Decision Analysis on Selecting the Best PSC Scheme between Cost Recovery vs. Gross Split for Block Extension, Case Study: Panca Block

This research study about the evolution of contract scheme type in Indonesia’s oil and gas industry started in the early 19th century using concession contract agreement change to contract of work and the current well-known existing production sharing contract with cost recovery scheme model. In 2017, the government introduced a new scheme of gross split as an alternative for expired blocks, block extensions, and new block offerings to the contractors. There are various pros and cons of feedback from stakeholders on the new scheme; in order to accommodate the responses, revisions to the regulation were done several times to ensure its attractiveness compared to the existing cost recovery. Since then, when selecting the best-production-sharing contract between the two scheme models based on a comparison of the economic value of the block, there have not been many explanations for the principle of both scheme models’ works. Researchers assess the decision analysis to select the best scheme model using the system thinking model of causal loop diagram through the methodology of qualitative analysis of interviews with the stakeholders to understand the current condition of both scheme models, determine the critical variables that influence decision-making and explore relationships and the value of the critical variables through the feedback loops analysis. Comparison analysis was carried out to decide the best scheme model through the four areas of interest within a block: producing fields, new field development, discovery area, and prospects and leads. The case study of the Panca block evaluates and shows the gross split as the best option for the existing producing fields while cost recovery for the other three areas of interest.

Introduction

Indonesia’s oil and gas industry started to be exploited in the late 18^th century, with Dutch businessmen noticing oil seepages in Sumatera, Java, and Kalimantan. The first exploration well was drilled in 1871 in West Java under a concession contract agreement (Fig. 1). However, the first discovery took place in North Sumatera, followed by other oil discoveries in Java and Kalimantan islands. In 1921, major oil discoveries were founded in Sumatera by STANVAC from the Talang Akar formation; afterward, Indonesia was well known as a country with high oil production. after gaining independence in 1945, Indonesia took over all the private and public companies under the colonialism regime, and the government took over and nationalized the oil and gas industry. In 1960^th the concession contract agreement was replaced by the contract of work agreement, such as a royalty scheme to allow the investor to exploit the hydrocarbon resources. In 1966^th, the contract of work was replaced by a production sharing contract (PSC) cost recovery agreement scheme because the previous contract model gave unfavorable revenue to the country (Rinto Pudyantoro, 2021). The principle of PSC cost recovery is all costs of exploration and exploitation of oil and gas will be reimbursed to the government once the discovery area is commercial to produce. Since then, the PSC cost recovery has been modified several times, which aimed to balance benefits between the government and the contractor. During the production life cycle of the block, the production rate declined, followed by a decline in revenues, while rising production costs increased the payment of reimbursement costs to the contractor and decreased the government’s income. In 2017, to avoid a reduction of government income, a new PSC scheme model of Gross Split was introduced as an alternative scheme model to the cost recovery model. The scheme of the gross split model is a gross revenue share split between the government and the contractor. While all the costs should be absorbed by the contractor, there is no mechanism for reimbursement costs. This new scheme received various pros and cons feedback from stakeholders, leading to some major international companies pulling out from Indonesia due to concerns about profitability and economic viability under the new terms. In order to accommodate various responses, the regulation related to PSC gross split has been updated a few times to ensure gross split is attractive compared to cost recovery.

Fig. 1. Indonesia oil and gas journey.

The announcement of the latest Ministerial Regulation of the Minister of Energy and Mineral Resources No. 12 2020, the third revision on the previous second revision of MRoEMR No. 20 2019, has given the flexibility to the contractor to select the best scheme model between existing Cost Recovery or Gross Split or different cooperative contract scheme model. based on the latest regulation the, selection on choosing the best PSC scheme model between Cost recovery and Gross Split evaluate based on the economic value of the block. There are not many explanations on the principle of both scheme model works such as the reason for the implementation of the new scheme model, the advantages and disadvantages of the existing model, factors determination to make Gross Split attractive and less attractive compared to cost recovery, and the relationship between factors involved that influences the decision, also its effects to the investment climate in oil and gas industry which will determine the revenue for the government and the contractor.

