An extract from The Oil and Gas Law Review, 9th Edition
Licensing
The right to explore oil and gas is provided by the execution of cooperation contracts, generally based on a production sharing scheme through a PSC between the government, through SKK Migas, and the company that wins the right to the working area covered by the PSC. Pursuant to MEMR Regulation No. 35 of 2008 regarding Procedures for the Stipulation and Tender of Oil and Gas Working Areas, a working area can be offered through either a direct offer or a tender. In a direct offer, a company that performs a technical assessment through a joint study with the DGOG will receive the right to match the highest bidder of the tender round.
A PSC is granted for 30 years, typically comprising six plus four years of exploration and 20 years of exploitation. A PSC that has entered into the exploitation phase shall be subject to cost recovery. The production output of the traditional cost recovery PSC is subject to a first tranche petroleum (FTP) requirement where 10 per cent of oil and gas production shall be given to the government first and the remaining portion will be distributed between the PSC contractor and the government based on the production split proportions set out in each PSC, cost recovery and certain taxes.
In 2017, MEMR Regulation No. 8 of 2017 regarding gross split PSCs (MEMR Reg. 8/2017) introduced a gross split production sharing scheme through a gross split PSC. The gross split is agreed through negotiations with SKK Migas, and the production output is split at gross without FTP or cost recovery, stipulated at the beginning of a field's development and subject to fluctuation depending on certain variables and progress components. Existing PSCs signed prior to MEMR Reg. 8/2017 shall be valid until their expiry and may be converted to gross split PSCs. If this option is exercised, the incurred and non-recovered operational costs of these cost recovery PSCs shall be calculated as an additional split to the PSC contractor's share. For expiring PSCs, the MEMR shall determine to adopt a gross split PSC, a cost recovery PSC or other form of cooperation contract, whether or not the expiring PSC is extended. The MEMR shall also determine the form of new PSCs based on the level of risk, investment climate and maximum benefit for the state.
In general, GR 35/2004 provides that a PSC should at least contain the following provisions: state revenues, the working area and its relinquishment, obligatory funding expenses, the transfer of ownership of oil and gas production, the contract period and contract extension requirements, settlement of disputes, the obligation to supply crude oil or natural gas (or both) for domestic needs, post-mining operation obligations, occupational health and safety, environmental management, the transfer of rights and obligations, reporting requirements, field development plans, preferential utilisation of domestic goods and services, the development of the surrounding community and a guarantee of the rights of nearby traditional communities and the prioritisation of the use of Indonesian workers.
Below is a table summarising brief key differences between cost recovery and gross split PSCs.
| Description | Cost recovery PSCs | Gross split PSCs |
|---|---|---|
| Production sharing split | Depending on each PSC, typically 65:35 between the government and the PSC contractor for oil, and 60:40 between the government and the PSC contractor for gas | 57:43 between the government and the PSC contractor for oil, and 52:48 between the government and the PSC contractor for gas, both of which can be increased based on:variable components (i.e., working area status, field location, reservoir depth, infrastructure availability, reservoir type, CO₂ content, H₂S content, specific gravity, local content achievement, production phase) andprogressive components (i.e., oil or gas price and cumulative oil or gas production)It has been reported that one gross split PSC (for a mature field) was set at 42.5:57.5 between the government and a PSC contractor12 |
| Approvals required | Approvals are provided for work programmes and budgets (WP&B) and the POD, and the Authorisation for Expenditure (AFE) | Approvals are provided for the POD |
| Recovery of costs | All allowable current costs as well as amortised exploration and capital costs | None |
| Procurement of goods and services | Regulated under the prevailing working guidelines issued by SKK Migas | Managed independently by each PSC contractor, not based on SKK Migas working guidelines |
The continuation of operations following the expiry of the term of a relevant PSC is regulated under MEMR Regulation No. 23 of 2018 regarding the Management of Oil and Gas Working Areas with Expiring PSCs, as most recently amended by MEMR Regulation No. 3 of 2019. This regulation provides that upon the expiry of a PSC, a PSC may be taken over by Pertamina, extended, jointly operated by Pertamina and the PSC contractor, or tendered to the public.
