An extract from The Oil and Gas Law Review, 9th Edition

Introduction

Indonesia is home to one of the oldest oil and gas industries in the world. Its oil and gas industry has been active for more than 130 years, since the first oil discovery in North Sumatra in 1885.2 The first-ever production sharing contract (PSC) in the world was executed in Indonesia.3

Indonesia's proven oil reserves at the end of 2020 amounted to 2.4 billion barrels, with production at 743,000 barrels per day or 36.4 million tonnes per annum.4 With respect to gas, Indonesia's proven gas reserves at the end of 2020 were 1.3 trillion cubic metres and production amounted to 63.2 billion cubic metres.5 Globally, Indonesia ranks 21st and 12th for gas reserves and gas production, respectively. In the Asia-Pacific region, Indonesia ranks fourth for gas reserves, following China, Australia and India, and fourth for gas production, following China, Australia and Malaysia.6

Oil and gas business activities in Indonesia are divided into the upstream sector (exploration and exploitation) and the downstream sector (processing, transportation, storage and trading).

In general, upstream oil and gas business activities by oil companies in Indonesia are based on PSCs, between the government, acting through the Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas), and the oil companies as PSC contractors. Up until 2017, there was only one form of PSC, with a cost recovery mechanism, called a cost recovery PSC. In January 2017, the Minister of Energy and Mineral Resources (MEMR) introduced a new PSC scheme based on a gross production split without a cost recovery mechanism, called the gross split PSC.

The Indonesian oil and gas industry, like the global industry, has experienced significant difficulties as a result of the collapse of global oil prices. While oil prices are beginning to return to more normal levels, the government still faces the problem of a lack of new reserve discoveries. One reason for this is the overall struggle of the global industry generally, but it is difficult to ignore the role of domestic regulatory and bureaucratic issues, specifically for foreign investors. To attract new business players to the upstream oil and gas industry, Indonesian President Joko Widodo (Jokowi), through the MEMR, has attempted to clarify and simplify the regulatory regime for the oil and gas industry. These efforts include the issuance of tax incentives and facilities, the revocation of exploration permit requirements, and the relaxation of restricted positions for expatriate employment.

In 2017, President Jokowi issued a regulation7 classifying a number of upstream oil and gas projects as national strategic projects in an effort to increase Indonesian oil and gas production. Classifying these as national strategic projects allows the government, through the Coordinating Ministry for Economic Affairs, to ensure that these projects can be put onstream immediately by expediting the infrastructure required for the projects and the issuance of regulations for their implementation. The national strategic upstream oil and gas projects are:

Project nameOperatorOnstream scheduleExpected production
Abadi Field ProjectInpex Masela, Ltd202710.5 million tonnes of gas per annum
Indonesia Deepwater DevelopmentPT Chevron Pacific Indonesia2024Average production at 33 million standard cubic feet of gas per day and 2,000 barrels of oil per day8
Jambaran-Tiung Biru FieldPT Pertamina EP Cepu2021Targeted production at 315 million standard cubic feet of gas per day9
Tangguh Train-3 BP Berau BV2020Production capacity at 3.8 million tonnes of LNG per annum10

The devastating impact of the covid-19 pandemic has extended to various industries, including the Indonesian oil and gas industry. Understandably, the pandemic creates uncertainty for the onstream schedules of the above projects.

We note that so far in 2021, the government has opened tenders for six working areas, something that was postponed in 2020 as a result of covid-19.

The following key developments occurred in 2020 and 2021:

  1. the issuance of Law No. 11 of 2020 regarding Job Creation (the Job Creation Law), which amended 79 laws including Law No. 22 of 2001 regarding Oil and Natural Gas (the Oil and Gas Law);
  2. the issuance of a Government Regulation overhauling Indonesia's licensing regime into a risk-based system;
  3. the issuance of an MEMR Regulation on the use of flare gas in the oil and gas business;
  4. the issuance of an MEMR Regulation amending an existing MEMR regulation on the downstream oil and gas business;
  5. the issuance of an MEMR Regulation on the management of work areas that are close to expiry;
  6. the issuance of MEMR Regulations prioritising the fulfilment of domestic needs, calculation of the retail sale price of oil, and reducing gas prices for sales to specific industries and power plants;
  7. the issuance of SKK Migas policies relating to upstream oil and gas operations in response to the covid-19 pandemic; and
  8. the issuance of an MEMR regulation granting certain PSC contractors the flexibility to adopt the cost recovery or gross split mechanism.

Legal and regulatory framework

i Domestic oil and gas legislation

The upstream oil and gas sector in Indonesia is mainly regulated by the Oil and Gas Law. Further provisions are regulated under Government Regulation No. 35 of 2004 regarding Upstream Oil and Natural Gas Business Activities, as amended most recently by Government Regulation No. 55 of 2009 (GR 35/2004).

