Recent developments in Indonesian oil and gas governance

June 2018 | EXPERT BRIEFING | SECTOR ANALYSIS

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It has been more than five years since Indonesia’s Supreme Court declared that certain articles in the law pertaining to the oil and gas industry were unconstitutional. This declaration was followed by dissolution of the Implementing Body for Upstream Oil and Gas Business Activities (Badan Pengelola Kegiatan Hulu Migas or as it is commonly called, BP Migas). Since then, the Indonesian government has made efforts to produce a new law. However, while the Indonesian public anticipates the new law improving oil and gas governance in Indonesia, the draft bill is still being discussed in parliament, with consensus seemingly a long way off.

While it waits for the People’s Representative Council to deliberate, the Indonesian government appears keen to tidy up and improve its oil and gas policies. This is evidenced by the issuance of several regulations earlier this year, which the government hopes will boost investment in the Indonesian oil and gas sector.

The first piece of legislation to attract business interest was the regulation regarding downstream oil and gas operations, issued by the Ministry of Energy and Mineral Resources (MEMR). This replaced the 2009 ‘Natural Gas Business Activities Through Pipelines’ Minister regulation. Furthermore, although Indonesia has a reputation as one of the largest gas producers in the world, the government believes that its gas infrastructure is still lacking. To this end, the new regulation is expected to attract investment and boost the development of gas pipeline infrastructure in Indonesia.

One of the highlights of the MEMR regulation is the removal of business licences for dedicated pipelines. Previously, such licences were granted to businesses in the event that transmission routes and distribution networks were unavailable. While a dedicated gas pipeline is generally not intended for use by multiple parties, the previous 2009 MEMR regulation did allow certain pipelines to be utilised by others, although this concession ultimately led to uncontrollable gas prices. The replacement regulation enables gas consumers to apply for approval to develop and operate a gas pipeline and related infrastructure facility for their own purposes.

Moreover, downstream players now have the same opportunity to obtain special rights to gas transmission segments and distribution network areas through a tender carried out by the Oil and Gas Downstream Regulatory Agency. The winning tender will be granted exclusive rights for 30 years and gas allocation pursuant to the tender document.

On the flip side, businesses have raised concerns over the removal of dedicated pipeline trading licences, with many believing the policy will diminish opportunities in the gas transportation business. In this respect, the government seems to be in difficult position, attempting to encourage gas infrastructure development while also seeking to maintain a gas transportation business climate.

Returning to the tender scenario, although it appears only the tender winner can control and operate gas distribution network areas, the new MEMR regulation opens up the possibility for the winner to engage other business entities when carrying out gas trading activities. It is worth noting that any entity appointed in this way should also procure trading infrastructure facilities. Accordingly, it appears that the government is set on creating a pathway for business entities to share the burden when procuring gas infrastructure facilities.

Furthermore, subsequent legislation was introduced to aid investment in the oil and gas industry, namely the MEMR Oil and Gas Supporting Business Activities regulation. This piece of legislation was issued to simplify certain provisions supporting oil and gas business activities. A signature component of this regulation is the removal of the requirement for third-party oil and gas companies to have a registration certificate or SKT Migas, as it is widely known. Instead, such companies need to obtain a ‘Certificate of Capability of Supporting Business’ online. Although not mandatory, the certificate is broadly acknowledged to be a required document for supporting companies intending to participate in certain oil and gas procurement activities.

Another boost from the Indonesian government came in the form of a Minister of Finance regulation regarding corporate income tax exemption facilities, or ‘tax holiday’, as it is widely known. Companies engaged in new investment in pioneering industries will now receive a 100 percent income tax exemption. In addition, the income tax exemption regulation specifically stipulates that the oil and gas industry should be categorised as a pioneering industry. In effect, this means that new investors may benefit from the new exemption. With current oil and gas refinery capacity in Indonesia unable to accommodate fuel demand, it is hoped this incentive will be a significant attraction for investors.

Needless to say, Indonesia’s oil and gas industry regime is still being refined. We watch with interest the government’s efforts to attract investment. Hopefully, the new regulatory arrangements seen this year will provide a suitable platform and allow a promising industry to take the next step.

Aka Fajaretta Nurafia and Ferdinand Jullaga Tambunan are associates at Mochtar Karuwin Komar Law. Ms Nurafia can be contacted on +621 571 1130 or by email: aka.fajaretta@mkklaw.net. Mr Tambunan can be contacted on +621 571 1130 or by email: ferdinand.jullaga@mkklaw.net.

Aka Fajaretta Nurafia and Ferdinand Jullaga Tambunan

Mochtar Karuwin Komar Law