separate set of revenue-sharing agreements between the central and sub-national governments (discussed in Section 4 below).

The government’s revenue from an oil or gas operation depends on the type of contract agreement between the national government and the contractors. There are three types of contract: 1) Production Sharing Contracts (PSC) are the dominant types (Figure 9). The government is represented by BP Migas and the Ministry of Energy and Mineral Resources. Under this type of contract government revenues take the form of cash rather than physical output, and this is paid to the Ministry of Finance. Operating costs are deducted from production through ‘contractor cost oil’ formula defined in the PSC.

2) Contracts between the private contractor and Pertamina, generally taking the form of Enhanced Oil Recovery (EOR). The equity share received by the government, represented by Pertamina, is in the form of physical production, with the government receiving the revenues indirectly, as a tax on the net profits of Pertamina.

3) Technical Assistance Contracts (TAC). These are a type of PSCs that are usually limited to exploitation, unless the contract involves a special area in which the government has encouraged exploration. BP Migas is phasing these contracts out, with Oil and Gas Law No. 22/2001 mandating that existing TACs not be extended.

These three contract types are not the exclusive forms of rights for exploration and exploitation, as parties are also able to enter into original agreements (USAID, 2006). There are two types of such agreements: Joint Operation Agreements (JOAs) and Joint Operation Bodies (JOBs). JOAs regulate the relations of the participating interest-holders, defining their rights and obligations and describing the procedures that the contractors must follow. BP Migas supervises the JOAs. JOB agreements create a non-legal entity that manages the operations on behalf of the participating interest-holders. JOB agreements are typically part of a JOA.

Among all these types of contract, PSCs are by far the most important, accounting for 89 percent of production, while 6 percent of production is distributed among TAC, EOR, JOB and JOA contract types (Figure 9).

# _Estimating the revenue flows_

Extracted oil or gas cascades through a series of mechanisms that apportion income and costs to producers and the government. The exact nature and quantity of these mechanisms varies by contract and is also dependant on the original date of a field. The most important of these mechanisms and their relative magnitude in enabling the impact of oil price movements on government revenues to be simulated are listed below. The following describes these mechanisms qualitatively. Figure 10 illustrates the mechanisms, while Annex 1 provides them mathematically.

**Figure 9.  Production by type of contract** _(2004 data)_

<!-- Start of picture text --> JOB<br>EOR<br>2% JOA<br>1%<br>TAC 1% Pertamina<br>2% 5%<br>PSC<br>89%<br><!-- End of picture text --> _Source: World Bank calculations from MigasProduction data reported in USAID (2006)_

- The First Tranche Petroleum (commonly referred to as ‘FTP’), is normally 20 percent of the gross revenue. The FTP is divided between the government and contractor.

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