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.