MEMR Imposes New Abandonment and Site Restoration Obligations for Indonesian Upstream Oil and Gas Activities

Indonesia's Minister of Energy and Mineral Resources ("MEMR"), after a long wait, has regulated abandonment and site restoration ("ASR") activities, or post-operation activities, for the upstream oil and gas sector.

MEMR Regulation No. 15 of 2018 regarding Post-Operation Activities in Upstream Oil and Gas Business Activities ("MEMR Reg. 15/2018") came into effect on February 23, 2018. It implements Article 17 (4) of Government Regulation No. 79 of 2010 regarding Recoverable Operating Costs and Income Tax Treatment in Upstream Oil and Gas Business Activities, as amended by Government Regulation No. 27 of 2017 (as amended, "GR 79"). Even though Article 17(4) of GR 79 only orders the MEMR to stipulate the procedure for the utilization of ASR funds, MEMR Reg. 15/2018 now imposes the obligation to conduct ASR activities.

MEMR Reg. 15/2018 revokes MEMR Regulation No. 1 of 2011 regarding Technical Guidelines for the Dismantling of Offshore Oil and Gas Installations ("MEMR Reg. 1/2011"). While MEMR Reg. 1/2011 only concerned offshore installations, MEMR Reg. 15/2018 applies to both onshore and offshore installations.

Planning

i. Post-Operation Activities

MEMR Reg. 15/2018 requires Production Sharing Contract ("PSC") Contractors to carry out post-operation activities before or on the expiry of the PSC. Post-operation activities comprise dismantling equipment, installations, and/or supporting facilities, including permanent well plugging, site restoration, and managing the disposal of equipment, installations, and/or facilities.

A post-operation activities plan must first be reported to the chairman of the Special Taskforce for Upstream Oil and Gas Business Activities ("SKK Migas") through the submission of a Work Program and Budget (if the PSC is in the exploration stage) or as part of the field development plan (if the PSC is in the exploitation stage).

This plan must include at least (i) a list of the equipment, installations, and/or facilities to be dismantled, as well as the well(s) to be permanently plugged, and (ii) the estimated costs. MEMR Reg. 15/2018 indicates that the Chairman of SKK Migas has the authority to approve the post-operation activities plan for a PSC in the exploitation stage, but remains silent regarding the post-operation activities plan for a PSC in the exploration stage.

The PSC Contractor may amend its reported post-operation activities plan with the approval of SKK Migas chairman.

ii. Funds for Post-Operation Activities

Article 11 of MEMR Reg. 15/2018 obligates a PSC Contractor to allocate funds for post-operation activities ("ASR Funds") in accordance with the estimated costs in the post-operation activities plan submitted to SKK Migas.

The ASR Funds shall be reserved gradually in accordance with the Work Program and Budget, with the first mandatory deposit being due the year production is deemed as commercial. The ASR Funds must be deposited in a joint account between SKK Migas and the PSC Contractor in an Indonesian state-owned bank.

For a PSC that uses the cost-recovery mechanism, the allocated ASR Funds are treated as recoverable operating costs. For a gross-split PSC, the allocated ASR Funds are borne by the PSC Contractor and can be used as a deduction by the PSC Contractor in calculating its income tax.

If the PSC Contractor amends its post-operation activities plan, the allocated funds must be adjusted accordingly.

Implementation

Prior to implementing post-operation activities, the PSC Contractor must obtain an approval from the Director General of Oil and Gas ("DGOG"). MEMR Reg. 15/2018 contemplates that the DGOG will form a Post-Operation Activities Evaluation Team ("Evaluation Team") to evaluate post-operation activities plans. Subject to the result of the evaluation by the Evaluation Team, the DGOG will issue its approval.

After DGOG approval is obtained, the PSC Contractor must immediately carry out the post-operation activities in accordance with the approved plan.

MEMR Reg. 15/2018 provides that the PSC Contractor must do the following prior to commencing post-operation activities:

MEMR Reg. 15/2018 also provides that the implementation of post-operation activities must adhere to the applicable Indonesian National Standard ("SNI") and/or relevant international standards.

Post-operation activities are implemented by utilizing the ASR Funds that have been allocated. If the realized costs of the implementation are less or greater than the estimated amounts, the margin shall be used to deduct or add to the operating costs of the relevant block or field, with the approval of the SKK Migas chairman.

After the post-operation activities are completed, the PSC Contractor must submit a report of implementation of post-operation activities to the DGOG within 30 (thirty) calendar days.

PSC Expiration

A PSC Contractor's obligation to carry out post-operation activities extends until the expiry of the PSC.

Based on Article 16 of MEMR Reg. 15/2018, if the PSC expires and the post-operation activities have been completed, any remaining balance in the ASR Funds will be retained by the State (for a PSC that uses the cost-recovery scheme) or returned to the PSC Contractor (for a gross-split PSC).

If the MEMR appoints another party as the new PSC Contractor, this new Contractor will bear the obligation to conduct post-operation activities and to allocate ASR Funds.

Article 17(3) of MEMR Reg. 15/2018 provides that the new PSC Contractor may utilize unused ASR Funds allocated by the previous PSC Contractor. It is unclear in what circumstance this provision would apply. Given that Article 16 stipulates that unused ASR Funds are retained by the State or returned to the PSC Contractor upon completion of post-operation activities, it is likely that Article 17(3) is intended to apply in the event the post-operation activities are not completed by the time the PSC expires.

Applicability of MEMR Reg. 15/2018

The transitional provisions of MEMR Reg. 15/2018 provide that:

• The allocation and utilization of ASR Funds allocated but not yet used prior to the enactment of MEMR Reg. 15/2018 must be adjusted to and/or implemented in accordance with the provisions of MEMR Reg. 15/2018; and
• PSCs that do not contain provisions regarding post-operation obligations are subject to MEMR Reg. 15/2018. Consequently, PSC Contractors now have the obligation to conduct post-operation activities and provide and utilize ASR Funds in accordance with MEMR Reg. 15/2018. The amount and means of allocation of ASR Funds are to be stipulated by the chairman of SKK Migas.

Pursuant to Article 19 of MEMR Reg. 15/2018, oil and gas activities in Aceh are also subject to this regulation, with the functions and duties of SKK Migas being handled by the Aceh Oil and Gas Regulatory Body (Badan Pengelola Migas Aceh or "BPMA").

Issues

This Regulation raises a number of questions. Among others and perhaps most importantly, whether the Government of Indonesia ("GOI") can unilaterally amend the terms of PSCs that did not contain any ASR obligations by issuing a regulation to such effect while the GOI is a party to the PSC. Most older-generations PSCs did not contain any ASR obligations.

These PSCs were signed by BP Migas (the predecessor of SKK Migas), which, given its nature as a state-owned legal entity, remains part of the GOI. Given that the GOI (through BP Migas) is a party to the PSC, the issue is whether the GOI\'s unilateral imposition of new obligations that were not contained in the PSC violates the sanctity of the PSC. The inability of the GOI to make such unilateral amendments was recognized by the Constitutional Court in the decision that declared BP Migas unconstitutional.

Second, MEMR Reg. 15/2018 provides that the margin between the planned ASR costs and the realized ASR costs can be used to deduct or add to the operating costs of the relevant block or field. It is unclear how this calculation can be done at the end of a PSC where there is no production from which to recover the operating costs from.

If a PSC Contractor overestimates the ASR costs such that there is an excess of ASR funds upon completion of the post-operation of a PSC that uses the cost-recovery scheme, it is also unclear why such excess would not be returned to the PSC Contractor but retained by the State, considering the PSC Contractor would not be able to cost-recover the ASR costs in the absence of production.

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