Decision analysis on selecting the best PSC scheme model between Cost Recovery vs. PSC Gross evaluation using a system thinking model through developing a rich picture diagram to understand the current condition of both scheme models, followed by interrelationship diagram generation to identify the critical variable influences on decision making and evaluate causal loop diagram model to analyze the scale influences of the variable through the feedback loops model to understand the value of the critical variable. Comparison analysis was carried out to select the best PSC scheme model. Panca block operated by SAKE will be the case study for comparative analysis between the Cost Recovery and Gross Split scheme model since the block already got an extension with the Gross Split scheme model. However, the portion of unexplored areas (Prospects & Leads) contributes about 44% of total resources and reserves volume, and there is an opportunity to revise the scheme model through the latest MRoEMR. The block is yet to expire, but the end period of the contract is in 2026; it is the best opportunity to re-evaluate the decision to select PSC Gross Split compared to the Cost Recovery scheme model since the block is currently potentially producing beyond the existing contract period and have abundant unexplored areas that potential contain hydrocarbons.

Literature Review

System Thinking

What is a system? A system is a network of multiple variables that are connected to each other through causal relationships and express some sort of behavior, which can only be characterized through observation as a whole (Rosnay, 1979; Dörner, 1996; Sterman, 2000), a system is a group of interacting, interrelated or interdependent components that form and function as a complex and unified whole. The components that build the system could be as physical (tangible) objects that we can touch, such as the various parts that make up a car, and/or components as intangible objects which are physical we cannot touch, but the effect can be noticed, such as processes; relationships; company policies; information flows; interpersonal interactions; and internal states of mind such as feelings, values, and beliefs (Anderson & Johnson, 1997).

The system thinking tools are used to understand the complex system in the selection of the best PSC scheme model because the human mind is incapable of truly understanding the behavior of complex social systems without the assistance of tools and technology (Forrester, 1971). There are several system thinking tools that could help to understand the relationship of each part/variable of the complex system in order to get a comprehensive structure system model, which will be advantageous in recognizing the source of the problem that impacts the whole system. In this research, the researcher used tools such as a rich picture diagram to map the components and factors related to the title of the thesis, knowing the boundary of its complex problem, and continuing by building the interrelationship diagram to understand the relationship and interaction of each component/ variable inside the system. The final outcome will be creating the structure system via a casual loop diagram to model complex issues that could describe cause and effect relationships. The casual loop diagram will help to identify the near true model solution for complex problems, to get the good decision analysis and risk factors that influence the decision making.

PSC Cost Recovery

PSC cost recovery started to initiate in the 1960s due to the previous scheme model of concession and contract of work not bringing enough revenue to the country, while the government didn’t have control over the system to allow intervention due to misjudged activities done by contractors. The PSC scheme model is based on a sharing agreement between the landlord and the worker, a concept created by the condition that the owner has abundant resources to be developed but has limited capital, the technology, and man resources to exploit it. The system was created in hopes of giving additional value and benefit to the government but, on the other hand, will not put the contractor on the great paint of running the business due to the reduction of benefits. However, the biggest advantage of the scheme to the contractor is the cost recovery scheme; the fundamental principle of it is all costs incurred (capital expenses and operating expenses) during exploration and operation activity will be reimbursed to the government with the condition of success to discover the oil and gas reserves. The scheme has been reducing the risk from contractors of not getting back the investment. It gives indirect benefit to the contractor and improves the NPV and IRR model of the company.

The PSC has the concept that the revenue generated by oil and gas production should deducted from the total cost of exploration and production, and the remaining revenue will be the net profit. According to the sharing split for both the government and the contractor, the net profit will be split. On the chart PSC scheme (Fig. 2), there is Domestic Marketing Obligation (DMO), which is the scheme created by the government to allow oil and gas companies to sell a certain amount of their production sharing inside the country with minimum price, which depends on the agreement. The net profit post is deducted by the DMO, and the added DMO fee will be subjected to tax and put on the contractor’s take (Fig. 2). On the other side, the government portion will get the first tranche of petroleum (FTP), DMO, and tax. After more than 50 years of existence, PSC cost recovery has evolved from the 1^st generation in 1966 to the 6^th generation in 2008 (Daniel, 2018).

