MAIN PROVISIONS OF JOA and JOB

JOINT OPERATION AGREEMENT (JOA)

Since the enactment of the Oil and Gas Law, JOA has also been a derivative of the KKS used by the KKS Contractors. Basically, JOA stipulates the percentage of capital to implement an oil contract.

Standard Provisions in the JOA:

1.         Terms

In principle, the JOA becomes effective after the KKS is signed. Negotiations in the drafting of JOA begin before the parties obtain the KKS. Because the JOA is for the purpose of the KKS, the JOA term shall conform to the terms of the KKS.

2.         Scope

The scope of the JOA is aimed at covering all joint operations starting from the signing of the KKS to the termination of the KKS. The implication of the JOA is the establishment of a joint venture which will require a separate account from the parties in the JOA.

3.         The Interests of the Parties

The JOA determines the portion of ownership and income, the amount of obligations to finance the production, and the size of risk to be borne by each respective party. In certain circumstances, the obligations of a party may be bigger than the percentage of its interests in the JOA if this party acts as the operator.

5.         Operator

Generally, the operator shall not obtain profit from the operations for itself and shall not suffer loss from acting as the representative of the parties. The duties and responsibilities of the operator are to conduct joint operations under the supervision of the operation commission.

6.         The Limited Responsibility of the Operator

The operator shall only be responsible for losses or accidents due to its own gross negligence or willful misconduct, such as the failure to take out insurance required by the operation commission; therefore, if the shared property is damaged or destroyed, the operator shall replace it and the replacement cost shall not be charged to the joint account.

7.         Monitoring the Operator

The operation commission (or often referred to as joint commission) is responsible for joint operations, policy related decision making, and approving work plans and budget. The parties shall provide information through reports and data in monitoring and decision making by the operation commission.

8.         Expense Control

Expense control is a form of monitoring joint operations by the operation commission. Generally, joint operations’ financing is jointly borne from the beginning by the parties through proportionate charging to the share of interests of each respective party.

9.         Insurance and Lawsuits

In addition to controlling expenses, the JOA also covers another form of protection to the operations through insurance and provisions on lawsuit settlement. There are at least 2 (two) categories of insurance in the JOA, namely insurance required by law and required by the joint venture itself.

Regarding provisions on lawsuit settlement, the operator shall notify the parties of every event that may lead to a lawsuit. Operators are usually authorized to settle lawsuits under a limited expense. In settling a certain case, the parties shall consult their lawyer (at their own expense) and not choose an operator to represent them.

10.       Non-Consent

A non-consent is applied because the mechanism in the operation commission will determine the operational plans based on the majority vote from the stakeholders in the JOA. The mechanism may certainly cause the interests of parties with fewer stakes to not be accommodated. Disapproval of the plans made by the operation commission is a result of various reasons such as operational financing or having majority stakeholders preferring their assets to be more significant than what has been approved by the operation commission. In principle, the non-consent provision is aimed at protecting parties with fewer stakes; even though the provision “contradicts” the basis of the JOA.

11.       Sole Risk

The background for the sole risk is the proposal (for drilling, assessment, and development) approved by more than 1 (one) party which in turn is not approved by the operation commission (majority party). Therefore, the parties not obtaining approval from the operation commission may still operate at their own risk.

12.       Default

Among the events categorized as default in the JOA includes failure of a party to pay its obligations to meet the “cash call” within the designated period. Generally, the operator shall notify in writing the parties not meeting their cash call and the party is given the opportunity to pay within 12 (twelve) days after the notification. If after passing 12 (twelve) days the defaulting party has not met its payment obligations for the cash call, the party shall be sanctioned by a withdrawal from the rights to (i) gain information access, (ii) attend the meetings and (iii) receive a production share.

13.       Transfer of Interest

In principle, the parties withdrawing from the joint venture shall transfer (reallocate, sell, swap) its stakes to the other parties in the JOA and normally this does not require approval from the licensor/SKK Migas. On the other hand, transfer of interests to another party outside the JOA shall require obtaining approval from BP Migas. It should be noted that in several cases, the JOA prohibits transfer of interests to parties outside the JOA. However, such provisions do not prohibit transfer to affiliates and therefore parties outside the JOA can be involved in the JOA by becoming affiliates to the parties planning to transfer interests.

