Split and Cost Recovery, (3) Identify the relevant attributes related to the decision problem–in this case: NPV, PI (Profitability Index), IRR, cash flow pattern, probability of NPV > 0, and sensitivity to ICP (Indonesian Crude Price), (4) Assign scores to evaluate the performance of each alternative based on the selected attributes. In this case, scores range from 1 (worst) to 5 (best), (5) As shown in the Table II the weight of each attribute, reflecting the level of importance to the decision-maker, and then calculate the utility value (SMART score), (6) Aggregate the weighted values to produce a final score for each alternative.

Table II. Weight and Criteria of SMART for Fiscal Term Option

Criteria	Description	Weighted (%)
C1: NPV	Net present value	35
C2: PI (Profitability index)	Return ratio to investment	20
C3: IRR	Internal rate if return	15
C4: Cashflow pattern	Sustainability of positive cashflow	10
C5: Probability of NPV > 0	Probability positive value of NPV based on Montecarlo simulation	15
C6: sensitivity to ICP	Resilience to Oil price fluctuation	5

Scores are assigned from 1 (worst) to 5 (best) based on data collected through interviews with external respondents (Government Body & Joint Ventures Partners), internal respondents (key personnel from Java Offshore PSC involved in the fiscal term change proposal), and the results of economic simulation as summarize in the Table III.

Table III. Weight and Criteria of SMART for Fiscal Term Option

Alternative	C1:NPV	C2:PI	C3:IRR	C4:Cashflowpattern	C5:prob.NPV > 0	C6:Sensitivityto ICP
Gross Split (GS)	1	1	1	2	1	3
Cost Rec (CR)	5	5	5	4	5	4

SMART score calculation using this formula:

$$\begin{array}{r}TotalScore=\sum (weight\times AlternativeScoreperCriteria)\end{array}$$

SMART Score calculation for the alternatives:

1. Gross Split (LF 2024)

2. Cost Recovery (LF 2024)

It is evident that the Cost Recovery scheme achieves a significantly higher score compared to the Gross Split (LF 2024). Cost Recovery outperforms Gross Split in nearly all criteria as shown in the Table IV, reinforcing the conclusion that the Cost Recovery scheme is more feasible for the sustainability of Java Offshore Enterprise’s operations.

Table IV. SMART Score Summary for Gross Split and Cost Recovery Model

Alternative	C1:NPV	C2:PI	C3:IRR	C4:Cashflowpattern	C5:prob.NPV > 0	C6:Sensitivityto ICP
Gross Split (GS)	1	1	1	2	1	3
Weight	35%	20%	15%	10%	15%	5%
Score	0.35	0.2	0.15	0.2	0.15	0.15
Total score for GS						1.2
Cost Rec (CR)	5	5	5	4	5	4
Weight	35%	20%	15%	10%	15%	5%
Score	1.75	1	0.75	0.4	0.75	0.2
Total score for Cost Rec						4.85

Limitation

The scope of this research is restricted to the review of the business analysis, which includes an internal and external factor analysis of the fiscal term change proposal in the Java Offshore Enterprise. Specifically, the economic evaluation of sensitivity analysis and uncertainty analysis, as well as the evaluation of both fiscal terms (Gross Split & Cost Recovery) for each scenario, are intended to optimize the development of Java Offshore until the end of the working area contract with the government. This investigation utilizes modified data that is owned by Java Offshore PSC. If the necessary data is unavailable, an assumption is made based on scientific judgment and literature.

Conclusion and Recommendation

This study aims to evaluate the economic viability of the Java Offshore PSC, which encounters substantial difficulties in maintaining its contribution to state revenue, mainly due to declining oil and gas production from mature fields within the existing fiscal term framework (Gross Split). The Government's policy measures encompass fiscal adjustments and incentives designed to enhance exploration activities and optimize production from established resources. Java Offshore block has been operating and start production since 1971. Considering its historical contributions, Java Offshore PSC faces numerous challenges, including declining production rates, increasing operating expenses, and concerns over infrastructure integrity. Under the current fiscal terms, it is challenging for Java Offshore PSC to maintain operations in this oil field block, which jeopardizes the viability of the field until the end of the Production Sharing Contract (PSC) lifecycle.

To evaluate the operational continuation of this block, techno-economic research with a strategic perspective, encompassing both external and internal environment analyses, was conducted. Analysis of the external environment was conducted utilizing the general environment and industry competitiveness. According to the report, legal and political factors are deemed to have a negative impact on Indonesia's upstream industry. The protracted bureaucracy, mismanaged administration, and complex regulations making the upstream industry unattractive for investment. The absence of new investment is partially responsible for the significant fall in Indonesia's oil and gas production, given that most of the the country's oil and gas fields are mature.

