The Ministry of Energy and Mineral Resources has introduced Regulation No. 15 of 2018 on Post-Operation Activities in Upstream Oil and Gas Business Activities (ASR Regulation). As a result of this regulation, production sharing contract (PSC) contractors, even those holding older generation PSCs that do not have abandonment and site restoration (ASR) obligations, or which do not require the creation of ASR funds, will need to set up such funds and, unless the PSC is taken over by a third party, will be solely liable for completing the ASR obligations.
The ASR Regulation raises a number of queries. We address some of these below:
1. Waht is ASR?
Post-operation activities cover the dismantling of equipment, installations and/or supporting facilities, including the permanent closure (capping) of wells, site recovery and handling of the removal of upstream equipment, installations and/or facilities (Post-Operation Activities). Under the terms of the regulations, such activities must be carried out before or on the expiry of the PSC.
We have checked with the Directorate General of Oil and Gas (DGOG), and such activities, including any site restoration activities, are primarily intended to relate to the removal of physical infrastructure. Accordingly, the ASR Regulation should not be interpreted as imposing a general obligation to restore/remediate hydrocarbon impacted soil, i.e., land on which crude oil has been spilt.
2. What do PSC contractors have to do in relation to ASR?
Under the ASR Regulation, holders of PSCs should carry out Post-Operation Activities. During the exploration stage, the plan of such activities should be set out in a work program and budget, and submitted to the Special Taskforce for Upstream Oil and Gas Business Activities (SKK MIGAS) for approval. During the production stage, the planned ASR operations will be set out in the draft plan of development (POD) submitted by the PSC contractor to SKK MIGAS (and is hence subject to the DGOG's /SKK MIGAS’s approval).
Post-operations, the PSC contractor will submit the detailed implementation plans, or amendments thereto, to the DGOG, through SKK MIGAS. The DGOG will create a task force to evaluate the plans, comprising representatives from the DGOG, SKK MIGAS and other authorities – we assume these might include the Ministry of the Environment and Forestry, Ministry of Maritime Affairs and Fisheries, as well as local government representatives. As the ASR plans incorporated in the work program and budgets, and plans for development, are also the basis for any costings and funding, the additional approvals required at the implementation stage leave the PSC contractors exposed to the risk that the previously agreed budgets might not be sufficient.
Prior to implementing the abandonment commitments set out above, the PSC contractor must:
- “socialise” such plans with the public and related agencies – it is unclear if this requires a formal consultation process; in practice, a series of town halls might be the easiest way to satisfy this requirement so far as the public is concerned;
- install safety signs around the relevant location;
- ensure that all infrastructure connected to the – presumably production - installation has been disconnected;
- ensure that all piping systems and other equipment are free of hazardous and toxic materials – in the context of pipeline systems and separation tanks, this aspect of pre-ASR operations would seem to be integral to the actual implementation of the ASR obligations themselves; and
- ensure the installation is free of hazardous and toxic waste materials. Again, the scope of this requirement is unclear – does it simply relate to removal of inventory, or does the obligation extend further, to clearing up spills in the immediate vicinity of the production infrastructure?
3. What are the mechanics of funding these ASR obligations?
The PSC contractor must fund its ASR commitments, as set out in its work programs and budgets; such funds will be deposited gradually, upon the commencement of commercial production. The funds should be deposited into a joint account (in SKK MIGAS’s and the PSC contractor’s name), with an Indonesian state-owned bank. Interest on such funds will reduce the PSC contractor’s funding requirements.
Funds deposited in such a joint account will be cost-recoverable and tax deductible (for cost recovery PSCs), or tax deductible (for gross split PSCs).
The ASR implementation plan approved by the DGOG appointed committee should be funded out of the reserved funds; any excess funds should be returned to the Government (for cost recovery PSCs – as these have been funded by the Government through cost recovery), or returned to the PSC contractor in the case of gross split PSCs. Overruns or underspends are subject to SKK MIGAS approval - the Contractor will still be liable to complete these works however.