Regarding the transfer of interests, the JOA uses the terms farm in and farm out.

14.       Transfer of Shares of a Party in the JOA

Similar to the provisions in the PSC, the provisions in the JOA do not stipulate, restrict, or prohibit the parties in the JOA from transferring its shares to other parties.

JOINT OPERATING BODY (JOB)

Unlike the JOA, in a JOB, Pertamina is directly involved in operations. This is evident in the operator which is usually a joint venture or consortium commonly referred to as the Joint Operations Board (Badan Operasi Bersama or “BOB”). BOB is a board established in the joint operation to act as the operator running oil operations and not a legal entity. To obtain a better picture of the JOB, the following is a definition of forms of cooperation in a joint venture:

Basically there are 2 (two) forms of cooperation used in a joint venture namely (i) equity joint venture (incorporated) and (ii) contractual joint venture (unincorporated). Hossain, in Law and Policy in Petroleum Development 121 (1979) defines equity joint venture as:

“A form of agreement in which a host government (or its national oil company) and foreign oil company form an operating company in which each owns a specified percent of the shares”

The two forms have different implications on the exposures of responsibility/liability. In a contractual joint venture (unincorporated) the form of cooperation is a consortium (BOB) which is not a legal entity and therefore the parties are directly responsible for the joint operations. On the other hand, an equity joint venture (incorporated) is in the form of a joint venture which is a legal entity and therefore it is directly responsible for the joint operations; the status of the parties is only as shareholders.

The author also presented an interesting fact that there is a form of joint venture which is initially a consortium/BOB; which is actually a contractual joint venture (unincorporated), but upon agreement of the parties and stipulated in a contract shall become a joint venture company within several years in the form of an equity joint venture (incorporated). This is allowable because the establishment of a contractual joint venture (unincorporated) is relatively faster and therefore the parties can prevent any delays in commencing joint operations.

MAIN PROVISIONS OF INDONESIAN PSC

MAIN PROVISIONS OF INDONESIAN PSC

1.      Scope (Section I)

The management of the PSC lies in the State (under BP Migas, or now is known as SKK Migas). Basically, the State is in charge of making the operational decision which will be conducted through an approval mechanism. In practice, SKK Migas shall be responsible for the operational management in the PSC, while the PSC contractor shall be responsible for the oil operations in accordance with the provisions of the PSC.

2.      Operatorship (Section I)

The PSC Contractor shall appoint one of the holders of the participating interest to be the Operator responsible for conducting oil operations and represent the parties in communicating with SKK Migas. The appointing of the operator and its successor requires prior approval from SKK Migas.

3.      Term of Contract (Section II)

The PSC shall be valid for a maximum term of 30 (thirty) years; including an Exploration Period during the first 6 (six) years which can be extended for a maximum of 4 (four) years provided that the PSC shall expire by the end of the Exploration Period or in the event that no oil or gas is discovered in commercial amounts.

4.      Commerciality of Contract Area (Section II)

The PSC Contractor is given 3 (three) years to plan and submit a POD to SKK Migas. The PSC stipulates the obligation to submit a POD during the Exploration Period.

5.      Limited Commercial Contract Area (Section II)

PSC stipulates that if during the Exploration Period oil is discovered in a field within the vicinity (outside) of the Work Territory and the reservoir includes the field within the Work Territory and according to SKK Migas the field outside can only be commercially produced if produced concurrently with the field within the Work Territory (unitized), and the POD is approved by the Minister of EMR, then the field within the Work Territory shall be regarded as a “Limited Commercial Contract Area”.

6.      Subsequent Petroleum Discovery (Section II)

Any subsequent oil discovery within the Work Territory must be reported to SKK Migas and the Government. A subsequent oil discovery refers to an oil discovery in a different field previously deemed commercial |by the Government. Determining the commercial status of a field is important to the PSC Contractor because the cost recovery shall apply to fields under commercial status.

7.      Relinquishment of Areas (Section III)

The PSC Contractor shall relinquish up to ¼ (a quarter) of the total area coverage of the Work Territory in the initial area in the contract by the end of the first 3 (three) years. However, the percentage of the Work Territory relinquishment above may rise to an additional 15% (fifteen percent) of the initial area in the contract if the PSC Contractor does not complete the activities it is committed to in the initial contract by the end of the first 3 (three) years, which leaves only 60% (sixty percent) of the Work Territory. The purpose of this provision is so that the Contractor will commit to conduct exploration in the initial years of the contract.

