Foreign investors seeking to operate in Indonesia’s oil and gas sector are currently restricted to several types of upstream business activities only. This is due to the last revision to Indonesia’s Negative Investment List through Presidential Regulation No. 39 of 2014 (See Overview of the Negative Investment List). In terms of recent developments in the sector, the Indonesian government has also cut down on the number of permits required to operate in this sector, as well as merged the issuance of licenses to be under the single authority of the Investment Coordinating Board (BKPM) as of October 2015. As such, foreign investors interested in investing in the oil and gas sector can now go directly to BKPM’s one-stop service system (PTSP) in applying for licenses. As with any business activity that is fully or partially funded by foreign capital, a foreign investor will need to establish a foreign investment company (PMA) and apply for a business license from the BKPM (See Incorporating a PMA Company in Indonesia).

With regards to specific business activities, foreign ownership is entirely prohibited for companies involved in:

1. Construction services for upstream onshore oil and gas production installations.
2. Construction services for upstream onshore oil and gas pipe installations.
3. Construction services for horizontal or vertical tanks and storage installations.
4. Onshore drilling.
5. Providing services in operating and maintaining oil and gas wells.
6. Design, engineering and technical inspection services.

Meanwhile, limited foreign ownership is allowed for ventures involved in:

1. Offshore drilling (up to 75%).
2. Construction services for oil and gas platforms (up to 75%).
3. Construction services for spherical tanks and offshore pipe installations (up to 49%).
4. Oil and gas survey services (up to 49%).

To be able to carry out commercial oil and gas exploration and production activities in Indonesia, special conditions and requirements apply for foreign investors. Specifically, foreign enterprises interested in extracting oil or gas from Indonesian soil can only do so as a PMA operating under a joint cooperation contract with SKK Migas which oversee all upstream oil and gas business activities on behalf of the government. In granting a concession to a PMA through a joint cooperation contract, the appointment can be made through a direct offer to the PMA or as a result of the PMA emerging as the winner in a tendering process.

Joint Cooperation Contract

The main provisions for a joint cooperation contract in oil and gas production operations are as follows:

1. A joint cooperation contract can be in the form of a production sharing contract, a joint operation agreement, a service contract, or a technical assistance contract.
2. The contract specifies the location.
3. A PMA can only hold one location and must return the site eventually; in stages or in its entirety. This provision also means that separate PMAs must be established for different locations.
4. The PMA must commence activities in no longer than six months after the effective date of the contract.
5. The PMA must carry out the work program in accordance with its initial proposal during the first three years of the exploration period.
6. A joint cooperation contract is valid for a maximum of thirty years after which a PMA can apply for an extension of twenty years. The maximum period already takes into account a maximum period of six years for the exploration phase extendable to a further four years.
7. The PMA must allocate funds for site rehabilitation.
8. All financing requirements and exploration risks are solely the investor’s responsibility.

Among the several alternative forms of joint cooperation contracts, production sharing contracts have been the most common to be utilised. Under this contract type, the total production of oil or gas measured in revenue is divided among the parties based on the agreed percentage. Additionally, the PMA is also obligated to allocate a maximum amount of 25% from all the oil or gas it produces to Indonesia’s domestic market.

Tenders

The majority of concessions are awarded through a tendering process which also considers financial and technical capability, administrative compliance, as well as track records.

The stages for participation in a tendering process are as follows:

1. Register as a tender participant.

2. Purchase the data package for the tendered block.

3. Attend the clarification meeting.

4. Submit two copies of the bid documents by the closing date. These documents should include:

   1. An application form.
   2. A proposal containing the work program and budget plans for six years of exploration.
   3. Geological and technical reports in support of exploration.
   4. Certified financial reports from the past three years.
   5. A statement letter confirming willingness and ability to pay any required bonuses.
   6. For a bid submitted by a consortium of companies; each agreement between and/or among consortium members and confirmation of the designated operator.
   7. A draft of the production sharing contract and a statement letter agreeing to its terms.
   8. A payment receipt for the tender information document.
   9. Proof of purchase of the data package.
   10. A copy of the PMA’s Deed of Establishment signed by a notary.
   11. A statement of compliance to the outcome of the tender.

For more information about investing in Indonesia’s oil and gas sector or finding a local partner in Indonesia, contact GBG Indonesia

Global Business Guide Indonesia - 2016

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Indonesia Energy Snapshot

Contribution to GDP: 3.44% (2016) Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).

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