Fig. 2. PSC scheme; cost recovery and gross split (Rulandriet al., 2018).

PSC Gross Split

PSC Gross Split was initially introduced by the government in 2017 through Ministerial Regulation of Minister of Energy and Mineral Resources (MRoEMR) No. 8 2017 as an alternative to the PSC scheme model besides cost recovery with the purpose of improving efficacy and effectiveness of production sharing in oil and gas without any cost recovery mechanism. Another objective is to encourage the contractors to carry out exploration and exploitation activities effectively and efficiently, eliminate government bureaucracy, and reduce the burden on the government of Indonesia’s budget, as there will be no more cost recovery (Daniel, 2018). The new scheme has been updated three times to ensure gross split is attractive compared to cost recovery, such as 1^st Revision with MRoEMR No. 52 2017, continuing with 2^nd Revision with MRoEMR No. 20 2019, and the latest regulation with MRoEMR No. 12 2020.

The split sharing is derived from gross sharing split revenue and share based on the split agreement between contractor and government while all costs related to the activities are absorbed by the contractor. Gross split consists of three components, which are base split, variable split, and progressive split (Wicaksono, 2021).

Base Split

Base split is the initial split given by the government to the contractor, which has a fixed split percentage. For oil, the contractor will get a base split of 43%, and for gas, the contractor will get a base split of 48%.

Variable Split

Variable split derived based on several components such as the fluid status, field location, depth of reservoir, infrastructure availability, reservoir characteristic, impurities contents such as CO₂ and H₂S, Oil gravity, local contents, and production stages (primary/secondary/tertiary recovery). Each component has a different split percentage, which will influence the overall variable split percentage.

Progressive Split

Progressive split is characteristic of dynamic split, consisting of three components of progressive split such as oil price, gas price, and production volume recovered during the phase of production. There is a threshold number that could add or deduct the progressive split components; for example, if the oil price is below 85 $/bbl, there will be an additional split; if it is above, it will deduct the progressive split. It applies as well for the gas price; whenever the gas price agreement is below 7 $/mmbtu, it will help to add the split, and whenever the gas price agreement is above 10 $/mmbtu, it will deduct the progressive split. The last component of progressive split is production volume recovered during the phase of production; if the contractor recovers total hydrocarbon below 175 MMBOE, there will be an additional split, and if it is above 175 MMBOE, there will be no additional split.

Methodology

The research methodology considers the complexity of the situation encountered by the oil and gas contractor who owned the production-sharing contract in Indonesia and will face the situation of choosing whether to extend or release the block at the end of the contract time. The research aims to help the contractor re-evaluate the PSC scheme model by understanding what variable should be considered in the decision-making of selecting the best scheme between the cost recovery or gross split model for block extension to have fairness principles both between the contractor and the government of Indonesia.

The conceptual framework model for this research was developed to define the critical variables that will influence the decision-making on the best scheme model for block extension (Fig. 3). Here below is the framework workflow:

1. Define the problem.
2. Drawing the current condition.
3. Define the variable/parameters and its relationship.
4. Develop a Causal loop diagram to see the causes and effects.
5. Identify the polarity of variable relationships, feedback loops, and leverage points.

Fig. 3. Conceptual framework model.

The research design was delivered using qualitative research methods taken from two sources of data collection, primary and secondary data. The primary data is based on in-depth interviews and brainstorming discussions with stakeholders involved, and production data is clustered based on areas of interest of the company. The secondary data was taken from actual data information shared by the company, published papers, and websites shared information about PSC, and social media discussed the difference between PSC Cost Recovery and PSC Gross Split and as well taken data from the SAKE company financial report.

All the data collection will be analyzed to get the variable/components influences on the decision analysis and risk factor on selecting the best PSC model type for block extension using the system thinking model. The data analysis develops by clustering (coding) keywords, which have similar meanings based on the primary and secondary data recognized. Develop a rich picture diagram to understand the overall situation on PSC scheme model, continue with generating an interrelationship diagram based on a rich picture diagram to get the variable drivers and outcome, and continue by modeling a causal loop diagram to seek the polarity of each variable to map the current dynamic situation and gain the information of critical variable which will influence the decision analysis and evaluate the factor that could enlighten the best PSC model scheme for block extension (Fig. 4).

