New oil and gas law goes ahead despite protests

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.