8.      Work Program and Budget (Section IV)

An important issue to be noted by the PSC Contractor is that it shall commence oil operations within no more than 6 (six) months after the contract becomes effective. In the event the KKS Contractor is negligent in commencing exploration within the time frame set above, the contractors shall be sanctioned with the termination of the KKS. Contracts shall include details of the work program and budget estimates for the first 3 (three) years (“firm commitment”) of the PSC Contractor. To guarantee the execution of the firm commitment, the PSC Contractor shall submit a performance bond.

9.      Rights And Obligations Of The Parties (Section V)

-          Health, Safety, and Environment

The current PSC Generation states the obligation of the PSC Contractor to conduct oil operations by implementing Health, Safety and Environment (“HSE”) measures in accordance with the prevailing standards in the oil and gas industry. Regarding the environment, the PSC Contractor must now consider the provisions of Law No. 32 of 2009 on Environmental Protection and Management (“Environmental Law”). Article 20 of the Environmental Law states that the definition of environmental pollution shall be measured based on environmental standards. The environmental standards for oil and gas activities have been stipulated in State Minister of Environment Regulation no. 4 of 2007 on Sewage Quality Standards for Businesses and/or Oil and Gas as well as Geothermal Activities which stipulates among others the water quality standard of production sewage in exploration and oil and gas production from on-shore facilities is 40^o Celsius.

-          Abandonment and Restoration Funds (“AARF”)

PSC stipulates that AARF funds are accumulatively deposited in the escrow account. In the previous Generation of the PSCs there was no provision on where the AARF shall be deposited.

-          Transfer of Participating Interest

The consent of SKK Migas and the Government must first be obtained before a transfer of participating interest to both affiliates and non-affiliates. The party to be receiving the transfer of participating interest can only receive the transfer if it currently does not have any participating interest in other PSCs or KKS. Regarding the transfer of participating interest, it should be noted that the PSC Contractor shall have a majority of participating interest (greater than 50%) in the respective PSC within the first 3 (three) years after the PSC becomes effective.

-          Change of Control

SKK Migas and the Government shall be notified and the PSC Contractor shall obtain prior approval from SKK Migas and Government regarding the plans on the change of control whether directly or indirectly on the composition of the participating interest in the PSC.

-          Insurance

During the contract term, the PSC Contractor shall insure all facilities, goods, equipment, supplies, even the oil produced and stored before being submitted. The selection of the insurance company and policy requires approval from SKK Migas. The insurance policy shall also state that SKK Migas is the co-insured party.

10.  First Trance Petroleum (Section VI)

Before the PSC Contractor recovers the operation costs, SKK Migas and the PSC Contractor are entitled to take 20% (twenty percent) of the oil production in the respective years. This provision is known as First Trance Petroleum (“FTP”). The amount of FTP is exempted from the cost recovery and shall be distributed between SKK Migas and the PSC Contractor proportionately to the portion of oil stipulated in the PSC.

11.  Recovery of Operating Costs and Handling of Production (Section VI)

-          Recovery of Operating Costs

The PSC Contractor can recover operational costs from a specific field with approved POD based on oil or gas sales. The operational costs to be recovered consist of exploratory expenditures, overall capital costs and non-capital costs. Operational costs not covered in the ongoing year shall be covered in the upcoming year.

Regarding the remaining oil, after being deducted by the FTP and operational costs, the PSC Contractor is entitled to 35.74% (thirty five point seventy four percent); this production sharing amount is not yet deductible by taxes.

Regarding natural gas, in the event gas is discovered but not in commercial amounts, it shall be burned off by the PSC Contractor. In the event natural gas is discovered in commercial amounts, the production share for the PSC Contractor may be as much as 71.42% (seventy one point forty two percent).

On 20 December 2010, the Government issued Governmental Regulation No. 79 of 2010 on Recoverable Operational Costs and Application of Income Tax in Upstream Oil and Gas Businesses (“Governmental Regulation on Cost Recovery”). Based on Governmental Regulation on Cost Recovery, there are 24 (twenty four) types of operational costs unrecoverable in the calculation of production sharing and income tax.

