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Apr 01, 2016

Indonesia’s New Oil and Gas Legislation

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Since November 2012, the Indonesian oil and gas regulatory framework has been in a state of transition. A new Oil and Gas Law, currently under discussion before the Indonesian Parliament, is expected to be enacted during the first half of 2016.

One of the main triggers for the reform was the Indonesian Constitutional Court’s decision on November 13, 2012, pursuant to which Badan Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi (BPMIGAS), the state upstream oil and gas regulator, was declared unconstitutional. A key driver for the reform has been the change in Indonesia’s oil and gas position. Due to decreasing production and increasing consumption, Indonesia is a net importer of oil and is expected to soon become a net importer of gas. As a result, the Indonesian State has focused on improving the country’s energy security, including by increasing control over its oil and gas resources. These drivers are expected to be reflected in the key changes introduced by the new oil and gas legislation.

Although the new Oil and Gas Law is expected to be passed imminently, the final terms of the law are still unclear and may differ from those included in the draft on which this article is based.

New Upstream Regulatory Structure

Until November 2012, BPMIGAS exercised regulatory control over upstream oil and gas operations. BPMIGAS was a non-profit, independent, state-owned legal entity. All upstream production-sharing agreements (“Kontrak Kerja Sama”) were entered into between investors and BPMIGAS. BPMIGAS and the relevant articles establishing BPMIGAS in Indonesia’s current Oil and Gas Law (Law No. 22/2001) were declared unconstitutional pursuant to Art. 33 of the Indonesian Constitution, which requires “all the natural wealth on land and in the waters” to fall “under the jurisdiction of the State.”  Because BPMIGAS was not directly under the control of the Indonesian Ministry of Energy and Mineral Resources (MEMR), this requirement was held to be breached. As a result, BPMIGAS was disbanded and all its duties, functions and responsibilities were transferred by Presidential Regulation to a temporary work unit known as SKS set up and controlled by MEMR. All upstream oil and gas contracts previously awarded by BPMIGAS remained in full force and effect. SKS was later superseded in 2013 by the Special Task Force for Upstream Oil and Gas Business (SKKMIGAS), also controlled by MEMR.

Under the new Oil and Gas Law, SKKMIGAS will be replaced by a new special state-owned enterprise (BUMN-K) for the oil and gas sector (except in Aceh where this role will be undertaken by a regional specialized state-owned enterprise). BUMN-K is expected to fall under the direct control of MEMR and will have a similar regulatory mandate to BPMIGAS/SKKMIGAS.

As concerns the oil and gas licensing structure, the BUMN-K will, like its predecessors, enter into production-sharing contracts with licensees. However, we understand that MEMR will have a leading role in determining the terms and conditions of these contracts (such as what costs are recoverable).

Under the new Oil and Gas Law, PT Pertamina, Indonesia’s national oil company (“Pertamina”), will have a right of first refusal over any new oil and gas contracts so as to increase its role as producer. The draft law included a note to the effect that should Pertamina exercise this right, it would be required to hold a 100% interest in the contract and that farm-ins would not be permitted. This could restrict Pertamina’s ability to access private investors’ capital and expertise. However, other options to allow private investors to participate in these oil and gas contracts indirectly (such as services contracts) may be available to Pertamina. If Pertamina does not exercise its right of first refusal, the BUMN-K will be entitled to auction the relevant oil and gas contract to private companies.

In a key departure from previous practice, we understand the BUMN-K is intended to operate as a commercial undertaking (rather than as a non-profit organization like BPMIGAS). This is intended to encourage a more commercial approach to the management of Indonesia’s oil and gas sector and to allow BUMN-K to develop sufficient financial standing to participate in oil and gas projects without requiring its obligations to be guaranteed by the Indonesian government. However, it is unclear how this will be balanced against the MEMR’s rights to direct the terms and conditions of oil and gas contracts. The BUMN-K is expected to hold only minority participations in any oil and gas contracts.

At the end of the term of any oil and gas contract, BUMN-K is required to transfer all rights to the contract to Pertamina. We understand that this would not apply to expiring existing oil and gas contracts.

Reform of Domestic Market Obligation

Since one of the key drivers for the reform of the Indonesian Oil and Gas Law is improving the country’s security of supply, the new oil and gas legislation will look to reform the way in which oil and gas produced in Indonesia will be allocated to the Indonesian market, in addition to seeking to increase Pertamina’s role as producer upstream.

Indonesian law currently requires 25% of oil and gas produced domestically to be allocated to the Indonesian market. Under the new regime, it is proposed that a state-owned enterprise be appointed to act as “gas aggregator” (badan usaha penyangga gas). All of the gas required to meet Indonesia’s domestic requirements would be sold by producers to the gas aggregator, which would determine the price at which gas would be sold to it and allocate gas purchased to different sectors based on a gas utilization priority structure set by regulation. It is not clear what the extent of the domestic sales requirements would be and whether the gas aggregator would have oversight over the terms on which Indonesian gas is exported. We understand that the gas aggregator may also be responsible for issuing licenses to conduct midstream activities such as transporting gas through pipelines. Regulations relating to the gas aggregator may be enacted separately to the new Oil and Gas Law.

Conclusion

There has been a significant amount of discussion around the reforms to the oil and gas laws under consideration by the Indonesian State. While the key drivers for these reforms and key initiatives are generally well understood, their detailed terms are still being developed. With respect to many of the reforms expected to be introduced by the new oil and gas laws, such as the reforms to the domestic market obligations, their detailed terms will need to be better understood for investors to fully assess their implications.

Authors and Contributors

Bill McCormack

Partner

Project Development & Finance

+65 6230 3877

+65 6230 3877

Singapore

Jean-Louis Neves Mandelli

Associate

Project Development & Finance

+65 6230 3834

+65 6230 3834

Singapore

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