Fig. 4. Data analysis method.

Result and Discussion

Data Analysis Review

The researcher interviewed about 12 stakeholders involved who have experience in the oil and gas industry and understand the production-sharing contact model (Table I). Researchers clustered the stakeholders into three types there are from Government institutions, Oil & Gas professionals, and SAKE Companies.

Table I. Stakeholder Overview

Stakeholder	Position	Role	Years
Government institution	Head of division of drilling & exploitation	Analyze & evaluate oil and gas fluid to improve the performances of the fluid	20+
	Cooperation contract analyst	Evaluate and monetize expiring block for relinquishment or block extension	10+
	Coordinator contract evaluation	Evaluate and monetize expiring block for relinquishment or block extension	20+
	Sub coordinator contract evaluation	Evaluate and monetize expiring block for relinquishment or block extension	20+
	Development program	Analyze & evaluate oil and gas fluid to improve the performances of the fluid
Oil & gas professional	VP operation other oil co	Supervise and managing operation area	17+
	Procurement & commercial manager	Supervise and managing procurement process	24+
	Oil and gas practitioners	PSC analyst and advisor	35+
SAKE company	Sr. exploration & development advisor	Reviewing and evaluation of exploration area to be develop for development project	21+
	Commercial team	Economic supervisor for block extension	25+
		Economic Sr. analysis	15+
	Subsurface team	Develop fulfill development strategy for block extension	10
	Planning and strategic team	Full field economic analysis for block extension	25+

The results from the interview season collected about 336 keywords and filtered to 101 unique keywords after removing redundant keywords. The large number of unique keyword findings from the interview season will make the system thinking model and decision analysis trapped in complex situations and time-consuming to analyze. In order to simplify the analysis of the system thinking diagram, the researcher continues to filter up to 43 unique keywords (Table II) with a frequency above average frequency (3.33). However, not all variables are used to generate a system thinking diagram since not all of them are applicable and can influence other variables, but the variables could be the first guidelines process for the researcher to develop a system thinking diagram to simply draw rich pictures and generate interrelationship diagram (IRD) to obtain the variables that involved and influence the system thinking of PSC Cost Recovery and PSC Gross Split model. Once completed by IRD, the researcher develops a causal loop diagram (CLD) model as a basis for analysis to check which variables are critical and influence decision-making for extending the PSC contract, whether with the Cost Recovery model or Gross Split model.

Table II. Unique Keyword Filter for System Thinking

No	Unique keyword filter for system thinking	No	Unique keyword filter for system thinking
1	Risk level	23	Cost effective
2	Cost recovery	24	Government regulation changes
3	Exploration area	25	Progressive split
4	Split sharing	26	Government take
5	Administration process approval	27	Political stabilization
6	Contractor split	28	Production acceleration
7	Investment	29	Return on investment
8	Reserves	30	Discovery
9	Uncertainty level	31	Exploration activity
10	Gas price	32	Producing field
11	Oil price	33	PSC scheme option flexibility
12	Procurement process simplification	34	Complexity of split
13	Production cost	35	Economic analysis
14	Cost efficient	36	Incentive
15	Gross split	37	Local content
16	Production rate	38	New field development
17	Revenue	39	NPV
18	Tax	40	Operating cost
19	Variable split	41	Regulation synergy
20	Base split	42	Split revision flexibility
21	CAPEX	43	Sunk cost
22	Certainty level

Analysis

Rich picture diagram analysis (Fig. 5) takes the variable from unique keywords, showing the system linking many variables that are interrelated and influence each other. Initially, the system starts from the block offering by the government for a new block area or proposal for the contract extension of the existing block. The selection of the PSC Scheme model, whether cost recovery or gross split, is greatly influenced by any regulation changes carried out by the government, while on the contractor’s side, it will affect the contractor and investor’s decision on total investment or not to invest in the oil and gas industry in Indonesia because the dynamic changes on the regulation. Apart from this, along the existing block area, there are a lot of areas that have not been exploited due to the limitation of exploration data and the lack of investment in exploration areas. The unexplored area normally has high-risk factors that must be considered in determining the best type of PSC scheme model; exploration activity will be carried out to reduce the uncertainty and risk level, such as seismic data or drilling exploration wells. The success of exploration drilling in finding new reserves of oil or gas will determine the investor’s confidence level to invest their funds in block areas.

