Legal Guide to Oil Regulation in Indonesia: Regulation Overview

Lesser Sunda Islands (courtesy of NASA)

This is the second post in our 2014 Legal Guide to Oil Regulation. Fitriana Mahiddin and Syahdan Z. Aziz will address a new topic each week.

Principal legal framework regulating oil activities

The oil and gas sector in Indonesia is mainly regulated by Law No. 22 of 2001 regarding Oil and Natural Gas (the Oil and Gas Law). Upstream business activities are further regulated by Government Regulation No. 35 of 2004, as amended several times, lastly by Government Regulation No. 55 of 2009 regarding Upstream Oil and Natural Gas Business Activities (GR 35). Downstream business activities are regulated by Government Regulation No. 36 of 2004 regarding Downstream Oil and Natural Gas Business Activities, as amended by Government Regulation No. 30 of 2009 (GR 36).

The Oil and Gas Law grants the government the exclusive rights to oil and gas exploitation and requires all private companies wishing to explore for and exploit oil and gas resources to enter into cooperation contracts, based upon a production sharing scheme with the government (through the Special Task Force for Upstream Oil and Natural Gas Business Activities or SKK Migas) (previously the Implementing Body for Upstream Oil and Gas Business Activities or BPMigas).

Exploration, development and production (i.e., upstream) activities are done by foreign or domestic companies acting as contractors to the government under cooperation contracts (also known as production sharing contracts or PSCs). All the financial risks of operations performed under the cooperation contract are borne by the contractor. Any oil and natural gas produced is shared between the contractor and the government in the proportions specified by the cooperation contract.

In late 2010, the government issued Government Regulation No. 79 of 2010 (GR 79) on operating costs that can be recovered and the income tax treatment of the upstream oil and natural gas sector. This regulation came into effect on December 20, 2010, and implements Article 31d of Law No. 7 of 1983 regarding Income Tax, as amended several times, lastly by Law No. 36 of 2008. While initially questioned by the oil and gas industry, GR 79 is now expected to encourage investment in the oil and gas industry in Indonesia. However, some provisions of GR 79 may create uncertainties for existing PSCs.

In late 2012, the Indonesian Constitutional Court issued Decision No. 36/PUU-X/2012, which annulled several provisions in the Oil and Gas Law and disbanded BPMigas. In response to the Constitutional Court decision, the President issued Presidential Regulation No. 95 of 2012 (PR 95/2012), which temporarily transfers the responsibilities of BPMigas to the Ministry of Energy and Mineral Resources (MEMR) while the government amends the Oil and Gas Law or issues a new regulation.

The Constitutional Court decision provides that existing PSCs remain in effect until they expire or until such other date as may be agreed. PR 95/2012 similarly provides that all existing PSCs remain in effect until their expiration. Subsequently, under Presidential Regulation No. 9 of 2013, the MEMR delegated the management of upstream oil and gas business activities to SKK Migas until the issuance of a new law on oil and gas. At present, an amendment to the Oil and Gas Law is being discussed and drafted by the government.

Downstream business activities in the oil sector, on the other hand, may be conducted by obtaining a business license from the relevant governmental authority, namely the MEMR. These licenses consist of a processing business license, transportation business license, storage business license and trading business license. One business entity may possess more than one business license. The specific requirements for downstream business licenses depend on the type of downstream business activities regulated by GR 36. Such business licenses are not required for a PSC contractor if the downstream activities are performed for its own oil products as a continuation of its exploration and exploitation activities.

Expropriation of a licensee’s interest

Law No. 25 of 2007 regarding Capital Investment (the Investment Law) provides that the government will not nationalize or take ownership of investors’ interests, except by law. In the event that the government does so, the government shall provide compensation based on fair market value. If fair market value cannot be agreed on by the government and the investor, the dispute shall be settled by arbitration.

Government regulatory and oversight bodies responsible for oil exploration and production

Mining authority in Indonesia is held by the government through the MEMR (see above for the regulatory and oversight bodies involved in upstream activities). Downstream activities are controlled by business licenses issued by the MEMR and the Regulatory Body for Downstream Oil and Natural Gas Business Activities (Badan Pengatur Hilir Minyak dan Gas Bumi or BPH Migas). The state oil company is Pertamina, which holds the authority to supply government subsidized fuel oil for domestic consumption. In engaging in upstream business activities, Pertamina acts as a contractor to SKK Migas, as is the case with other oil and gas companies.

Oil production, export and import statistics

SKK Migas maintains biyearly statistics on the volume of production of oil and gas. Relevant statistical charts are accessible on SKK Migas’s official website (www.skkmigas.go.id (http://www.skkmigas.go.id/)). Oil export and import statistics are maintained by the Central Statistics Body (Badan Pusat Statistik or BPS), which are accessible on the BPS website (www.bps.go.id (http://www.bps.go.id)).

Reproduced with permission from Law Business Research Ltd. This article was first published in Getting the Deal Through – Oil Regulation 2014. For further information, please visit www.GettingTheDealThrough.com.

This article is intended for informational purposes only and does not constitute legal advice. This article should not be acted upon in any specific situation without appropriate legal advice.

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