The existing Gross split scheme shows the economic limit of the block in late 2024, then Cost Recovery and Gross Split Scheme (Looking Forward 2024) scenario was performed to assess technical feasibility and economic valuation of the project. This evaluation is critical for Java Offshore PSC to make decision whether continue develop baseline and future project or stop the field development and the consequences is production will decline sharply and potentially JVE couldn’t fulfill its commitment to Government of Indonesia until end of PSC contract. Gross Split scheme (LF 2024) evaluation base on scenario to develop baseline and future project resulting in NPV of -359 million, a profitability index (PI) of 0.83 and the Internal Rate of Return (IRR) of NA. Contrary to this, Cost Recovery scheme (LF 2024) evaluation with the same scenario of field development (baseline plus future project) resulting in NPV of US$ 295 million, a profitability index (PI) of 1.38 and the Internal Rate of Return (IRR) of 17.3%. This economic evaluation indicates that Java Offshore PSC business under Cost Recovery (CR) scheme is profitable and feasible to proceed.

Higher economic value could be achieved if Java Offshore PSC can convince Government to accept the fiscal term change proposal from Gross Split to Cost Recovery. The do-nothing scenario is not feasible to execute due to economic cut-off could happen in end of 2024, thus initial Government Income (GoI) of US$ 6.09 billion is unrealistic. The GS and Cost Rec scenarios (LF 2024) yield GoI figures of US$ 3.89 billion and US$ 2.85 billion, respectively. It is reflected that GoI of Gross Split is higher than GoI of Cost Rec. However, the economic limit of the GS (LF 2024) scenario is identical to that of the original GS (LF 2017) occurring in 2024. From the Contractor perspectives, Cost Recovery (LF 2024) is the best option to maintain operation of this block until the end of the PSC contract, nevertheless government is interested in ensuring a steady share for itself. Despite the decline of Government take to US$ 2.85 billion, this is the best choice for both contractors and government. Economic evaluation summary shows if the Java Offshore block operates until economic cut-off (2024) will result in the Government Take is only US$ 235 million and oil lifting 10 million barrels and 17 BCF for gas compared to Cost Recovery (LF 2024) that result US$ 2.85 billion of Government Income and 155-million-barrel cumulative production for oil, 239 BCF cumulative production for gas. The continue operation of this block is very important, many industries in java region needs gas supply from Java offshore to support its operation. Multiplier effect of economic not only impose by national economic growth but also to regional economic growth.

Based on findings and evaluations of the scenario given, several recommendations that could be drawn from this study of Java Offshore PSC and future similar mature field development project are:

• Adopt cost recovery fiscal scheme for java offshore enterprise: It is clearly seen that decision-making utilizing SMART tool indicate Gross Split (GS) scheme is no longer financially suitable for mature oil field development like those Java Offshore PSC operated, especially that cashflows give the negative value start from 2025. Transition to Cost Recovery (Cost Rec) offers robust fiscal structure for future field development project by enabling cost recovery or cost reimbursement, access to gross revenue split, improving contractor returns and boosting project feasibility. The primary objectives for the government are to secure a consistent revenue stream from this project and to stimulate regional and national economic growth through job creation and support for essential industries such as PT Pupuk Kujang (Fertilizer Plant) and PT PLN (national electricity company).

• Strengthening stakeholder alignment: The success of fiscal term change proposal relies not only on regulatory approval but also on strong alignment among internal (JVE as subsidiary company and PT Pertamina as Holding Company), and external stakeholder (such as SKK Migas, Ministry of Energy and Mineral Resources, Local government, suppliers and buyers like PT Pupuk Kujang). A structured stakeholder engagement plan, highlighting mutual benefits among stakeholders like energy security, economic development, and local society life improvement, should be formalized and implemented.

• Engage regulator intensively for fiscal adjustment approval: Java Offshore PSC should monitor, communicate and actively engage with the Government regulatory body and The Ministry of Energy and Mineral Resources to present technical and economic justification and analysis of the proposed change. Collaboration and transparent dialogue will help align expectations and accelerate the approval process regarding the PSC terms.

• Use this case of study as lesson learned for other mature field: The methodology used in this research, like economic modeling analysis, strategic formulation analysis, sensitivity, probabilistic approach, and decision-making analysis using SMART, could be replicated to other State Own Enterprise subsidiaries in the upstream operator that operates and manages mature assets. PHE Subholding Upstream is advised to document this approach as a best-practice model for prospective implementation in other blocks experiencing analogous economic challenges.

• Monitor and adjust dynamic external conditions: Due to the volatility of oil prices, the evolving global investment landscape, and the transition to renewable energy, Java Offshore PSC must consistently assess the external environment and revise its development plan. Scenario planning and regular re-evaluation of economic assumptions will guarantee adaptability and sustained strategic alignment.

Conflict of Interest

The authors declare that they do not have any conflict of interest.