-          Regarding Handling of Production

Ownership on the shared oil shall be transferred at the point of export (or in Governmental Regulation on PSC referred to as point of lifting). The PSC Contractor is also entitled to export its share of oil.

12.  Consultation and Arbitration (Section XI)

Any dispute shall first be settled by a consensus within 90 (ninety) days after any notification on any such dispute. Disputes unresolved by a consensus shall be settled by arbitration under the provisions of the United Nations Commission on International Trade Law (UNCITRAL) in a location agreed upon by the parties and shall be conducted in English. (The current PSC generation may use BANI as the settlement forum).

In the previous generations of PSCs, provisions on settling disputes were made based on those of the International Chamber of Commerce and the arbitration was in a location agreed upon by the parties and conducted in English.

13.  Termination (Section XIII)

Basically, the PSC Contractor may not request contract termination within the first 3 (three) years. However, any party is entitled to fully terminate the PSC with a written notice 90 (ninety) days in advance if any violations are made by the other party provided that such violation has been proven by arbitration.

14.  Indonesian Participating Interests

As the first POD is approved by the Government, the PSC Contractor shall offer 10% (ten percent) of the participating interest to the region owned company appointed by the regional government of the location of the Work Territory, or national companies appointed by the Minister of EMR. The PSC Contractor shall notify the offering of the participating interest to the regional government or to the Minister of EMR through SKK Migas.

Types of OIL CONTRACTS IN GENERAL

In general, types of Oil Contracts between the state and contractors can be classified into three types:

1.         Concessions

William & Meyers, in the book Oil and Gas Law series, defines a concession as “an agreement (usually from a host government) permitting a foreign petroleum company to prospect for and produce oil in the area subject to the agreement. The terms ordinarily include a time limitation and a provision for royalty to be paid to the government”. In the concession, the contractor owns the gain from the exploration and exploitation without involving the state as the concession grantor.

In Indonesia, concession agreements are no longer used because they would then grant the Mining Rights to the contractor and this contradicts with Article 33 of the 1945 Constitution.

2.         Production Sharing Contracts

PSCs or referred to as Production Sharing Arrangement in other countries, is a contract commonly used in Indonesia to date. The PSC was introduced when the Law 8 of 1971 was enacted, as Article 12 paragraph (1) of the Law 8 of 1971 states that Pertamina may cooperate in other parties in the form of a PSC. Martin & Kramer, in the book Oil and Gas Law, defines PSC as: “a contract for the development of mineral resources under which the contractor’s costs are recoverable each year out of the production but there is a maximum amount of production which can be applied to this contract recovery in any year. In many such contracts, the maximum is 40%. This share of oil produced is referred to as “cost oil.” The balance of the oil (initially 60%) is regarded as “profit oil” and is divided in the net profit royalty ratio-for instance, 55% to the government. After the contractor has recovered its investment, the amount of “cost oil” will drop to cover operating expenses only and the profit oil increases by a corresponding amount”.

3.         Service Contracts

There are 2 (two) forms of service contracts, namely pure-service contract and risk-service contract. Martin & Kramer, in the book Oil and Gas Law, defines pure-service contract as a contract in which the contractor does not bear the risk for exploration and contractor service, and the State shall pay a flat fee. As for a risk-service contract, the Society of Petroleum Engineers stated that a risk service contract is very similar to a PSC with the only difference being in the remuneration received by the contractor i.e. a fee (and not production yield as in a PSC).

Every country has its own discretion in choosing among the types of contracts stated above and some countries may apply more than one model of contract. In Indonesia, Law 8 of 1971 only acknowledged cooperation under PSCs in the past. However, the Oil and Gas Law now allows for forms of oil and gas contracts other than the commonly used PSC, such as a service contract.

supporting businesses in THE INDONESIA investment negative list

Based on Ministerial Regulation 27 of 2008, only Indonesian legal entities may conduct a Supporting Business. However, Ministerial Regulation 27 of 2008 shows inconsistencies through further stating that the “companies” referred to covers: (i) National Oil and Gas Supporting Services’ Companies, (ii) Domestic Oil and Gas Supporting Services’ Companies and (iii) Transnational/Multinational Oil and Gas Supporting Services’ Companies, without further defining the definitions of the companies. Readers of Ministerial Regulation 27 of 2008 are also confused about the differences between a National Oil and Gas Supporting Services Company and a Domestic Oil and Gas Supporting Services Company.