4. When must the ASR obligations be carried out?
If the PSC is extended/taken over (e.g., by Pertamina), then the new PSC contractor assumes the obligation to perform and fund the ASR. The new PSC contractor will also be entitled to use the ASR funds already set aside.
This raises the question of timing. The PSC is, effectively, the PSC contractor’s license to operate, in a particular contract area. It is also the means by which foreign companies are allowed to carry out business activities in-country, without the need to set up an Indonesian entity. Does this mean that the ASR obligations should have been performed in full prior to the PSC expiry? There are conflicting views on this, given the wording of Article 17 of the ASR Regulation (which talks about the PSC contractor carrying out its ASR obligations before or on the expiry/at the end of the PSC).
In this connection, even if the ASR operations are carried out after the PSC has expired, the cost of such operations should still be cost recoverable, as it is the ASR funds which are cost recoverable, not the operations to be carried out with them.
5. How will the Government enforce these obligations?
The regulations do not impose any sanctions on PSC contractors that fail to set aside funding for, or to implement, their ASR obligations. However there are a number of options open to SKK MIGAS/DGOG to ensure the regulation is complied with:
- DGOG/SKK MIGAS could seek to enforce the regulation under the provisions of, say, the environmental law.
- DGOG/SKK MIGAS could seek to withhold relevant work program and budget/POD approvals
- SKK MIGAS might try to argue that the failure to comply with the ASR obligations is a breach of some of the following articles of the PSC:
|2013 PSC terms|
|1.||5.2.4 - preparation and execution of the Work Program in a workmanlike manner, applying HSE standards applicable in the oil and gas industry. This language is found in newer PSCs. Older PSCs have an obligation to implement Programs in a workmanlike manner, using appropriate scientific means.|
|2.||5.2.6(b) - take the necessary precautions for the protection of ecological systems, navigation and fishing and to prevent the extensive pollution of the area, seas or rivers as a direct result of petroleum operations.|
|3.||5.2.6(c) - be responsible for the removal of all equipment and installations from the Contract Area and perform all necessary site restoration activities in accordance with the applicable regulations.|
|4.||5.2.6(d) and (e) - include an estimate of anticipated abandonment costs and site restoration costs in relevant WPBs / PODs.|
|5.||15.3.1 - the laws of the Republic of Indonesia apply to the PSC (Article 15.3.2 states that no term of the PSC prevents the GOI from exercising its inalienable rights).|
Arguably, any of these might entitle SKK MIGAS to insist that it is able to claim breach of contract for failure to comply with the terms of the ASR Regulation.
6. Issues posed
- The Government might try to enforce these ASR obligations - either by withholding approvals for work programs and budgets or plans of development, or under the terms of the environmental law, or any supplementary regulations to the ASR Regulation, even if this is contrary to the PSC. Specific legal advice should be sought in relation to the enforceability of these ASR obligations outside the framework of the PSC.
- In this connection, older generations of PSC contained only very light obligations in relation to ASR obligations. Does this prevent the Government imposing these ASR obligations on such PSC contractors? In effect, are such PSCs a "shield" against further Government regulation? There are good arguments for saying why this is the case. Again, the issues posed by this question are complex, and specific legal advice should be sought on this matter.
- The residual liabilities created by oil and gas operations is an issue that has become increasingly problematic in other jurisdictions - it remains to be seen whether the ASR Regulation will change the position with regards to such liabilities in Indonesia.
7. What should PSC contractors do?
For many companies, the issues posed by the ASR obligations may not be all that substantive, given that these obligations already sit in their PSCs. However, for those companies operating under older PSCs, or seeking to extend their PSCs, the ASR Regulation imposes significant additional liabilities which may not, potentially, have been contemplated by such PSC contractors.
PSC contractors should, clearly, be aware of this potential risk. They might also want to assess the extent to which they wish to challenge the applicability of these obligations to their PSCs. Any such challenge, in turn, will involve an assessment of the risks to relationships and to reputation caused by such a course of action, versus the actual costs of carrying out these operations and the expectation of being able to recover some or all of these costs.