Fig. 5. Rich picture diagram on production sharing contract.

PSC Cost Recovery vs. Gross Split Selection

IRD and CLD have similar variables and influences in developing the flowchart diagram relationship generated from 43 unique keywords. However, not all unique keywords are used to develop the diagram; only variables related to the PSC Cost Recovery based on interview sessions are included, and some additional variables are required to be involved. There are about three variables not in the unique keyword but should be filled into the flow diagram: Government Split, State Budget (APBN), and DMO Fee Variable. The evaluation of about 30 variables that are interconnected and influence each other.

Many variables involved in system thinking of PSC Cost recovery show the complex system involved (Fig. 6). To reduce the complication in data analysis evaluation, researchers set the limit for each variable that has an important role in the evaluation and influence on decision-making analysis. Critical variable is evaluated based on the number of relationships of each variable influence another variable, whether they act as drivers (shown by going out arrows) and act as outcomes (shown by going in arrows) with a total combination of both is four and the requirement of three influences for driver or being influenced for outcomes filtered. Based on the above causal loop diagram, nine critical variables act as drivers and outcomes.

Fig. 6. Causal loop diagram psc cost recovery.

Based on the causal loop diagram model, there are about nine critical variable influences on decision making to select PSC Cost recovery as the best PSC scheme model for block extension (Table III).

Table III. Critical Variable of PSC Cost Recovery

No	Critical variables	Drivers	Outcome	Total
1	Investment	3	4	7
2	Exploration activity	3	3	6
3	Contractor take	3	3	6
4	New field development	2	3	5
5	Revenue	2	3	5
6	Government take	2	3	5
7	Risk level	3	1	4
8	Resources	3	1	4
9	Production cost	1	3	4

The implementation of the new PSC gross split as one type of PSC scheme model has received many variation statements and opinions from oil and gas industrial players, professionals, and among academics because of potentially affected the investment climate in the domestic oil and gas industry, which currently declining to the level become unfavorable, in which contrary to the government’s target of achieving 2030 oil production by one million bopd and gas production of 12 bscfd.

Researchers are encouraged to find the best solutions to remedy the problems that arise, try to describe the complexity that occurs in the PSC gross split model using system thinking model analysis and evaluate the relationship between variables on the new PSC scheme gross split.

Generating IRD and CLD for PSC gross split system thinking (Fig. 7) based on filtered unique keywords, the researcher found about 31 variables are interconnected and influence each other. Those 31 variables were taken not necessarily from 43 unique keywords but taken as well from 101 keywords overall. In addition, out of 31 variables to generate a flow diagram, there are three not in the unique keyword but should be filled in, which are Government Split, State Budget (APBN), and GOI (Government of Indonesia) Variable.

Fig. 7. Causal loop diagram PSC gross split.

A similar method, such as PSC Cost Recovery, identifies critical variable influences on decision-making, resulting in a total of 11 critical variables that could be considered in decision-making to select PSC gross split as the best option for contract extension (Table IV).

Table IV. Critical Variable of PSC Gross Split

No	Critical variables	Drivers	Outcome	Total
1	Investment	4	5	9
2	Exploration activity	4	2	6
3	Contractor split	2	4	6
4	New field development	2	4	6
5	Discovery	4	1	5
6	Gov. regulation changes	4	1	5
7	Risk level	3	2	5
8	Progressive split	1	4	5
9	Revenue	2	3	5
10	Production rate	2	3	5
11	Production cost	1	3	4

Based on the critical variable identification from the causal loops diagram for PSC Cost recovery and PSC Gross Split, there are a total of about 14 unique critical variables, whereas 6 out of 14 influences both PSC scheme models. PSC scheme variable matrix model guideline was generated to measure the qualitative analysis with low, best, and high modes into a quantitative approach to compare the influences of critical variables on the decision-making based on the area of interest within the concession block. There are four areas of interest: existing producing fields, discovery area, new field development area, and prospects and leads area.

