Indonesia Omnibus Law – Changes to the Oil and Gas Law

Indonesia's closely watched omnibus jobs creation bill recently became law. The stated aim of Law No. 11 Year 2020 on Jobs Creation (the "Omnibus Law") is to boost investment and create jobs by streamlining regulations and simplifying the licensing process to improve the ease of doing business in Indonesia.

The Omnibus Law amends various provisions in laws across numerous sectors, including Law No. 22 of 2001 on Oil and Gas (the "Oil and Gas Law").

We highlight some of the noteworthy changes to upstream and downstream oil and gas business activities under the Omnibus Law. We understand that a separate and more detailed amendment to the Oil and Gas Law is being prepared by the House of Representatives.

Upstream Oil and Gas Business

Introduction of Business License

Under the Omnibus Law, companies involved in upstream oil and gas business activities are required to obtain a "Business License" from the Central Government (the President, assisted by the Vice President and the Minister of Energy and Mineral Resources ("MEMR")). A Business License is defined very generally in the Omnibus Law as being legally granted to a business entity to commence and carry out its business and/or activities.

It is unclear what type of Business License will be applicable to upstream oil and gas operations as the Omnibus Law did not revoke the requirement under Article 6 of the Oil and Gas Law that upstream oil and gas business activities be carried out and controlled through a Production Sharing Contract ("PSC").

Upstream oil and gas may be considered a high-risk business sector under the Omnibus Law, which would require business actors in the sector to obtain at least a Business Identification Number (NIB) and a Business License from the Central Government before conducting business activities.

There are questions around the criteria and requirements for a PSC contractor to obtain a Business License. Another question is how this requirement will affect existing PSCs. The Omnibus Law contains a general transition provision stipulating that business licenses and sectoral licenses issued prior to the introduction of the Omnibus Law will remain in force until the expiration of the license, while Business Licenses that are in the application process shall be adjusted to conform with the provisions of the Omnibus Law.

It is unclear whether under this provision PSC contractors with existing PSCs would not be subject to the requirement in the Omnibus Law to obtain a Business License.

Sanctions

The Omnibus Law amends the provision in the Oil and Gas Law on sanctions. It now provides that any person conducting exploration and/or exploitation activities without a "Business License or PSC" shall be subject to imprisonment for a maximum of six years and a maximum fine of Rp.60 billion.

Downstream Oil and Gas Business

Single Business License

The Omnibus Law removes the multiple business licensing requirement for downstream oil and gas business activities (processing, transportation, storage and/or trading) under the Oil and Gas Law. Rather, it designates a single integrated Business License that is applicable for all of the foregoing business activities. This Business License will be processed through an online system managed by the Central Government.

Currently, companies must manually apply for downstream business licenses with the Indonesian Capital Investment Coordinating Board ("BKPM") c.q. the Directorate General of Oil and Gas in accordance with MEMR Regulation No. 40 of 2017 on the Delegation of Authority in Granting Licenses in the Oil and Gas Business Sector to the BKPM. With the enactment of the Omnibus Law, Business Licenses for downstream activities will be applied for and issued electronically through an online system managed by the Central Government.

Sanctions

Under the Omnibus Law, a company that conducts any downstream business activities without a Business License shall be subject to administrative sanctions in the form of termination of business and/or activities, a fine and/or "coercion (paksaan) by the Central Government". There is no further elaboration on what is meant by coercion (paksaan). These sanctions will be further regulated in a Government Regulation that is to be issued.

A party that conducts downstream business activities without a Business License that result in damage to health, safety and/or the environment shall be subject to maximum imprisonment of five years or a maximum fine of Rp.50 billion.

Previously, under the Oil and Gas Law, a party that conducted downstream business activities without a business license was subject to imprisonment and a fine, with the maximum amounts differing according to the type of activity, i.e. processing, transportation, storage or trade. These sanctions were not subject to any prerequisites, e.g., activities that result in damage to health, safety and/or the environment.

Administrative sanctions for the violation of any requirement in a Business License and/or in the Oil and Gas Law as amended by the Omnibus Law are not made explicit in the Omnibus Law, which simply provides for "administrative sanctions." The criteria, type, fine amounts and the procedures for administrative sanctions are to be regulated by a Government Regulation. Previously, under the Oil and Gas Law, the administrative sanctions were stipulated as written warning, suspension of activities, freezing of activities, or revocation of business license.

The Omnibus Law also imposes sanctions for any person abusing the transportation and/or trading of subsidized gas fuel and/or liquefied petroleum gas in the form of imprisonment for a maximum of six years and a maximum fine of Rp.60 billion. Previously, the Oil and Gas Law only imposed the aforesaid sanctions for the abuse of the transportation and/or trading of subsidized fuel.

Key Takeaways

The Omnibus Law does not amend many provisions in the Oil and Gas Law and leaves room for further revisions under the amendment to the Oil and Gas Law the House of Representatives is said to be preparing. Revisions in the downstream sector should be in line with the overall purpose of the Omnibus Law, which is to simplify licensing procedures and remove excessive regulatory requirements. Revisions in the upstream sector, specifically relating to the Upstream Business License, may complicate business procedures and create more red tape by adding a new requirement for a business license in addition to a PSC.

It will be necessary to monitor developments with these changes under the implementing regulations to be issued, and how the Omnibus Law is implemented in practice.

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