- In line with the Indonesian competition watchdog’s (KPPU) concerted efforts to eradicate unhealthy business competition and promote a positive investment climate, KPPU has handed down two recent decisions to Indonesian petroleum industry players. These two decisions have sent a clear signal to the Indonesian petroleum industry that KPPU will investigate, prosecute and fine oil companies which are involved in collusive tendering practices.
- In 2010 alone, KPPU imposed fines on 29 companies for a total amount of around US$126 million for collusive tendering and cartel practices.
- The following article highlights KPPU’s key findings and considerations in respect of the two recent decisions and the implications of the decisions on the Indonesian petroleum industry.
KPPU decision in the Donggi Project
On 5 January 2011, KPPU fined Indonesian oil companies, PT Pertamina (Persero) (Pertamina), PT Medco Energi Internasional (Medco) and PT Medco E&P Tomori Sulawesi (MEPTS), and Mitsubishi Corporation from Japan (Mitsubishi) for conspiring with each other to:
- appoint Mitsubishi as the winner of a competitive tender (also referred to as a ‘beauty contest’) to participate as a partner in the Donggi-Senoro LNG Project in Sulawesi (Donggi Project), and
- provide Mitsubishi with data and information obtained from a competitor for the Donggi Project that provided Mitsubishi with an unfair business advantage.
The total fines imposed by KPPU amounted to IDR31 billion. Mitsubishi faced the heftiest fine of IDR15 billion whilst Pertamina was fined IDR10 billion, Medco IDR5 billion and MEPTS IDR1 billion. These are the highest fines that KPPU has ever imposed. The underlying rationale for this apportionment appears to be that Mitsubishi was the party which had the ‘most to gain’ and therefore should bear the heftiest penalty.
However, it is not clear why KPPU did not exercise its powers to make orders to cancel the tender award to Mitsubishi and/or require Pertamina, Medco and MEPTS to re-tender for the Donggi Project.
KPPU found that the manner in which Pertamina, Medco and MEPTS had conducted the beauty contest and determined that Mitsubishi presented the winning bid was in clear breach of Article 22 of Law No.5 of 1999 on the Prohibition of Monopolistic and Unfair Business Competition (Anti-Monopoly Law). Essentially, this provision prohibits businesses from conspiring with each other and/or other parties to determine the winner of any tenders in a manner which will cause unfair business competition.
In this case, Pertamina and Medco invited seven oil companies to tender for the Donggi Project, namely Mitsubishi, PT LNG Energi Utama (LNGEU), LNG Japan Corporation, Toyota Tsusho Corporation, Itochu Corporation, Marubeni Corporation and Mitsui by sending an invitation letter as well as the Terms of Reference for the beauty contest (TOR).
KPPU’s investigation revealed that the Boards of Directors of Pertamina, Medco and MEPTS had provided Mitsubishi with opportunities to present to them prior to and during the beauty contest. This was a clear advantage handed to Mitsubishi because no other bidders were provided with these opportunities and such other bidders were totally unaware that these meetings had taken place. KPPU determined that such meetings provided Mitsubishi with an unfair ‘edge’ on its competitors.
Further, KPPU discovered that the invitations for the beauty contest were issued to the bidders at different times, thereby disadvantaging those bidders who had less time to prepare their tender bids.
Finally, the terms of the ‘scoring system’ applied to the tender bids were not clear by reference to the TOR nor were these terms ever properly explained. In any event, from a review of the various tender bids, it was clear to KPPU that Mitsui’s tender bid was in fact the most ‘competitive bid’ in that it was substantially better than Mitsubishi’s tender based on the objective criteria set in the TOR.
Access to confidential information
In addition, KPPU also accepted a complaint made by LNGEU that Pertamina and Medco had provided Mitsubishi with an unfair advantage because Mitsubishi had exclusive access to certain confidential information about the Donggi Project.