Business Solution

To test the system thinking method using a causal loop diagram to identify the critical variable influence on decision analysis to select the best PSC scheme model, a case study of Panca Block owned by SAKE company has been evaluated. SAKE currently has Panca PSC; the block will expire in 2026. The block already has an extension with PSC Scheme model of Gross Split. According to the primary data collecting, there are about seven unexplored areas (prospects & leads) within the concession area with a potential of oil and gas resources of around 69.45 MMBO and 53.51 BCF of gas, contributing to 44.46% of the total resources and reserves (Table VI). The existing producing fields have proven reserves of 25.89 MMBO of oil and 116.69 BCF of gas from three proven producing fields (contributing about 25.72%). During the period of an existing contract, the company has done many exploration activities to increase its value; Panca PSC has successfully discovered new oil and gas reserves in four exploration areas that are currently under commercial evaluation (contributing about 28.02%). In addition, on a different area of interest, there are two new field developments that have received government approval for development, with the potential contribution of oil and gas reserves of about 1.8%, with the total resources and reserves of the Panca Block potential to produces beyond the end of the existing contract in May 2026, which is attractive enough to consider to extent the block. However, the high contribution of Prospects & Leads resources that consider high-risk unexplored areas, with the PSC Gross Split, there is the possibility that the high investment spent might not return due to failure to discover hydrocarbon with the announcement of the latest MRoEMR No. 12 2020, stated the contractor has an option to choose between using PSC Gross split or Cost Recovery or different Cooperative Contract Type (Article 2) for the extension block and there is no obligation for the expired block or for block extension to select PSC Gross Split as the scheme model. It is necessary to re-evaluation to select the best PSC scheme model for extension and propose to the government a different scheme model if the selected PSC Gross Split for block extension is found to be unfavorable for the contractor and investor.

A large portion of Prospect & Leads (44.46%) that have not been verified and proven to contain oil and gas are considered high-risk level areas of interest; the PSC Scheme that would be fit should have a model that could compensate the cost of activities related to proving the area contain hydrocarbon.

Nine critical variables to be considered for PSC Cost Recovery and eleven variables to be considered for PSC Gross Split to select the best PSC scheme model are quantified from qualitative analysis (low, best high). The researcher uses the conversion guideline of Table V for each critical variable based on the area of interest, as shown in Tables VII and VIII.

Table V. PSC Scheme Variables Matrix Model Guideline

No	Variable factor	Cost recovery	Gross split	Low	Medium	High
1	Investment	√	√	3	2	1
2	Exploration activity	√	√	3	2	1
3	Risk level	√	√	3	2	1
4	New field development	√	√	1	2	3
5	Revenue	√	√	1	2	3
6	Production cost	√	√	3	2	1
7	Contractor take	√	–	1	2	3
8	Government take	√	–	1	2	3
9	Resources	√	–	1	2	3
10	Gov. regulation changes	–	√	3	2	1
11	Discovery	–	√	1	2	3
12	Contractor split	–	√	1	2	3
13	Progressive split	–	√	1	2	3
14	Production rate	–	√	1	2	3

Table VI. Reserves & Resources Panca Block

Status	Potential area	Oil MMBO	Gas BCF	Oil Eq. MMBOE	%
Producing fields	3	5.89	116.69	45.34	25.72
New field development	2	3.05	0.8	3.18	1.8
Discovery area	4	28.05	128.01	49.38	28.02
Prospects & leads	7	69.45	53.51	78.37	44.46
Total	16	126.43	299.01	176.26	100

Table VII. PSC Cost Recovery Score Matrix Evaluation

Variable	Status
	Producing fields	New field development	Discovery area	Prospects & leads	Average (%)
Investment	2	2	1	1	50.00
Exploration activity	3	3	2	1	75.00
Contractor take	3	3	3	1	83.33
New field development	1	3	2	3	75.00
Revenue	3	3	3	3	100.00
Government take	3	2	2	1	66.67
Risk level	3	3	2	1	75.00
Resources	2	1	2	3	66.67
Production cost	2	1	3	3	75.00
Total score	22	21	20	17	74.07
Average (%)	81.48	77.78	74.07	62.96	74.07

