Introduction

The oil & gas industry in Indonesia has functioned via a production sharing contract ("PSC") regime since the 1960s and has enjoyed a period of relative stability in recent years. A decision by the Constitutional Court of Indonesia yesterday has cast doubt over the validity of the PSC system and the current functioning of the key government administrator of the oil and gas industry in Indonesia, BPMIGAS.

On 13 November 2012, the Constitutional Court of Indonesia (the "Court") issued a decision which annulled articles within the Indonesian Oil & Gas Law 22/2001 (the "Oil & Gas Law"). The two key take-way points from the decision are that: (1) BPMIGAS, the Government body in Indonesia regulating the upstream oil & gas sector, is to be dissolved with immediate effect; and (2) that the "private law" PSC model should not be used going forward and should be replaced with a "public law" concession / licence based system.

In its ruling, the Court declared BPMIGAS "unconstitutional", noting that any sections in the Oil & Gas Law relating to the "executive agency" concept (which was the space BPMIGAS was created to fill) are not legally binding. The Court ordered the immediate dissolution of BPMIGAS and stipulated that its functions would need to be administered by the Government, in this case via the Minister of Energy and Mineral Resources ("MEMR"). In addition, all rights and powers of BPMIGAS in relation to PSCs, should be carried out by the Government or a State Owned Enterprise determined by the Government.

Up until 2001, Pertamina (the main Indonesian National Oil Company) played the equivalent role of BPMIGAS as government administrator of the Indonesian oil & gas sector. The regulatory function of Pertamina was abolished in 2001 in order to separate the functions of owner and regulator and to create a level playing field for holders of oil & gas interests in Indonesia. There is no suggestion that Pertamina would be appointed to replace BPMIGAS in relation to its government administrator role for PSCs, and indeed the 2001 reforms were aimed at removing this role held by Pertamina previously. The Government has indicated that all options will now be considered in determining how to deal with the administration of the sector going forward.

The Constitutional Court has specific powers in relation to the review of legislation and the decision of the Court is not open to appeal. The Government has responded to the decision indicating that they will comply with it but that they will need to take some time to implement the requirement to dissolve BPMIGAS, in order to protect the investment climate in the Indonesian upstream oil & gas industry. Given the Court's decision is to take effect immediately, there may be uncertainty over the validity of any acts taken by BPMIGAS (or any substitute) in this interim period.

Implications for Indonesian oil & gas interests

This decision will have far-reaching implications for Indonesia's oil & gas sector. BPMIGAS is one of the key players in the sector and is the main body awarding new oil & gas interests, approving extensions of PSCs, approving transfers of PSCs, administering various approvals under PSCs and overseeing sales of the Government's share of hydrocarbons.

Existing PSCs are to remain in force in their current form: in giving the Court's ruling, the Chief Justice, Mahfud MD declared that "all of the existing oil and gas contracts will be unaffected until they expire". However, the replacement of BPMIGAS as administrator of PSCs has the potential to have wide-ranging practical implications for parties to PSCs, in particular, in areas such as cost recovery, approval of work programs and budgets, approvals of plans of development and hydrocarbon sales, where BPMIGAS's function is central to the system. BPMIGAS's key role in approving data disclosure and approving transfers also means that this decision will have implications for current and future disposal and acquisition processes involving Indonesian oil & gas interests and may cause delay and uncertainty in those processes.

It is also unclear how extensions of existing PSCs and grants of new oil & gas interests will now be dealt with in Indonesia. This will have implications for parties who are in current PSC negotiations with BPMIGAS, as there will now be no clear legal basis for BPMIGAS to award oil & gas interests.

Background to Constitutional Court ruling

A judicial review challenging the Oil & Gas Law was filed by several Non-Government Organisations. The plaintiffs alleged that the existence of BPMIGAS violated Article 33 of the Indonesian Constitution, which states that "the land, the waters and the natural resources within Indonesia shall be under the powers of the State and shall be used to the greatest benefit of the people". In the plaintiffs' view, BPMIGAS treated foreign investors favourably and did not adequately safeguard Indonesian resources for Indonesians.

In giving its ruling, the Court granted part of the plaintiffs' judicial review claims and revoked certain articles of the Oil & Gas Law relating to BPMIGAS and the production sharing contract basis of awarding oil & gas interests. There was a dissenting view from Justice Harjono, who did not agree that the production sharing contract system was unconstitutional.

Outlook

It is too early to assess the impact of the Court's ruling on existing and future investments in Indonesian oil & gas interests (including transfers of existing interests). Much will depend on the regulatory regime that will replace the current set-up and how quickly the government can respond with a sensible solution.

There are some parallels here with recent developments in the Indonesian mining sector, as the system of granting interests in that sector to foreign investors was in 2009 changed from a contract of works basis to a licence / concession basis. As subsequent changes in the Mining Law and their impacts have demonstrated, these changes have meant additional uncertainty for foreign investors. Note too that it is now 3 years since these changes to the Mining Law took effect and there is still no system in place for granting new licences.