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Legal Updates | ESDM Regulation 42 and Oil and Gas Companies

On 14th July 2017, the Minister of Energy and Mineral Resources (Minister) published Regulation No. 42 of 2017 (Reg. 42).

The share transfer/change in control and change of director provisions of Reg. 42 apply to upstream and downstream oil and gas companies, IUPTL holders (power producers) and IPB holders (geothermal companies). This alert discusses the implication of Reg. 42 on oil and gas companies.

Upstream oil and gas companies

Change in control

The regulation requires the transfer of a PSC Contractor's shares resulting in a direct change of control to obtain the approval of the Minister, based on a recommendation from SKKMIGAS.

Control is broadly defined, to include a change in the direct owner of the PSC contractor (this requirement still exists even where the shares of the PSC contractor are being transferred to an affiliate, and the ultimate holder remains the same), or any indirect change in the majority of shares with voting rights, or controlling rights if the company does not issue shares, or a change in any agreement appointing the controlling shareholders. Accordingly, on one interpretation, the regulation is saying that a direct change in control, which captures indirect changes in share ownership, requires approval.

The relevant provisions talk about "transfers of the Contractor's shares, resulting in a direct change of Control". Further on, they talk about transfers of shares resulting in an indirect change in Control. Such indirect change in Control requires notification to SKKMIGAS, only. Given this, we interpret these requirements as meaning that only transfers of shares of the party holding the PSC Contractor trigger the requirement for approval under Reg. 42.

However, we believe that where the PSC does contain change in control provisions that extend to indirect holding companies, then these provisions will need to be followed.

As a result of these changes, the position would seem to be that a transfer of all or a majority of the shares of a PSC company, regardless of what is in the PSC, requires the Ministerial approval. In any event, only such transfers of shares to Affiliates is permitted. Notwithstanding this, where shares in a company holding the PSC Contractor are transferred, no approvals may be required (unless the terms of the PSC require this).

Change in control approvals process

The process involves the submission of a lengthy list of documents, including details of who the ultimate owner of the acquiring company will be. It is not clear where this line is to be drawn - does this go all the way up to listed companies (and even their shareholders)?

Other requirements that might be problematic are, for example, the requirement of the new controlling company to have 3 years' worth of audited public accounts. It is to be hoped that the ESDM will take a pragmatic approach, and accept the audited accounts of parent entities, although we understand this might not necessarily be the case.

The regulation requires the acquiring company to have a taxpayer number, and 2 years' worth of corporate income tax returns. Although the phrase used - Nomor Pokok Wajib Pajak - is the phrase used to describe an Indonesian tax registration, hopefully, proof of tax registration offshore will satisfy this requirement.

The regulation also requires changes in control to be approved, ratified, recorded or otherwise notified to the BKPM and the Ministry of Law and Human Rights, in accordance with applicable law. Given the applicable law wording, these provisions should not apply, in practice, to permanent establishments.

One welcome development is that the SKKMIGAS recommendations and Ministerial approvals process should not take more than 28 business days in aggregate. Furthermore, the Minister is required to provide a reason why a request for approval has been rejected. This being said, there is no deemed approvals process, such that the approval is deemed to have been granted if SKKMIGAS/the Minister do not action this within the time specified. In practice, therefore, these time periods may be more of a guideline than a rule.

Transfers of working interests

The regulation also requires all transfers of working interests to obtain the approval of the Minister, based on a recommendation from SKKMIGAS. The regulation goes on to state that transfers of majority interests during the first three contract years of a PSC are only permitted to Affiliates. This restriction reflects what is in PSCs.

Changes to directors/commissioners

Changes of directors and commissioners of PSC contractors will also need to obtain Ministerial approval. based on a recommendation from SKKMIGAS.

As with the share transfer approval process, there is a requirement for submission of a number of administrative documents, including the past income tax returns of the incoming Director/Commissioner. Again, the Minister must notify its approval or rejection within 14 business days.

Downstream oil and gas companies

Change in control

One significant development under Reg. 42 relates to downstream oil and gas companies. They now need to obtain approval if there is any transfer of a majority of their shares. There is no exception for transfers to affiliates. Prior to Reg. 42, none of the downstream licenses had such a requirement.

This raises the question, what is a downstream company? This is not defined but would include, we assume, companies holding processing, storage, transportation or trading companies licenses from the ESDM.


The application for the downstream transfer of a majority of shares is submitted to the Minister through the oil and gas directorate.

As for upstream oil and gas companies, a comprehensive list of documents needs to be submitted including, equivalent value reports for the shares being acquired (which is an upstream oil and gas approval concept), audited financial statements of the acquiring company (again, problematic if this is new holdco); and a taxpayer number of the acquiring company (also problematic if, for example, the acquiring entity will be an offshore entity - unless an offshore tax registration will satisfy this requirement).

Similar to the upstream approvals regime, a 14-day period applies for the Minister's approval. There are no deemed approvals provisions.

If approval is obtained, similarly to upstream companies the company will notify the BKPM and the Ministry of Law and Human Rights.

Changes to directors/commissioners

Again, as for upstream companies, changes of directors and commissioners require Minister approval, based on a recommendation from the Directorate General of Oil and Gas.

Transition Provisions

Under the transition provisions of Reg. 42 existing approvals "stand"; current and new applications will be governed by the terms of the regulation.


Contract sanctity

Reg. 42 raises a number of questions as to how the ESDM views contract sanctity. Earlier generations of PSCs, through to 2007, do not have any change in control requirements. It is unclear whether ESDM will seek to apply change of control approval requirements to these older PSCs. Previously, when government/ministerial regulations were introduced, SKKMIGAS seems to have opted to abide by a number of terms of the older PSCs, notwithstanding that these might conflict with the new regulations. Query whether this will be the approach adopted in relation to these new regulations.

Likewise, earlier generations of PSCs permitted transfers of working interest to affiliates, on notice, only, and this became a way of transferring working interests through new SPVs to third party buyers, without seeking approvals. This exemption, too, has disappeared.

Lack of clarity

The drafting of the regulation raises a number of questions. Some of these have been touched upon above. Furthermore, Article 6(2) suggest that changes of direct shareholder may only be made to an affiliate. Under the change in control provisions of post-2007 PSCs, it was arguable that no approvals were needed in these circumstances. It is unclear whether Article 6(2) is intended to be an exception to the need to seek approval (given the ongoing control by an affiliate); however this is not how it is currently drafted.

Given the reference to "transfers" of shares resulting in changes in control query whether the issuance of shares by the upstream or downstream company to a third party entity triggers these requirements. Arguably, they do not (subject to any restrictions that might already apply under the terms of the PSC, if applicable)


While project financing in the upstream space is rarely, if ever used; it is much more common downstream. A key component of any security package will be pledges of shares over the project/license holding company. As approvals are needed to transfer any shares, and as it is highly unlikely that the ESDM will grant a pre-approval, investors will likely require the project company to be structured through a holding company, with share pledges being issued over this and, as a 'blocking' measure only, over the project company.

What should companies do?

Given some of the issues raised above, further clarification of this regulation is required. It seems as if the Government may be willing to further revise this regulation.

Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 1st august 2017

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