Legal Guide to Oil and Gas Regulation in Indonesia: Competition and Outlook

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This is the sixth and final post in our 2013 Legal Guide to Oil and Gas Regulation in Indonesia. For more information, please contact Fitriana Mahiddin or Syahdan Z. Aziz.

Competition

While BPH Migas can impose penalties on business entities engaged in the natural gas sector, the Commission for the Supervision of Business Competition (KPPU) is responsible for implementing Indonesia’s Anti-Monopoly Law. The KPPU may issue decisions that certain agreements, conduct or positions in the relevant market (including the natural gas market) are anticompetitive and therefore in violation of the Anti-Monopoly Law. The decisions of the KPPU can be appealed in district courts and then in the Supreme Court.

The general prohibitions set forth in the Anti-Monopoly Law will be applied. These prohibitions can be categorized as follows: prohibited agreements; prohibited conduct; and abuse of a dominant position in a given market sector.

Should the KPPU determine that a violation of the Anti-Monopoly Law has occurred, it may, among other things, order the termination of the prohibited agreement or cessation of the prohibited conduct or abuse of dominant position. Though administrative sanctions are within the KPPU’s authority, if the case is appealed to a district court, the court may, among other penalties, impose criminal sanctions, revoke a company’s business license or require the termination of conduct that causes damage to other parties.

The transfer of shares in any company with foreign ownership requires the approval of the BKPM. This approval is usually granted routinely, but for the natural gas sector, the BKPM may require a recommendation from Migas or BPH Migas. Once any required recommendation letter is obtained, the BKPM’s approval should be issued within two weeks. For the transfer of assets, generally speaking, no approval is required, although the purchasing company would have to obtain all the requisite licenses before engaging in business and the selling company may have to obtain approval to transfer assets it had imported with tax or customs facilities.

For mergers, acquisitions and consolidations, while the Anti-Monopoly Law does not give the KPPU the authority to pre-approve such transactions, the KPPU must be notified of all mergers, acquisitions and consolidations involving assets and sale values exceeding certain stipulated thresholds within 30 days after closing. To implement the Anti-Monopoly Law, the government has issued Government Regulation No. 57 of 2010 (GR 57). GR 57, among other things, stipulates further the thresholds, exceptions to the notification requirement, pre-acquisition or merger reporting to the KPPU and the assessments that must be made by the KPPU for mergers and acquisitions.

Foreign Investment

Upstream oil and gas business can be carried out directly by foreign entities. Foreign companies may not directly engage in downstream activities, although they may establish subsidiaries to engage in these activities, the establishment of which requires the approval of the BKPM and obtaining the requisite downstream business licenses. If the acquisition is made by acquiring an interest in an existing Indonesian company, then it would require the approval of the BKPM. The conditions for obtaining the BKPM’s approval of either the establishment or acquisition of an Indonesian company will depend on the regulations and policies in effect. The BKPM’s current internal guidelines seem to indicate that it will permit maximum foreign ownership of 100% in a company engaged in downstream oil and gas business activities.

Furthermore, there are no special requirements or limitations imposed on foreign companies. Law 22, however, restricts companies from engaging in both upstream and downstream activities at the same time and provides that a company (whether foreign or domestic) may hold an interest in only one cooperation contract.

The most recognized treaties that would affect regulatory policy are those tax treaties to which Indonesia is a party. Multinational agreements may also affect regulatory policy where these agreements have been ratified by the Indonesian Government.

Dispute Resolution

PSCs provide the dispute resolution procedures and forum. The parties are free to elect the forum for dispute resolutions. Parties are free to choose the venue and submit their claims to Indonesian courts or to foreign courts, or to choose arbitration as the means for dispute resolution.

For service contracts, the BP Migas guidelines for procurements provide that any disputes arising out of or in relation to service contracts that are subject to arbitration must be settled by a reputable Indonesian arbitration institution, with the hearings held in Indonesia. With the recent disbanding of BP Migas, it became uncertain as to the applicability of the BP Migas guidelines.

However, the Minister issued a letter to PSC contractors stating that the existing BP Migas guidelines shall mutatis mutandis be in full force until SKSPMIGAS issues new guidelines. Pursuant to GR 36, BPH Migas has the obligation to settle disputes involving special rights holders of natural gas transportation and/or anything related to natural gas transportation via pipeline. In the event the dispute settlement proposed by BPH Migas is not accepted by the parties, the parties can file an objection claim with the Central Jakarta District Court.

Indonesia is a signatory to the New York Convention, which was ratified by Presidential Decree No. 34/1981. The Arbitration Law was then enacted in 1999 to adopt the provisions of the New York Convention and regulate the procedures for the registration and enforcement of foreign arbitral awards. Indonesia is also a signatory to the ICSID Convention.

There is no special difficulty in this matter. To our knowledge, have been litigation cases against the government. However, there are no publicly available sources regarding this matter.

Updates

The Constitutional Court recently issued Decision No. 36/2012 on the judicial review of Law 22, ruling that the status of BP Migas was unconstitutional and contrary to the 1945 Constitution, and therefore disbanding BP Migas. In response to the Constitutional Court decision, the President issued Presidential Regulation No. 95 of 2012 on the Transfer of Duties and Functions of BP Migas.

The Constitutional Court decision provides that existing Cooperation Contracts/PSCs remain in effect until they expire or until such other date as may be agreed. The Presidential Regulation similarly provides that all existing PSCs remain in effect until they expire. The Presidential Regulation also provides that all operating processes handled by BP Migas will forthwith be handled by the Minister. For further implementation, the Minister issued two decrees, transferring the staff, functions and duties of the former BP Migas to SKSPMIGAS, the new temporary unit under the Ministry of Energy and Mineral Resources.

As a result of the foregoing change, until a new regulation is issued by the government, there is still uncertainty about the status of existing PSCs and the status of new PSCs or amendments to PSCs, particularly who will sign these PSCs representing the government. As to upstream operational approvals such as POD, Work Program and Budget, and AFE, the related approval processes are temporarily being handled by the Minister and SKSPMIGAS.

This article appeared in the 2013 edition of The International Comparative Legal Guide to: Oil & Gas Regulation, published by Global Legal Group Ltd., London.

For the first five parts in our series, see:

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