MEMR Introduces Regulation on Non-Conventional Oil and Gas Operations in Indonesia

The Indonesian Minister of Energy and Mineral Resources (MEMR) recently enacted Regulation No. 38 of 2015 regarding Expediting Non-Conventional Oil and Gas Operations (MEMR Reg. 38/2015). MEMR Reg. 38/2015 came into effect on November 2, 2015.

The main points of MEMR Reg. 38/2015 are:

Non-Conventional Oil and Gas Cooperation Contracts

Under MEMR Reg. 38/2015, there are three types of cooperation contracts for non-conventional oil and gas operations. These are Production Sharing Contract (PSC), Sliding Scale Production Sharing Contract (Sliding Scale PSC), and Gross Split Sliding Scale Production Sharing Contract (Gross Split Sliding Scale PSC). The type of contract used for a non-conventional oil and gas work area will be determined by the Directorate General of Oil and Gas (DGOG) on behalf of the MEMR.

While PSCs are common in Indonesia's oil and gas sector, Sliding Scale PSC and Gross Split Sliding Scale PSC are new. As defined by MEMR Reg. 38/2015, a Sliding Scale PSC is a form of contract with progressive production sharing based on annual cumulative production with an operational cost recovery mechanism, while a Gross Split Sliding Scale PSC involves the sharing of progressive gross production based on annual production without a cost recovery mechanism.

MEMR Reg. 38/2015 does not elaborate on the implementation of Sliding Scale PSC and Gross Split Sliding Scale PSC. According to a DGOG press release, progressive production sharing in the Sliding Scale PSC and Gross Split Sliding Scale PSC means the percentage of the split between the Contractor and the Government can be adjusted according to the amount of production. A cooperation contract shall have a maximum term of 30 years, extendable up to 20 years for each extension.

Mandatory Fund Deposit

Under Article 7 of MEMR Reg. 38/2015, a Contractor must deposit funds in a joint account with upstream regulator SKK Migas in the amount of:

1. 10% of the total exploration firm commitment or US$1.5 million, whichever is greater; or
2. 10% of the total budget for the work plan commitment for the first two years of the exploitation period, or US$1 million, whichever is greater.

MEMR Reg. 38/2015 does not further regulate how to or who should determine which provision shall apply.

Approval of Plan of Development (POD)

Pursuant to Article 9 of MEMR Reg. 38/2015, the calculation of reserves to obtain POD approval shall be proven reserves added by 70% of probable reserves. This calculation may be done without a certification of reserves. The first POD approval shall be obtained from the MEMR based on the consideration of SKK Migas, whereas subsequent POD approval(s) must be obtained from the Chairman of SKK Migas.

Commercialization and Utilization of Non-Conventional Oil and Gas

Production of non-conventional oil and gas is prioritized for domestic needs. Under Article 11 of MEMR Reg. 38/2015, a Contractor can sell its non-conventional oil and gas production prior to the first POD approval with the consent of the MEMR (based on the consideration of the Chairman of SKK Migas). The income from such sale shall be split according to the split proportion stipulated in the relevant cooperation contract. For PSC and Sliding Scale PSC, the split shall precede the taking of first tranche petroleum and the calculation of cost recovery.

Transitional Provisions

Under Article 12 of MEMR Reg. 38/2015, existing Coal-Bed Methane (CBM) Contractors shall calculate reserves for POD approval in the manner accordant with Article 9 of MEMR Reg. 38/2015 as discussed above. Further, under Article 13 of MEMR Reg. 38/2015, a CBM Contractor whose contract is still valid may propose an amendment of its current contract or a change of form of its current contract, provided that the CBM Contractor has fulfilled at least 60% of its firm commitment. The amendment proposal shall be submitted to the MEMR through the Chairman of SKK Migas.

The remaining portion of the firm commitment that has not been fulfilled shall be carried out pursuant to such amendment or change of the existing contract. The CBM Contractor is also obligated to deposit funds in the amount of 10% of the remainder of the firm commitment that has not been fulfilled in a joint account with SKK Migas. Upon such proposal for amendment, the Chairman of SKK Migas shall convey its considerations to the MEMR. If the MEMR approves the proposal, the MEMR shall stipulate the form and the main terms and conditions of the relevant contract.

MEMR Reg. 38/2015 does not provide a time frame within which the MEMR must decide whether or not it approves the proposal.

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