New oil and gas law goes ahead despite protests

Hendarsyah Tarmizi The Jakarta Post Jakarta

Despite opposition from some oil-rich provinces and nationalist oil experts, the new oil and gas law is likely to go ahead and become effective next year.

The law was endorsed by the House of Representatives in October this year, but its enforcement still requires the President's approval.

The main effect of the new oil and gas law is to open up the country's oil and gas sector both in the upstream and downstream operations to free market competition.

Pertamina will, as a consequence, lose the exclusive rights it has enjoyed for decades. The state-owned oil and gas company will also have to surrender its regulatory functions and responsibilities managing the production-sharing contractors (PSCs) activities to the authorities.

The government will later form two separate agencies to take over Pertamina's regulatory functions in both upstream and downstream oil industries.

The first agency will be called the Implementation Body, which will manage and control the upstream activities that include exploration and exploitation (production activities).

The second will be called the Regulatory Agency, which will be responsible for supervising and administering the downstream operations such as oil processing, transportation, distribution, storage and sales.

The new legislation was first proposed to the House in 1998 but was turned down for fear that the country's oil and gas resources would fall into foreign hands. The main opposition came from Pertamina, which at the time had also proposed its own bill.

The second draft, with a similar theme, was submitted to the House in the middle of this year. This time Pertamina, with former chairman of PT Caltex Pacific Indonesia (CPI) Baihaki Hakim as its president, seemed to have been more supportive to the new law.

Although Pertamina, which will become the main victim of the legislation, did not oppose the law, it did not mean that all the other parties applauded the legislation.

Uncertainty related to the production split (between central government and provincial administration) from offshore oil and gas operations has incited protests from oil rich Riau and several other provinces.

The unclear stipulation related to tax payment has also incited protests from foreign-sharing contractors, who fear that the exemption of value added tax, which they have enjoyed for years, would be terminated.

Ariono Abdulkadir, the executive director of the Foundation of the Indonesian Institute for Energy Economics (IIEE Foundation), said the new law, which consists of 12 chapters and 66 articles, would require 12 government regulations and two presidential decrees to further explain details of the implementation of the new law.

In a recent seminar on the implication of the new oil and gas law on national petroleum and gas industries, Ariono said that the country's future oil and gas industries would be largely determined by the effectiveness of the Implementation Body and the Regulatory Agency in managing the country's oil and gas resources, and of course, the government's regulations on the implementation of the law.

The Implementation Body and Regulatory Agency will be formed through a presidential decree. Their members, who will comprise of experts and professionals appointed by the President, will directly report to the President and will have received endorsement from House members before being appointed.

The Implementation Body will be formed one year after the enforcement of the new law at the latest, while the Regulatory Agency should be set up two years after the enforcement of the law.

According to Ariono, there will be two types of companies that will be allowed to operate in oil and gas activities. The first company will be in the form of a "permanent establishment", a form of a company which operates under foreign legal status. This kind of company will only be allowed to operate in upstream operations.

The second one is a business entity that is established under Indonesian law. This form of company could operate both in the upstream and downstream activities.

The upstream activities, according to the new law, will be carried out by a business entity or permanent establishment under a contract of cooperation with the Implementation Body. Each cooperation contract, which under the current law is known as a production-sharing contract, is to be reported to the House.

Other main points in the upstream operation are: - The terms of the contract include state revenues, operating area, mandatory investment, the handover of the contract to other parties, the length of the contract, the extension of the contract and the obligation to supply the domestic market. - A business entity and a permanent establishment are allowed only to operate in one area (oil and gas bloc). If they want to operate more than one oil and gas bloc, they will have to establish different entities. - The contract lasts for 30 years but it is extendible for another 20 years. The duration for exploration activities is set at a maximum of six years and can be extended for another four years. - The production sharing contract will be called cooperation contract under the new law but it is not certain whether the prroduction sharing split of 85/15 (the government/contractor) for oil and 70/30 for gas will be maintained. - A business entity or permanent establishment that is involved in upstream operations cannot carry out business activities in the downstream. However, a business entity that is involved in the downstream, is permitted to have activities in the upstream. - A licensed business entity or permanent establishment that does not carry out exploration activities in five years after their exploration time-limit ends should return their concession area to the Minister of Energy and Mineral Resources.

The main aspects of the downstream oil and gas activities under the new law include: - Oil and gas activities are carried out by a business entity under license from the government. The license could in the form of a permit to operate processing activities, in transportation, in storage or in retailing. - Each business entity can receive more than one license as long as it is not contrary to existing regulations. - A business entity or permanent establishment is no longer required to acquire a license for processing, transportation, storage and marketing activities as long as such activities are part of their upstream business. - Private companies can enter the retail sales of fuel products but it is still unclear about the pricing policy.