What about foreign ownership in companies conducting a Supporting Business? Based on the Investment Negative List, several sectors in Supporting Businesses have limited foreign ownership:

No.	Business Sector	Limit
1.	Offshore oil and gas drilling services outside eastern Indonesia	Maximum foreign ownership 95% (ninety five percent).
2.	Onshore oil and gas drilling services	Maximum foreign ownership 95% (ninety five percent).
3.	oil and gas operating and maintenance services	Maximum foreign ownership 95% (ninety five percent).
4.	Engineering Procurement Construction (EPC) services	Maximum foreign ownership 95% (ninety five percent).

Floating Production Storage & Offload or Floating Storage Offload

Regarding offshore oil and gas drilling services or oil and gas operating and maintenance services, we have become familiar with tankers or large crude carriers modified or converted to be used as Floating Production Storage & Offload (“FPSO”) or Floating Storage Offload (“FSO”).  The FPSO is a tanker which operates as a production, offloading, and temporary storage vessel. The FPSO is not a sailing vessel and usually docks in a certain radius near the seashore at places that are not harbors. The FPSO or FSO’s nature is unique because (i) it conducts a business activity categorized as offshore oil and gas drilling services, and therefore is regulated under oil and gas regulations, however (ii) it uses a ship as the media in conducting its business activities. This has resulted in 2 (two) different perspectives regarding the limitation of foreign ownership in companies in FPSO or FSO business sectors.

If considered as vessels, the FPSO or FSO shall be subject to the prevailing laws and regulations in the shipping industry. Foreign entities may conduct business activities in shipping in Indonesia through a foreign investment company. Based on the provisions in the Investment Negative List, companies engaging in general material or hazardous material transport can be owned by foreign entities to a maximum of 49% (forty nine percent).

classification of INDONESIA OIL AND GAS supporting businesses

Oil and gas supporting businesses (“Supporting Business”) are regulated in Minister of EMR’s Regulation No. 27 of 2008 on Oil and Gas Supporting Business Activities (“Ministerial Regulation 27 of 2008”). A Supporting Business can be conducted by (i) companies, including national companies, domestic or transnational/multinational or (ii) individuals, commanditaire vennootschaps, firms and individuals with skills to provide non-construction consultation services in oil and gas.

Based on Ministerial Regulation 27 of 2008, Supporting Businesses are classified as follows:

No.	Classification
1.	Supporting Services Businesses	Construction services in oil and gas	Construction planning services including design engineering
			Construction services including Engineering, Procurement, and Construction (EPC), installation and commissioning
			Construction supervision services
		Non-Construction services in oil and gas	Seismic surveys
			Non-seismic surveys
			Geology and geophysics
			Drilling
			Rig drilling operations
			Underwater work
			Explosives, radio active material, and hazardous material management
			Onshore/offshore logistics base
			Operation and maintenance
			Technical inspections
			Technical testing
			Post-operation works (decommissioning)
			Research and development
			Education and training
			Drilling and production waste management
			Other services
2.	Supporting Industrial Services	Material industry
		Equipment industry
		Oil and gas utilizing industry

opening A foreign representative office FOR UPSTREAM OIL AND GAS ACTIVITIES IN INDONESIA

According to Article 3 paragraph (1) point c of Governmental Regulation No 35 of 1994 on the requirements and guidelines to the Production Sharing Contract ("PSC") in oil and gas, the provisions of the requirements for the PSC are, among others, that the potential PSC Contractors must have a representative office established in Indonesia. Similar obligations are usually stated in the Kontrak Kerja Sama ("KKS"), in which the Permanent Business Establishment (Bentuk Usaha Tetap) acting as a KKS contractor must open a representative office in Indonesia, usually located in Jakarta. 

The opening of a representative office is regulated under the Investment Coordination Board, but for special sectors such as trade and oil and gas, the regulating is performed by agencies or institutions overseeing the respective sectors. According to Minister of EMR’s Decision No. 1454K/30/MEM/2000 on the Technical Guidelines for Performing Governmental Duties in Oil and Gas (“Ministerial Regulation 1454 of 2000”), oil and gas management can be performed by a regional government including, among others, the permits for opening a representative office in the sub-sector of oil and gas.

