Indonesia Issues Regulation to Prioritize the Domestic Use of Crude Oil

The Indonesian Minister of Energy and Mineral Resources has issued Regulation No. 42 of 2018 regarding the Prioritization of the Use of Crude Oil for the Fulfilment of Domestic Demand (MEMR Reg 42/2018), which came into effect on September 6, 2018.

MEMR Reg 42/2018 was issued in response to the order by Indonesian President Joko Widodo to implement the program to stabilize the foreign exchange rate in the energy and mineral resources sector.

Article 2 of MEMR Reg 42/2018 requires PT Pertamina (Persero) (Pertamina), the Indonesian state-owned oil and natural gas corporation, and business entities that hold a Crude Oil Processing License (Crude Oil Refining Business Entities) to prioritize the utilization of crude oil, including condensate (Article 7 of MEMR Reg 42/2018), from domestic Production Sharing Contract (PSC) contractors before considering imports.

To satisfy domestic demand for crude oil, Article 3 of MEMR Reg 42/2018 requires PSC contractors or their affiliates to offer their portion of crude oil to Pertamina and/or the Crude Oil Refining Business Entities at least three months before the export recommendation period for the PSC contractors' portion of crude oil.

Pertamina and/or the Crude Oil Refining Business Entities are obligated to negotiate for the purchase of the PSC contractors' share of crude oil in a business-to-business scheme. The regulation does not elaborate on what such a business-to-business scheme will look like or entail. The result of the negotiations must be reported by Pertamina and/or the Crude Oil Refining Business Entity to the Directorate General of Oil and Gas (DGOG), in accordance with Article 6 of MEMR Reg 42/2018.

Article 5 of MEMR Reg 42/2018 provides that after negotiating the terms, Pertamina may directly appoint the PSC contractor for the purchase of crude oil. Such appointment may be made in the form of a long-term contract with a period of 12 (twelve) months.

Article 8 of MEMR Reg 42/2018 provides that implementing regulations for MEMR Reg 42/2018 will be issued by the DGOG and the Special Task Force for Upstream Oil and Gas Business Activities (Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi or SKK Migas). No implementing regulation has been issued as of the date of this writing.

The provisions of MEMR Reg 42/2018 raise the question of whether the Government of Indonesia could unilaterally amend the terms of a PSC that did not contain any obligation for the PSC contractor to offer its portion of crude oil to Pertamina and/or the Crude Refining Business Entities. It is also unclear how MEMR Reg 42/2018 would treat the validity of existing sale and purchase agreements between PSC contractors and their buyers. It will be necessary to see how these issues are addressed in practice and by the expected implementing regulations.

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user's own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.