In November 2020, the government enacted the Job Creation Law. One of the most significant changes set forth by the Job Creation Law is the requirement for a PSC contractor to obtain a Business Identification Number (Nomor Induk Berusaha or NIB) and a 'Business Licence' through the online single submission (OSS) system managed by the Ministry of Investment/Capital Investment Coordinating Board (Badaan Koordinasi Penanaman Modal or BKPM). An NIB is a registration number issued by the OSS system to indicate that a company and its business activity have been duly registered under the law. The NIB also replaces certain corporate licences, such as the Importer Identification Number and the Corporate Registration Certificate. We note that under Government Regulation No. 5 of 2021 regarding the Implementation of Risk-Based Business Licensing (GR 5/2021), one of the implementing regulations of the Job Creation Law, the relevant 'Business Licence' applicable to a PSC contractor is the PSC contract itself, with no mention of any separate licensing requirement. Indonesia's single window licensing service, known as the OSS system, was only recently updated, in August 2021, to accommodate the new provisions of GR 5/2021 and we note that the update has yet to cover all the changes to the licensing regime that were expected to occur following the implementation of the Job Creation Law. As of now, it appears that no separate business licence is required for a PSC contractor and that the PSC contract itself is deemed a 'Business Licence' or equivalent thereto.
Production restrictions
Oil and gas production remains owned by the state until its possession is delivered at the point of export or other delivery point. Once it reaches the point of export or other delivery point, the PSC contractor is entitled to the production of oil and gas based on the production split as regulated under the PSC.
The PSC contractor can take its share of the oil and gas production in kind. For oil production, the PSC contractor may take its oil production share in kind and sell it with the option not to commingle the sale with the government's share of oil production. For gas production, in practice, the PSC contractor's and the government's share of production are sold jointly.
Exports of oil and gas are subject to the fulfilment of the Domestic Market Obligation (DMO) and the initial domestic offering under MEMR Regulation No. 42 of 2018 regarding Prioritised Use of Natural Oil for the Fulfilment of Domestic Needs. This regulation requires PSC contractors or their affiliates to offer their crude oil portion to Pertamina or holders of the crude oil processing licence, or both, through a negotiation process on a business-to-business arrangement no later than three months before commencing the export recommendation period for the PSC contractor's entire portion of crude oil. Through the negotiation process, Pertamina may directly appoint a PSC contractor for the purchase of the crude oil, which may be made in the form of a long-term contract with a term not to exceed 12 months.
In January 2019, the government issued Government Regulation No. 1 of 2019 on Export Proceeds from the Exploitation, Management and/or Processing Activities of Natural Resources. This regulation requires foreign exchange proceeds derived from the export of natural resources, including oil and gas, to be placed in the Indonesian financial system through a special account in an Indonesian foreign exchange bank, which must be licensed by the Financial Services Authority. The Indonesian branch offices of overseas banks do not satisfy this requirement. The deposit of the export proceeds in a special account must be carried out no later than the end of the third month after the registration of export declaration. The funds in the special account can only be utilised by the PSC contractor for certain payments, such as customs, loans, imports, profits or dividends, and other purposes permitted by the Indonesian Investment Law (namely Law No. 25 of 2007 regarding Capital Investment, as last amended by the Job Creation Law).
A PSC contractor is required to fulfil the DMO by supplying oil or gas, or both, to meet domestic needs. The participation of the PSC contractor is determined on a prorated basis in accordance with its share of total oil and gas production. Typically, the amount of the PSC contractor's participation is 25 per cent of the oil and gas production, subject to stipulation by the MEMR. In the past, there was no DMO requirement related to gas production. A DMO requirement for gas was introduced in PSCs that were signed after the issuance of the Oil and Gas Law.
The value of oil to determine the sharing of production and for tax purposes must be not less than the Indonesian Crude Price (ICP). With respect to gas, the relevant gas sales contract is based on negotiations on a field-by-field basis between SKK Migas, buyers and individual producers. There is a requirement that the determination of gas prices by a PSC contractor must follow the considerations provided under MEMR Regulation No. 6 of 2016 regarding Provisions and Procedures for Determining the Allocation, Utilisation and Price of Gas, as amended by MEMR Regulation No. 32 of 2017, namely the economics of a particular gas field, domestic and international gas prices, and the added value of the domestic utilisation of gas. After determining the gas price, it must be submitted to the MEMR, through SKK Migas, for approval.
In April 2020, the MEMR issued MEMR Regulation No. 8 of 2020 and MEMR Decree No. 89K/10/MEM/2020, which amended gas prices for specific industries (e.g., the fertiliser, petrochemical, oleochemical, steel, ceramics, glass and rubber glove industries). Additionally, MEMR Regulation No. 10 of 2020 and MEMR Decree No. 91K/12/MEM/2020 amended gas prices for power plants. The adjustment of existing gas prices because of the foregoing regulations will not affect a PSC contractor's entitlement, but instead becomes a reduction of the government's entitlement in accordance with the PSC for the working area for the current year. This reduction cannot exceed the government's entitlement for the current year.