Specifically for the Special Capital Region of Jakarta, according to Governor of the Special Capital Region’s Decree No. 95 of 2004 on the Oil and Gas Business in the Province of the Special Capital Region of Jakarta (“Governor’s Decree 95 of 2004”), every Permanent Business Establishment establishing a representative office in the sub-sector of oil and gas in the Special Capital Region of Jakarta must obtain written consent from the Head of the Mining Agency. 

The request for a permit must be submitted in writing with the following requirements:

1. a copy of Citizen’s ID/Passport of the head/management of the company;
2. a bank reference from the country of origin; 
3. a bank account of the foreign company and head office;
4. a business registration certificate or its equivalent from the country of origin;
5. a recommendation from the Indonesian embassy in the country of origin stating the name and address of the company, names of the owner and members of the Board of Directors, representative offices overseas and activity plans in Indonesia;
6. a recommendation from the Directorate General of Oil and Gas;
7. a power of attorney for the head of the representative office from the management at the head office;
8. an organizational chart of the head office and representative office in Indonesia;
9. working plans of the representative office/realization of activities in Indonesia; and
10. a company profile and annual report.

The permit granted will be valid for 2 (two) years and can be renewed. The Permanent Business Establishment with a representative office permit in the Special Capital Region of Jakarta must submit a monthly written statement on the company’s oil and gas business to the Governor of the Special Capital Region through the Head of the Mining Agency with a carbon copy to the Minister of EMR.

Indonesia Oil and Gas Key Regulations

INDONESIA OIL AND GAS KEY REGULATIONS

Indonesia has known oil at least since 1596 when Dutch traders reported that oil was being used in Sumatra for lighting and medicinal purposes. Realizing the importance of the oil industry in Indonesia, the Dutch colonial government enacted the Indische Mijn Wet in 1899, which was later amended by Law 44 of 1960 after independence. Lastly, Law 44 of 1960 was amended by the Law No. 22 of 2001 concerning Oil and Gas ("Oil and Gas Law").

Some Important Features in the Indonesia Oil and Gas Law

Here are some features / terms under the Oil and Gas Law:

INDONESIA OIL AND GAS KEY REGULATIONS

Indonesia has known oil at least since 1596 when Dutch traders reported that oil was being used in Sumatra for lighting and medicinal purposes. Realizing the importance of the oil industry in Indonesia, the Dutch colonial government enacted the Indische Mijn Wet in 1899, which was later amended by Law 44 of 1960 after independence. Lastly, Law 44 of 1960 was amended by the Law No. 22 of 2001 concerning Oil and Gas ("Oil and Gas Law").

Some Important Features in the Indonesia Oil and Gas Law

Here are some features / terms under the Oil and Gas Law:

1.          In the Oil and Gas Law, mining rights (Kuasa Pertambangan) are only required for the activities of exploration and exploitation; while processing, transport, storage and trade are conducted under a business permit instead of mining rights.

2.          The Oil and Gas Law defines oil and gas activities as “upstream activities” (covering exploration and exploitation) and “downstream activities” (covering processing, transport, storage and trade) which are governed by different regulations;

A Permanent Business Establishment (Bentuk Usaha Tetap) or Business Entity (Badan Usaha) conducting upstream activities may not conduct downstream activities, and vice versa. If a Business Entity wishes to perform upstream activities and downstream activities concurrently, the entity must establish a separate legal entity.

Indonesia governs upstream activities in Governmental Regulation No. 35 of 2004 on Upstream Activities in Oil and Gas which was later amended by Governmental Regulation No. 34 of 2005 on the Amendments to Governmental Regulation No. 35 of 2004 on Upstream Activities in Oil and Gas (“GR 35/2004”). The GR 35/2004 regulates upstream activities and includes working areas, general surveys and oil and gas data, conducted through KKS, domestic market obligations, state revenue, procedures or settling the procedures for the use of owned land or state land, occupational safety and health as well as the use of domestic goods and services.

To regulate downstream activities, the Government enacted Governmental Regulation No. 36 of 2004 on Downstream Activities in Oil and Gas (“GR 36/2004”) which regulates downstream activities, business permits, processing business, transport, storage and trade, strategic petroleum reserves, standards and quality, the availability and distribution of certain fuels, oil and gas prices, as well as working safety and health, among others.