By way of background, LNGEU is a company established by LNG International Pty Ltd (a wholly owned subsidiary of Liquefied Natural Gas Limited – ASX LNG) and an Indonesian entity that had entered into an agreement with Pertamina and Medco in 2005 to develop and own the Donggi Project.
In 2006, Mitsubishi sought to become LNGEU’s partner in the Donggi Project and conducted a detailed due diligence. In doing so, Mitsubishi had access to commercially sensitive and confidential information in relation to the Donggi Project, including all relevant technical, financial, modeling, planning and development information. In late-2006, Pertamina and Medco decided to put the Donggi Project out to tender and allowed Mitsubishi to compete in the tender.
LNGEU protested to the Government of Indonesia, KPPU and BPMIGAS when it discovered that Mitsubishi had been allowed to tender for the Donggi Project and then had been successful in winning this tender. LNGEU is currently considering legal action to recover the investment it had made in advancing the Donggi Project.
Essentially, KPPU found that:
- the information and data which Mitsubishi had accessed through its due diligence of PTLNG were ‘trade secrets’ in accordance with Article 3 of Law No. 30 of 2000 on Trade Secrets, and
- Mitsubishi had used these trade secrets in preparing its tender bid and when presenting to the Boards of Directors of Pertamina, Medco and MEPTS.
On the basis of this conduct, KPPU determined that Pertamina, Medco, and Mitsubishi had breached Article 23 of the Anti-Monopoly Law which, in essence, prohibits parties from conspiring with each other to obtain and use confidential information or company secrets of their business competitors that would result in unfair business competition.
Pertamina, Medco, and MEPTS are in the process of appealing KPPU’s decision.
KPPU decision in Madura Block 2009
The KPPU decision in respect of the Donggi Project followed a similar decision on 9 December 2010 in which KPPU fined two Chinese oil companies, Huabei Petroleum Services (Huabei) and SPE Petroleum, IDR2 billion each for collusive practices in relation to a tender for integrated services relating to the drilling of exploration wells in the Madura Block 2009.
Although, the KPPU decision has not been formally published, it is well understood that KPPU held that the tender process was ‘rigged’ in favour of Huabei insofar as other bidders for the drilling contract were not afforded the same time in which to prepare and provide their bids. It was also found that Huabei was an affiliated entity and therefore the tender process was not independent.
Implications of the decisions on the petroleum industry
Clearly, these recent decisions by KPPU reflect its continued appetite to investigate allegations of collusive dealings, prosecute and impose fines where such conduct is proven.
The key implications for those involved in the Indonesian petroleum sector are as follows:
- KPPU is prepared to act independently of BPMIGAS as the relevant industry regulator responsible for promulgating and enforcing the relevant rules and regulations relating to the tendering in respect of oil and gas products eg the stipulation of tender obligations under Minister of Energy and Mineral Resources Decree No.1480 of 2004 on the Procedure on Determination and Offering of Working Areas for Oil and Natural Gas. In certain circumstances, this may also mean that KPPU will review arrangements or tender awards that have been ostensibly approved by BPMIGAS.
- KPPU may investigate certain practices based on complaints made by business competitors, particularly those that have been unsuccessful in a tender.
- Although KPPU only imposed fines in relation to the Donggi Project and the Madura Block 2009, KPPU may become emboldened in the future to impose heavier penalties or make more far reaching orders, including orders for the cancellation and/or reopening of certain contracts and arrangements that it determines are in breach of the Anti-Monopoly Law.
- In practical terms, oil and gas companies need to ensure that they are careful in managing their tender processes properly. In particular, they need to ensure that such arrangements with tendering parties are kept objectively independent and that no one party can be actually or constructively deemed to have been afforded an ‘unfair advantage’ as a result of prior dealings or involvement with the principals.
KPPU is now very much seen as a competition regulator to be reckoned with, and is seriously committed to promoting healthy business competition and a positive investment climate in Indonesia.