In general, the Oil and Gas Law grants the government the exclusive right to oil and gas exploration and exploitation and requires all private companies that wish to explore and exploit oil and gas resources to enter into cooperation contracts with the government through SKK Migas. Such cooperation contracts most often take the form of a PSC.

There are currently two types of PSCs used for Indonesian upstream oil and gas business activities. Before 2017, all PSCs were based on a cost recovery scheme, whereby PSC contractors could obtain reimbursement of their operating costs through the production of oil and gas. In mid-January 2017, the government introduced gross split PSCs with no cost recovery arrangements. Under a gross split PSC, the government allowed PSC contractors a higher production split than that allowed under the cost recovery scheme, but all costs had to be borne by the PSC contractors.

The key provisions of the Oil and Gas Law include the following:

  1. the government's entitlement to oil and gas resources up to the delivery point;
  2. SKK Migas's control over the management of oil and gas operations;11
  3. all capital and risks of oil and gas operations are to be borne by PSC contractors;
  4. one company can hold only one oil and gas working area;
  5. the term of a PSC is 30 years, which can be extended by a maximum of 20 years; and
  6. PSC contractors are obligated to provide 25 per cent of their production share to fulfil domestic demands.
ii Regulation

The MEMR, through the Directorate General of Oil and Gas (DGOG), oversees affairs in the energy and mineral resources sector, including supervision of the implementation of oil and gas business activities, preparation of policies for the upstream oil and gas business sector, determination of cost-recoverable and non-cost-recoverable activities in the upstream oil and gas business, and issuance of approvals related to upstream oil and gas activities, such as the first plan of development (POD), the transfer of participating interests, and direct and indirect change of control of the entities holding a PSC.

With the issuance of the Presidential Regulation No. 9 of 2013 regarding Management of Upstream Oil and Gas Activities, as amended by Presidential Regulation No. 36 of 2018, the upstream sector is managed and supervised by SKK Migas. In general, SKK Migas has the right to organise the management of upstream oil and gas activities, to the extent the management is in accordance with the relevant PSC. The Head of SKK Migas reports directly to the President. In performing its duties, SKK Migas is supervised by a supervisory committee, consisting of the MEMR, a Deputy MEMR, a Deputy Minister of Finance (MOF) and the Head of the Capital Investment Coordinating Board.

Currently, a draft oil and gas law is being discussed by the House of Representatives. One of the anticipated changes in the new law includes the establishment of a Specific Oil and Gas Business Entity (BUK Migas), which would take over the current authorities of SKK Migas and also manage downstream oil and gas activities.

PSC contractors' activities are subject to audit by the government. The auditing authority rests with the Agency for Finance and Development Supervision (BPKP). Based on Government Regulation No. 60 of 2008 regarding the government's internal management system, the BPKP has the authority to audit the state treasury as part of an internal government audit. These audits include state revenue and expenses including the allocation of cost recovery costs under the state budget. With respect to the audit of income tax obligations, a joint audit will be conducted by BPKP, SKK Migas and the Directorate General of Taxation, based on MOF Regulation No. 34/PMK.03/2018 regarding Implementing Guidelines for Joint Audits of the Implementation of Cooperation Contracts in the Form of Production Sharing with Recovery of Operating Costs in the Upstream Oil and Gas Business.

iii Treaties

While Indonesia does not recognise foreign court decisions, international arbitration awards can be enforced in Indonesia through mechanisms provided in Law No. 30 of 1999 regarding Arbitration and Alternative Dispute Resolution. In general, Indonesia has bound itself to enforce foreign arbitral awards if (1) the award is rendered by a tribunal in a country bound by the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention) or a bilateral treaty with Indonesia; (2) the dispute is commercial in nature, as that term is understood under Indonesian law and the Convention; and (3) the award does not contravene Indonesian law or notions of public order or policy.

International treaties and other multinational agreements are binding upon Indonesia after ratification, which may be done by way of a law to be approved by the House of Representatives, or by way of a presidential regulation to be further implemented by a ministerial regulation, which will be notified to the House of Representatives. All regulations and decrees issued afterwards must not deviate from the provisions of the international treaty or the national regulation enacted in light thereof. Therefore, once an international treaty is binding upon the government, regulatory policy or activity shall develop in accordance with the international treaty. Indonesia is a party to, among others, the United Nations Convention on the Law of the Sea (UNCLOS), the 1987 Montreal Protocol, and the International Convention on Civil Liability for Oil Pollution Damage and the protocols and amendments thereof.

Indonesia has entered into many bilateral tax treaties with other countries to avoid the imposition of double taxation in both countries. As of 2020, Indonesia has entered into double taxation treaties with 66 countries, with contracting states including Australia, France, Japan, Malaysia, Singapore, the United Arab Emirates and the United States.