3.    The Oil and Gas Law returns the authority on mining rights to the government and establishes an implementing agency for controlling upstream activities in oil and gas.

The Oil and Gas Law returns the authority on mining rights to the central government and then established an implementing agency which was later known as BP Migas (now is known as "SKK Migas") for short as the controller of upstream activities in oil and gas.

4.           The Oil and Gas Law returns the role of Pertamina as the business entity subject to the laws and regulations governing State-Owned Enterprises (Badan Usaha Milik Negara or “BUMN”).

5.        The Oil and Gas Law also revoked the exclusive rights of Pertamina in refining and processing, transport and sales by allowing private involvement in downstream activities and established a regulating institution to regulate and monitor the procurement and distribution of oil and gas fuels in downstream activities (BPH Migas).

6.          The Oil and Gas Law opens up opportunities for new types of agreements other than the PSC in conducting upstream activities by using the term KKS. Under the requirement of transfer of the natural resource ownership during the handover point, the management is controlled by the implementing agency and all of the capital as well as risks shall be borne by the Business Entity or Permanent Business Establishment. In addition, the Oil and Gas Law also includes the compulsory basic terms for the KKS.

7.         The Oil and Gas Law allows other forms of a cooperation contract on oil and gas mining other than the commonly used PSC. KKS, is defined as “a PSC or other forms of cooperation in exploration and exploitation which is more profitable to the state and the income can be used for the welfare of the people”. Aside from the PSC, the Oil and Gas Law does not state any other forms of cooperation. However, Governmental Regulation on Upstream Activities has provided examples of other forms of cooperation acknowledged by the laws and regulations in oil and gas.

8.         The Oil and Gas Law also provides the opportunity for regional businesses, small enterprises and cooperatives to be business actors in upstream and downstream activities in oil and gas.

9.         The Oil and Gas Law implements the ring fencing policy, in which every business entity or form is allowed 1 (one) working area and in the event the business entity runs several working areas, a separate business entity for each working area is required. The Oil and Gas Law provides numerous opportunities for business entities, but the Oil and Gas Law also limits only 1 (one) working area to 1 (one) business entity. There has been implementation of ring fencing in Indonesia prior to the enactment of the Oil and Gas Law but under Governmental Regulation No 35 of 1994 on the requirements and guidelines to the PSC in oil and gas (“Governmental Regulation on PSC”).

10.     The Oil and Gas Law prioritizes the use of natural gas for domestic consumption and regulates the domestic market obligation (“DMO”). DMO terms previously only regulated in PSC, are now also specified in the Oil and Gas Law. Article 22 of the Oil and Gas Law was tested materially by the Constitutional Court but this did not annul the DMO terms.

11.       The Oil and Gas Law entrusted domestic BBM and natural gas prices to a fair and proper business competition but this does not disregard the social responsibility of the Government to certain economic levels in society. The Oil and Gas Law is still concerned about specific groups of the public/consumers by providing certain types of BBM and natural gas for household purposes and small scale consumers whose price policies are set by the government. The government will appoint 1 (one) business entity to distribute and trade this particular BBM. In business, the activities of performing the role and responsibilities of the government are called “public service obligation” or “PSO”.

12.      The Oil and Gas Law regulates the obligations of the Business Entity or Permanent Business Establishment towards community development.

13.       The Oil and Gas Law acknowledges the basic principles of Law No. 22 of 1999 on Regional Government (“Law 22 of 1999”) by involving the regional government in the offer of a working area and the initial field development in a working area. The GR 35/2004, as the implementing regulation of the Oil and Gas Law, also obliges the KKS Contractor to offer a 10% (ten percent) participating interest to the local BUMD.

14.       The Oil and Gas Law acknowledges that the principle of Law No. 25 of 1999 on Financial Balancing between the Central and Regional Governments (“Law 25 of 1999”), is adhered to by setting the distribution of state revenue from oil and gas mining between the central government and regional government.

According to the Oil and Gas Law, KKS Contractors are obliged to pay the state in tax and non-tax revenues. The non-tax state revenue covers state shares, levies covering fixed levies and exploration and exploitation levies, and bonuses. The non-tax state revenue is the revenue of the central government and regional government, which is distributed in accordance with the prevailing laws and regulations.