Following the issuance of Minister of Energy and Mineral Resources (“MEMR”) Regulation No. 23 of 2018 on the Management of Oil and Gas Working Areas with Expiring Cooperation Contracts, as amended by MEMR Regulation No. 28 of 2018 (“MEMR Regulation 23/2018”), there was substantial speculation in the media (fuelled by reported statements from MEMR officials) that MEMR Regulation 23/2018 prioritised existing production share contract (“PSC”) contractors over Pertamina in relation to the extension of expiring PSCs. This uncertainty has now been resolved by a Supreme Court decision which maintains the priority rights of Pertamina.
Our view at the time of the issuance of MEMR Regulation 23/2018 was that there was no regulatory support for the supposed ‘priority’ for existing PSC contractors in relation to the extension of expiring PSCs. Article 2 of MEMR Regulation 23/2018 did re-order the list of options that MEMR has in relation to the expiry of a PSC so that granting extensions to existing PSC contractors came before granting applications from Pertamina. However, Article 2 did not expressly (or, in our view, implicitly) give any priority to existing PSC contractors over Pertamina. Nonetheless, significant confusion arose within the industry as to the intention and interpretation of MEMR Regulation 23/2018.
In response to the supposed priority rights of existing PSC contractors, on 12 October 2018, the Federasi Serikat Pekerja Pertamina Bersatu (the Pertamina United Workers Union Federation – “FSPBB”) filed an application for judicial review of Article 2 of MEMR Regulation 23/2018 to the Indonesian Supreme Court. The FSPBB argued that the order of the list of options for MEMR in relation to the expiry of a PSC suggests that existing PSC contractors are granted preference over Pertamina for the extension of expiring PSCs, contrary to Article 33 of the Indonesian Constitution, Law No. 19 of 2003 on State Owned Enterprises and Law No. 30 of 2007 on Energy.
In response to this claim by the FSPBB (and contrary to previous reported statements from MEMR officials), MEMR argued that MEMR Regulation 23/2018 did not provide any such priority to existing PSC contractors over Pertamina and complied with all applicable laws and regulations in the oil and gas sector.
The Supreme Court made its decision on 29 November 2018, but its reasoning was only recently made public. The Court granted the judicial review application of FSPBB, declaring that Article 2 of MEMR Regulation 23/2018 contravened (among other things) Article 33 of the Indonesian Constitution, and is therefore not legally binding to the extent that the order of options under Article 2 might be interpreted as granting priority to existing PSC contractors over Pertamina.
The publishing of this Supreme Court decision confirms once and for all that existing PSC contractors have no special or priority rights or preference over Pertamina in relation to the extension of expiring PSCs. As a result, the Indonesian Government will continue to review PSC extension applications on their merits. This is likely to continue the recent trend of awarding PSC extensions in favour of Pertamina, as illustrated by the high-profile extension of the Rokan PSC.