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On March 3, 2023, the Minister of Energy and Mineral Resources of the Republic of Indonesia (Menteri Energi dan Sumber Daya Mineral or the “ESDM”) promulgated Regulation No. 2 of 2023 on the Implementation of CCS[1] and CCUS[2] in Upstream Oil and Natural Gas Business Activities (the “Regulation”).
CCS and CCUS are the processes related to the capture of CO2 which may then either be stored (i.e., CCS) or utilized in products or services (i.e., CCUS). CCS and CCUS also requires the transportation of CO2 unless the CO2 is to be used or stored on site.
The promulgation of the Regulation reflects the Government of the Republic of Indonesia’s (“GOI”) recognition of CCS and CCUS technology as a promising means of reducing carbon emissions to achieve net-zero emissions by 2060 while concurrently boosting Indonesia’s oil and gas output to 1 billion barrels of oil and 12 billion cubic feet of gas per day.
The Regulation is intended cover the entire process of setting up a CCS/CCUS activity, “starting from the design to the implementation stage.” The Regulation includes regulation of:
Given the breadth of the Regulation, this article will focus on: (1) the mechanisms for approval of plans and implementation of CCS/CCUS projects; (2) the ongoing monitoring, measurement, reporting and verification requirements; (3) carbon credit monetization as a means of funding the CCS/CCUS projects; (4) CCS as a service; and (5) CCS/CCUS activities closure.
Article 10 of the Regulation provides that any CCS/CCUS project must proceed in two sequential phases: (1) planning and (2) implementation.
Under the planning phase, the contractor of an oil and gas working area must submit a proposal or study to the applicable Indonesian regulator. CCS and CCUS activities may only be undertaken by contractors that have been appointed to explore and exploit a working area based on a contract with the relevant authority. If the CCS/CCUS activity is part of the first field development plan[3], then the proposal or study should be submitted to the ESDM. However, if the CCS/CCUS activity is part of a subsequent field development plan, the proposal or study should instead be submitted to the Special Task Force for Upstream Oil and Gas Business Activities (Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi or the “SKK Migas”) or the Oil and Gas Management Agency for Aceh (Badan Pengelola Migas Aceh or the “BPMA”) (as applicable).
The objective of the planning phase is to ascertain that the proposed CCS/CCUS activities are in compliance with the prescribed standards and good engineering principles and rules. Therefore, the submitted proposal or study must be comprehensive and include the planned technical, economic, operational, safety and environmental, and activities closure aspects of the project. Additionally, if the proposal or study site encompasses a reservoir, the proposal or study must also consider the engineering, safety and environmental aspects of the project, as well as the operational model for transporting, storing, injecting and/or utilizing carbon emissions.
Upon securing approval of its proposal or study from the relevant regulator, the contractor of an oil and gas working area may then proceed to the implementation phase and commence its CCS/CCUS activities. Under the implementation phase, the contractor of an oil and gas working area must ensure that the following tasks are carried out:
The implementation of CCS/CCUS activities is supervised by the Directorate General of Oil and Gas (“DGOG”) as mandated by the ESDM. DGOG also provides facilitation, consultation, technical guidance and/or socialization to the contractors carrying out CCS/CCUS activities. The DGOG through the Oil and Gas Inspector shall perform (1) inspection to ensure the safety of the CCS/CCUS equipment, installations and facilities; and (2) supervision of CCS/CCUS monitoring activities in annual basis or at any time if necessary.
Ongoing Monitoring and MRV Obligations
The Regulation imposes an obligation on the contractor of an oil and gas working area to carry out ongoing monitoring of its CCS/CCUS activities to ensure the safety of its workers, plant and equipment, the environment and the public in performing the CCS/CCUS activities in question. This monitoring obligation commences upon securing approval from relevant regulator and will continue for up to ten years after the verified closure of the CCS/CCUS activities for safety and to ensure that the CO2 remains underground. The ten-year post-closure cut-off date for liability for CO2 leakage is similar to what we have seen in other jurisdictions which have developed CCS/CCUS specific regulatory regimes (e.g., Australia).
To fund this ongoing monitoring, the contractor must reserve a budgeted amount in its working program, which budget shall be subject to the approval of SKK Migas or BPMA (as applicable), and the amount so reserved shall be deposited into a joint account under the names of the contractor of the oil and gas working area and SKK Migas or BPMA (as applicable). The fund may also be used to take remedial action relating to CO2 leakage during the ten-year period following verified closure of the CCS/CCUS activities. This approach is very similar to the one applicable in the context of decommissioning in the upstream oil & gas industry.
Based on its monitoring, the contractor must submit a semi-annual safety report to SKK Migas or BPMA (as applicable).
Failure by the contractor of the oil and gas working area engaged in the CCS/CCUS activity to comply with its monitoring and reporting obligations will result in administrative sanctions, including temporary suspension of the CCS/CCUS business.
Under Presidential Regulation No. 98 of 2021 on the Implementation of Carbon Economic Value for Achieving NDC[4] Target and Controlling GHG Emissions in National Development (“PR 98/2021”) and as further implemented under the Minister of Environment and Forestry Regulation No. 21 of 2022 on the Procedures for Carbon Pricing Implementation, carbon emissions can be monetized in a number of ways. For CCS/CCUS activities in connection with upstream oil and gas activities, they can be monetized by the contractor of an oil and gas working area through carbon trading and/or cost recovery[5] from the joint facilities.
