Legal Guide to Oil Regulation in Indonesia: Local Content, Transfers, Decommissioning and Transportation

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Legal Guide to Oil Regulation in Indonesia: Local Content, Transfers, Decommissioning and Transportation
9 September 2014

This is the fifth post in our 2014 Legal Guide to Oil Regulation. Fitriana Mahiddin and Syahdan Z. Aziz will address a new topic each week. Use of domestic goods A PSC contractor is required to prioritize the use of domestic goods, services, technology and engineering and design expertise in a transparent and competitive manner, in accordance with the PSC contractor's needs, quality standards, pricing and fair time for delivery. The calculation of local content in the oil industry can be found in the Working Guidelines of the Implementing Body for Upstream Oil and Gas Business Activities (BPMigas) No. 007 Revision-II/PTK/I/2011 regarding Supply Chain Management for the Contractors of a Production Sharing Contract, as amended (PTK 007). The Special Task Force for Upstream Oil and Natural Gas Business Activities (SKK Migas) routinely supervises the realization of local content standards by PSC contractors. PTK 007 stipulates that failure to comply with the commitment to achieve local content standards shall be subject to administrative or financial sanctions, or both. Transfers to third parties Under Government Regulation No. 35 of 2004, as amended several times, lastly by Government Regulation No. 55 of 2009 regarding Upstream Oil and Natural Gas Business Activities (GR 35), any direct transfer of a contractor’s participating interest in a PSC must be approved by the Ministry of Energy and Mineral Resources (MEMR) based on the recommendation of SKK Migas. From 2007 onward, PSCs have stipulated that transfers of participating interests to affiliates and changes of control in a party to a PSC require prior written consent of the MEMR. GR 35 also imposes a requirement that if all or a portion of the rights of the contractor are transferred to a non-affiliate or to another company that is not a partner in the same working area, the MEMR can 'request' that the contractor offer the interest a national company. In addition, during the first three years of the PSC (firm commitment), the initial contractor must remain a majority holder of the participating interest and remain the operator of the PSC. At present, SKK Migas is drafting new guidelines (PTK) for the transfer of participating interests. The draft elaborates on the transfer of participating interests and includes, among other things, provisions on the government consent requirement for the transfer of participating interests and the procedure for obtaining such consent. Change of operator Under a new PSC standard form, the appointment of an operator and its subsequent successor must be subject to the prior written approval of SKK Migas, and SKK Migas must notify the government (MEMR) of such an appointment. A standard Joint Operating Agreement form also provides that a change of operatorship is subject to obtaining the approval of the participating interest holders. Decommissioning Although without obligating specific actions, the Oil and Gas Law promotes environmental management in the oil and gas sector and specifies that post-operation obligations must be met in such respect. There are extensive regulations and instruments governing this issue. In a nutshell, a contractor must dismantle disused mining installations by taking proper steps to ensure working and navigation safety, with due compliance with the notification and reporting procedures before and after the dismantlement. MEMR Reg 02P/1992 requires that land reclamation be carried out after the completion of oil mining activities. Under PTK 040/2010 and the relevant PSC, the contractor is also required to reserve funds for abandonment and site restoration activities (ASR), with such funds to be deposited in a joint account of the contractor and SKK Migas (ASR joint account). ASR obligations may also be found in the environmental documents (AMDALs) relevant to the PSC. As mentioned above, during the term of the PSC, a contractor is required to reserve ASR funds and deposit the same in an ASR joint account. The deposited ASR funds are not merely a guarantee of performance of ASR activities, but will be disbursed and used to finance ASR activities after the production period ends. The method of calculation is detailed in PTK 040/2010, as is the procedure for depositing and disbursing the ASR funds. The amount of ASR funds to be deposited each semester shall be calculated based on the adjusted most recent ASR cost estimation subtracted by the balance of ASR funds available in the ASR joint account, divided by the remaining period of ASR fund accrual, which is subject to evaluation by SKK Migas. Transportation Under the Oil and Gas Law, the MEMR will establish a transportation master plan and, given its general authority over the transmission and distribution of oil and natural gas, determine joint use of transportation systems and intervene in pipeline operator disputes. The Regulatory Body for Downstream Oil and Natural Gas Business Activities (BPH Migas) is given the authority to settle questions over access to oil and natural gas transportation systems and the interconnection of, and cooperation between, pipeline systems. A holder of a license from the MEMR for special rights (the operator of a gas pipeline) must allow third-party access to its natural gas transportation and storage facilities, under the supervision of BPH Migas. Based on the Oil and Gas Law and Government Regulation No. 36 of 2004 regarding Downstream Oil and Natural Gas Business Activities, as amended by Government Regulation No. 30 of 2009 (GR 36), transportation of crude oil is a downstream activity that can only be performed by a business entity, which requires a specific business license from the MEMR, unless such transportation is a continuation of exploration and exploitation activities conducted by a PSC contractor. Reproduced with permission from Law Business Research Ltd. This article was first published in Getting the Deal Through – Oil Regulation 2014. For further information, please visit This article is intended for informational purposes only and does not constitute legal advice. This article should not be acted upon in any specific situation without appropriate legal advice.

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