Table VIII. PSC Gross Split Score Matrix Evaluation

Variable	Status
	Producing fields	New field development	Discovery area	Prospects & leads	Average %
Investment	3	1	1	1	50.00
Exploration activity	3	3	2	1	75.00
Contractor split	3	2	2	1	66.67
New field development	1	3	2	1	58.33
Discovery	3	2	2	1	66.67
Gov. regulation changes	3	3	2	1	75.00
Risk level	3	3	2	1	75.00
Progressive split	2	1	1	1	41.67
Revenue	3	2	2	1	66.67
Production rate	3	2	2	1	66.67
Production cost	3	2	2	3	83.33
Total score	30	24	20	13	65.91
Average %	90.91	72.73	60.61	39.39	65.91

The results of this analysis to decide the best PSC scheme for Panca block extension based on the area of interest explained if PSC Gross Split and PSC Cost Recovery have a competitive advantage in the area of interest of Producing Fields (90.91% and 81.48%), both PSCs have the same main focus on areas that are already producing because carry low-risk level and high uncertainty level to produce hydrocarbon. The less competitive area of interest was found to be Prospects & Leads (39.39% and 62.96%), as expected due to the area considered a high-risk level and low uncertainty level, which require high investment to expedite exploration activities with a target lowering the risk and increase the certainty level of the unexplored area. However, Cost Recovery has a higher score compared to Gross Split because the costs incurred to prove the existence of oil and gas in the Prospects & Leads area of interest can be returned to the contractor through a cost recovery mechanism to the government once discovered and commercial to produce while for gross split all cost absorbed by the contractor. In the new field development area, both scheme model has >70% average score, which is considered favorable to be developed. The different score matrix only 5.05% (Cost Recovery has a better score compared to Gross Split) is because, in the phase of development, the certainty of production volume to be recovered is certain since resources volume already changes to the proven reserves and the cost development becomes certain. In the discovery area, the cost recovery has a high score compared to the gross split (74.07% vs. 60.61%) due to the investor for PSC Cost recovery confidence the investment will return to them via reimbursement cost model, which will maintain a positive cashflow on the contractor take while on the PSC Gross Split contractor and investor require detail analysis to develop the discovery area with effective and efficient cost spending since no reimbursement cost mechanism. The result of the overall score matrix average based on analysis of critical variables using area of interest for both PSC schemes (Table IX) determines if the Cost Recovery model has a higher score matrix compared to Gross Split (74.07% vs. 65.91%).

Table IX. Decision Analysis Comparison PSC Cost Recovery vs. PSC Gross Split based on Area of Interest

Area of interest	Cost recovery	Gross split
Producing fields	81.48%	90.91%
New field development	77.78%	72.73%
Discovery area	74.07%	60.61%
Prospects & leads	62.96%	39.39%
Average	74.07%	65.91%

A web diagram is created to see the extent of its influence on the Producing Field, New Field Development, Discovery Area, and Prospects & Leads (Fig. 8). It can be seen that PSC Cost Recovery has advantages in 3 aspect areas of interest, while PSC Gross Split only excels in one aspect area of producing fields. For the extension block that focuses on the producing field with low Prospects & Leads area of interest, PSC Gross Split is the better option to be considered, while for the block that still has large Prospects & Leads area of interest, the best PSC Scheme is Cost Recovery since it has high certainty level of investment returned to the investor.

Fig. 8. Web diagram model comparison based on area of interest of PSC cost recovery vs. PSC gross split model.

Different approaches to the analysis based on similar critical variables to both scheme models to strengthen decision making. Overall scoring shows the PSC Cost recovery has better value compared to the Gross Split and leads on the critical variable of Revenue and New Field Development, while the PSC Gross Split leads on the Production Cost and is on par for Investment, Exploration Activity, and Risk Level (Table X).

