The Department of Energy (DOE) is eyeing to improve the incentive regime for the upstream petroleum industry with the proposed ‘special allowance’ to be extended to operators in marginal petroleum blocks, as well as new plays and frontier acreages.

In a draft DOE Circular, it has been stipulated that the special allowance shall be extended to 
petroleum service contractors to enable them “to maintain or continue operations in marginal petroleum fields” – primarily when the annual operating expenses would already exceed the cost recovery allowance of 70%.

The policy is expected to be firmed up upon the submission of comments of the industry players and other relevant stakeholders as solicited by the energy department.

“Petroleum service contractors shall be entitled to the special allowances granted under this Circular, which shall be applied by deducting the applicable special allowances from the gross proceeds,” the DOE expounded, specifying though that the royalty share of the government shall not go less than 60% when calculated based on the difference of the gross income to the sum of operating expenses, as aligned with Presidential Decree 87 or the Oil and Gas Law.

As fleshed out, for marginal petroleum operations, the special allowance shall be at 6.0% if the operating expenses (OE) versus gross proceeds (GP) would be at 70% but still less than 75%.

Nevertheless, that shall climb to 9% when the expenses for operations as against gross proceeds would already hover at 75% but less than 80%; then there will be heftier special allowance of 12% if operating expenses vis-à-vis gross proceeds would already go beyond 80%.

Further, the DOE is batting for special allowance prescription to new plays as well as exploration ventures at frontier or remote areas.

The new plays, in particular, shall refer to ‘untested’ geologic prospects even if these would be proximate or straddling productive basins – and the planned special allowance shall be reckoned as 7.5% of the gross proceeds.

At frontier domains, the grant of special allowance shall be gauged on how far that particular petroleum block would be from the identified delivery market.

For areas within 200 kilometers to less than 400 km, the special allowance as reckoned from percentage of gross proceeds shall be 2.5%; then that will go up to 5.0% at 400km but less than 800km; and 10% for 800km and above.

The energy department reiterated that the targeted policy enforcement will potentially spur “exploration activities and encourage producing service contractors to invest in other exploration service contracts.”

It further stated that “the special allowance on cost recovery shall be computed proportionately to the service contractor's participating interest in the producing service contract.”

Then when the exploration service contract converts to production, the DOE qualified that “the operating expenses recovered under this special allowance shall no longer be recovered from the converted exploration service contract.”