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Legal Updates | Development of Oil and Natural Gas in Indonesia

Indonesia’s oil and gas sector is governed by Law No. 22 of 2001 regarding Oil and Gas (the “Oil and Gas Law”). The state retains mineral rights throughout Indonesian territory and the Government holds the mining authority.

The oil and gas sector comprises of upstream and downstream activities which are separately regulated and organised. Upstream activities include exploration and exploitation, and are regulated under Government Regulation No. 35 of 2004 regarding Upstream Oil and Natural Gas Business Activities as has been amended several times; the latest amendment is stipulated under Government Regulation No. 55 of 2009 (“GR 35”). The upstream sector is managed and supervised by the Special Task Force for Upstream Oil and Natural Gas Business Activities (“SKK Migas”).

Due to the unique territorial composition of the archipelagic state of Indonesia, upstream oil activities may be undertaken in onshore and offshore areas. Work areas for onshore and offshore operations are determined by the Ministry of Energy and Mineral Resources (“MEMR”) based on consultations with and recommendations from the respective regional governments.

Downstream activities encompass processing, transportation, storage and trading, and are regulated under Government Regulation No. 36 of 2004 regarding Upstream Oil and Natural Gas Business Activities as has been amended by Government Regulation No. 30 of 2009 (“GR 36”). Downstream operations fall under the auspices of the MEMR and Downstream Oil and Gas Regulatory Agency (“BPH Migas”).

Through Government Regulation No. 79 of 2014, the Government has stipulated that the national energy policy is to be implemented from 2014 - 2050, focusing primarily on energy availability for national needs, prioritisation of energy development, utilisation of national energy resources, and national energy reserves. The target for the availability of primary energy, which includes natural oil and gas, is approximately 400 million tonnes of oil equivalent (“MTOE”) in 2025 and approximately 1,000 MTOE in 2050.

In early 2016, the President of Indonesia announced a list of national strategic projects, which include several downstream oil and gas projects, namely the development of the Bontang and Tuban refineries, upgrading existing refineries, and construction of the Banten LPG terminal, Belawan–Sei Mangkey gas pipelines, an LNG mini-refinery, and an LNG-LNCG station on Java island. A Presidential Decree and Presidential Instruction seeks to accelerate these projects and mandate enhanced cooperation among relevant Government institutions in ensuring the achievement of these objectives.

Right to Develop Oil and Natural Gas Reserves

Private companies earn the right to explore and exploit oil and gas resources by entering into cooperation contracts, mainly based upon a production sharing scheme, with the Government (through SKK Migas), thus acting as a Contractor to SKK Migas. One entity can hold only one Production Sharing Contract (“PSC”), and a PSC is normally granted for 30 years, typically comprising six plus four years of exploration and 20 years of exploitation. All financial risks of operations under the PSC are borne by the Contractor. If a work area proceeds to the exploitation stage, the Contractor is entitled to cost recovery.

Except for certain types of non-conventional oil and gas PSCs, the production output is typically subject to a first tranche petroleum requirement, cost recovery and certain taxes, and the remaining portion is distributed among the Contractor and the Government in the proportions set out in the PSC. Recent Government tenders have adopted the “open bid split” model in which investors may offer or bargain the signature bonus and production split. For non-conventional PSCs, the sharing proportion is not always fixed at the beginning of the contract, but floats on a sliding scale based on production rate.

Throughout the PSC term, expenditures are planned ahead by the Contractor in an annual Work Plan and Budget to be approved by SKK Migas. A Contractor must also prepare an Authorisation for Expenditure (“AFE”) for specific work and can only execute the work upon SKK Migas’ approval of the relevant AFE.

When a commercial discovery is made, the Contractor must prepare a Plan of Development (“POD”) for the relevant field. The first POD is approved by the MEMR based on the considerations of SKK Migas and kicks off the exploitation stage. Subsequent PODs are approved by SKK Migas.

SSEK - 18th april 2017

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)