Table X. Comparison PSC Cost Recovery vs. PSC Gross Split Based on Similar Critical Variables

Variable on both PSC	Cost recovery	Gross split
Investment	50.0%	50.0%
Exploration activity	75.0%	75.0%
Risk level	75.0%	75.0%
Revenue	100.0%	66.7%
New field development	75.0%	58.3%
Production cost	75.0%	83.3%
Average	75%	68.13%

A web diagram model was generated to seek overall similar critical variable evaluation (Fig. 9); it can be seen that PSC Gross Split is less attractive on the New Field Development and Revenue variables. This is because new field development requires high costs, which will suppress revenue from contractors because there is no longer a production cost reimbursement mechanism such as PSC Cost Recovery. Meanwhile, for PSC cost recovery, these two variables become their competitive advantages compared to PSC Gross Split because the costs incurred in new field development will be returned to the contractor through a cost recovery mechanism with the condition the area is discovered and commercially viable to produce. The PSC Gross Split leading on the production cost is related to the non-cost recovery mechanism applied, which would make the contractor run the business cost-efficiently and effectively, while for the Cost recovery model, it is less likely for the contractor to apply prudent cost spent due to the presence of cost reimbursement method for all oil and gas activities.

Fig. 9. Web diagram model of similar critical variable comparison on both PSC model.

PSC Cost Recovery scheme model becomes a support system for contractors that operate the concession area to maintain the sustainability of investment in the oil and gas industry with all the limitations and challenges presented, while for the government, it is appropriate to carry out detailed supervision so that the costs reimbursement request by contractors to the government can be accountable audit in administrative processes and in follow the regulations for Cost recovery mechanisms. In order to support the sustainability of production during the period of the contract extension, the government should offer sweetness such as incentives for exploration activity to reduce risk levels, increase the opportunity to discover hydrocarbon and increase resources and reserves volume. It will reduce the concerns regarding the large cost recovery value by increasing revenue through the discovery of new reserves accompanied by increased national production. On the PSC Gross Split, the requirement to implement cost-effective and efficiently is a must in order to generate favorable cash flow for the contractor, while encouraging the contractor of gross split to do the exploration activities to lower the risk level of prospect and leads might be challenging since it requires comprehensive analysis to avoid high sunk cost which will reduce the revenue and the mode to run the business is related to the cost and benefit.

In the case study of the Panca Block operated by SAKE, the PSC Cost Recovery is a better option compared to the PSC Gross Split since the block contains a lot of Prospects & Leads unexplored areas. It is considered SAKE to propose revision on the scheme model for the Panca Block extension in order to allow the development of Prospects & Leads areas of interest and discover the hydrocarbon that will benefit and increase the value of the company.

Conclusion

Selecting the best PSC scheme model for block extension requires considering various factors influencing the decision-making for block extension. This research was applied based on the system thinking method with causal loop diagram analysis.

1. There are about 11 critical variables identified for PSC Gross Split evaluation and about nine critical variables that should be considered to evaluate PSC Cost Recovery. There are a total of six intersection critical variables that exist in both PSC scheme models.
2. Considering the evaluation of six intersections critical variables, PSC Cost Recovery is the best PSC scheme model compared to PSC Gross Split. It is identified if PSC Cost Recovery is attractive to be selected for two variables (Revenue and New Field Development) by having a higher score compared to the Gross Split PSC. PSC Gross Split is attractive if only the Production Cost Variable is considered. The other three variables have the same score: Investment, Exploration Activity, and Risk Level.
3. A comparison of both PSC Cost Recovery and PSC Gross Split needs to be done based on critical variable identification to select the best PSC scheme model. The comparison is based on the four areas of interest within the block boundary, which are producing fields, new field development, discovery area, and prospects & leads.
4. Based on the study case of Panca Block, owned by SAKE company, and from the perspective of four areas of interest, PSC Gross Split would be fit as the best PSC scheme model for producing fields because it is low risk and willing to lower the producing cost of producing fields by implementing cost-effective and efficient to maximize the contractor take.
5. PSC Cost Recovery is preferable as the best PSC scheme model for block extension if the area within the block contains a lot of unexplored areas (Prospects & Leads) because it still has high uncertainty and high risk. There is a guarantee of investment return via a cost reimbursement model once the area is discovered to contain hydrocarbon and commercial produce.