As a result of the above laws, Indonesia is looking to implement both a “cap and trade” and a “cap and tax” mechanism, with the Indonesian government progressively introducing measures such as emissions caps for sectors with significant carbon footprints, as well as a carbon tax for certain sectors. These regulatory measures should foster the creation of a domestic carbon market within Indonesia (and a significant incentive for large emitters to seek to invest in carbon capture). Similar measures underpin the carbon market in the EU and the U.K., for example.
Indonesia also allows international carbon emissions trading. This can be a further way of monetizing CCS/CCUS projects (e.g., through the sale of carbon offsets internationally).
CCS/CCUS projects will also be entitled to a number of tax incentives. Specifically, the Regulation provides that the contractors undertaking CCS/CCUS activities are entitled to the tax incentives under the prevailing regulations applicable to upstream oil & gas projects with production sharing contracts. Under the applicable Government Regulation No. 53 of 2017 on Tax Treatment for Upstream Oil and Gas with Gross Split Profit Sharing Contract, these tax incentives will cover:
The Regulation permits contractors of oil and gas working areas to inject and store carbon emissions generated by third parties within the contractor’s working area. Storage of third parties’ CO2 would be required to be documented in a cooperation agreement which is subject to approval from either SKK Migas or BPMA (as applicable). SKK Migas or BPMA are to issue further regulation on technical guidance for this approval procedure.
This aspect of the Regulation opens up ‘CCS as a service’ for contractors of working areas, whereby third parties would pay for storage of their CO2.
A contractor’s responsibility for the project is transferred to the government once the cooperation contract is terminated. For such transfer, a contractor is required to ensure that CCS and CCUS facilities have been securely closed, with no indication of leaks, and that the contractor has followed good engineering practice to prevent future leaks and failures. This is to be verified by a third-party verification body.
CCS/CCUS activities will be terminated if one of the following situations occurs:
To proceed with the closure of CCS/CCUS activities, the contractor must submit the plan of business closure to the ESDM through SKK Migas or BPMA (as applicable) outlining:
The contractors are allowed to commence the activities closure by referring to the plan of activities closure upon receiving an approval from ESDM. The DGOG (or appointed third-party verification body) shall conduct verification on the CCS/CCUS business closure, which procedures shall be further specified under the anticipated DGOG’s regulation. The cost arising from the process of CCS/CCUS activities closure and verification as carried out by DGOG shall be borne by the contractors as part of its operation cost.
As of the date of this article, the GOI has already approved a CCUS project at BP’s Tangguh LNG project in West Papua province. Japan’s Inpex Corp is expected to submit its revised plan of development for its Abadi LNG project, which will include a carbon capture installation. Additionally, Indonesia’s state energy firm Pertamina has conducted several studies on CCUS with partners, including ExxonMobil and Mitsui, plans to conduct another study with Chevron, and has also conducted a carbon injection test at one of its oil fields late last year.
Given the promulgation of the Regulation, the ESDM is encouraging companies to put forward detailed proposals for government approval.
The Regulation provides an approval mechanism for CCS/CCUS projects and a helpful framework to ensure the implementation and monitoring of CCS/CCUS projects adheres to certain standards, which in some respects reflects what has been implemented in other jurisdictions that have sought to implement CCS/CCUS specific regulations. However, there are areas of the CCS/CCUS value chain which still require further clarity. For instance, while the approach to carbon pricing/trading is reminiscent of that in other markets (e.g., EU and U.K.), it is still in the process of being implemented in Indonesia. Consideration would also need to be given to the transportation of CO2 within Indonesia, which, due to its geography, is likely to have to be undertaken by ship.
The monetization of CCS projects also remains an area for further development. Due to the instability of carbon credit trading, CCS projects are likely to require regulatory support to ensure reliable revenues from CCS. CCUS will be able to rely on revenues from utilization, including enhanced oil recovery; however, this would not support sequestration of CO2.
[1] Carbon capture and storage (“CCS”).
[2] Carbon capture, utilization and storage (“CCUS”)
[3] A field development plan is generally incorporated in the cooperation contract (Kontrak Kerja Sama) and contains, among others, supporting data and exploration evaluation data, an evaluation description of the reservoir, methods of drilling development wells, number and location of production and/or injection wells, production facilities, and post-operation plans. The first field development plan requires the approval from ESDM.
[4] Nationally determined contributions.
[5] Cost recovery is operational costs that can be returned by GOI to contractors in the event the upstream oil and gas business activities result in commercial production. The amount of operational cost that is regarded as cost recovery is incorporated in the work plan and budget (Rencana Kerja dan Anggaran) as approved by SKK Migas or BPMA (as applicable).
[6] The regulation does not specifically describe what the cost estimation relates to, but we assume this is in the context of the closure plan.
[7] The regulation does not provide remediation steps that need to be taken on closure of the CCU/CCUS activities. However, the closure plan will be evaluated by SKK Migas or BPMA. Upon a recommendation from SKK Migas/ BPMA, the ESDM will either approve or reject the closure plan. For a closure plan that is rejected, the closure plan must be revised as suggested to eventually receive approval from ESDM. Although the regulation does not specifically state this, under general law, all oil and gas facilities will eventually become state-owned assets.
Praxisgruppen
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