OPINION: The Turmoil Ended, or the Calm Before the Storm?

The following article is printed with permission from Hadiputranto, Hadinoto & Partners.(ed)

The Government has acted quickly to scotch the damage done by the Constitutional Court's decision No. 36/PUU-X/2012 of 13 November 2012 regarding BPMIGAS' dissolution (please see our Client Alert of 13 November 2012 (Turmoil?but no Oil: Constitutional Court Decision No. 36/PUU-X/2012)

A new Presidential Regulation and two Ministerial Decrees have been issued (Presidential Regulation No. 95 of 2012 dated 13 November 2012 ("Presidential Regulation") as followed by MEMR Decree No 3135K/K/MEM/2012 and MEMR Decree No. 3136K/73/MEM/2012 dated 15 November 2012 ("MEMR Decrees")1), which effectively:

(i) assign the functions previously carried out by BPMIGAS to the Ministry of Energy and Mineral Resources ("MEMR");

(ii) establish a "Temporary Working Unit" (Satuan Kerja Sementara/"SKS") under the MEMR to assume BPMIGAS' functions; and

(iii) reaffirm that all PSCs shall continue in force until their expiry.

In addition, the President made a strong statement on 14 November 2012, seeking to reassure oil and gas companies of the significance attached to them by the Government of Indonesia ("GOI").

What has changed?

Aside from the change in the organizational structure brought by the introduction of the SKS, not a lot has changed. The Oil and Gas Law (No. 22 of 2001) and Government Regulation No. 42 of 2002 established BPMIGAS as a State-Owned Legal Entity (Badan Hukum Milik Negara), answerable to the GOI and MEMR, but with its own, stand-alone legal personality. Although its costs and budgets are subject to ministerial approvals, BPMIGAS' income and receipts - as separated property of the state - did not form part of the State assets.

The MEMR Decrees provide that the SKS will assume BPMIGAS' previous duties and will answer to the MEMR. However, the Decrees suggest that any matters related to the operational activities of BPMIGAS, including budgeting and treatment of its assets, shall apply to the SKS as well. Query whether this means that the SKS will have a similar legal status as BPMIGAS, and its assets will also be separated from State assets.

The Temporary Working Unit

The SKS is established effective upon the issuance of the MEMR Decrees. We understand that the Decrees provide that all of BPMIGAS' personnel are transferred to the SKS, with the same title/position, salary and benefits applicable to them before the dissolution of BPMIGAS. Query whether this will apply to the top most personnel at BPMIGAS.

Who are the current counterparties to the PSC?

One of the questions now facing oil and gas companies is who is their counterparty? Have their PSCs been statutorily assigned to the SKS? The Presidential Regulation stipulates that the MEMR has assumed all of the duties and functions (i.e. the obligations) of BPMIGAS, which includes execution of PSCs. It also stipulates that all PSCs shall continue through to the end of their term. In our view, despite the lack of clear language that the PSCs have been transferred/novated to the SKS, this would seem to be the intention of the newly-issued regulations.

This raises yet another question. Bearing in mind that part of the reasoning behind the Constitutional Court's decision was that the GOI?s regulatory role should not be combined with its commercial one (which should be carried out by a business entity, i.e. a State-Owned Enterprise), then in what sense is it lawful, even temporarily, for the MEMR to combine these 2 functions in the SKS?

Is this the end of the turmoil?

We do not think so.

Key to the Constitutional Court's decision was that the functions of regulator and PSC counterparty (which was felt to be a primarily commercial role) should be separated. Clearly, the assignment of all of BPMIGAS' functions to the MEMR/SKS does not achieve this separation. We would expect another different entity to be established, or appointed, to be the contract counterparty for oil and gas companies under the PSC, with the MEMR continuing to exercise a supervisory/regulatory function.

This interpretation is substantiated by the President's speech, in which he said:

"?Therefore, given the sensitivity, vulnerability and easiness of creating uncertainty in the investment world of our country, we the Government will comply and proceed with the Constitutional Court?s verdict, which is final and binding, and will implement rapid actions. We have prepared and issued official regulations through this Presidential Regulation (No. 95 of 2012), as a concrete example that there shall be no single day where there is a vacuum (in regulations). Though there is a transition period now, the Government will immediately begin tomorrow to formulate definite rules that Insya Allah (God willing) will be a new law so that the upstream oil and gas business shall go on well, transparent, free from deviation, free from conflict of interest and so on. This is a State asset, the strength of our economy, our future. We will create definite laws or regulations after BPMIGAS is dissolved so that the people can calm down, knowing that this body is being properly managed without deviation, without loss to any one of us".

Conclusion

Given the President's comments, and the Constitutional Court's decision, it seems more than likely that there will be some overhaul of the oil and gas laws. It has been suggested that such an overhaul might lead the way to improving the current regime. While this is always to be hoped, clearly we will have to wait and see whether or not the oil and gas industry will rue the day that BPMIGAS was annulled. In the meantime, it does look like "business as usual" for oil and gas companies, albeit against a much more uncertain regulatory background.

For further information please contact:

Luke D. Devine
Foreign Legal Consultant
+62 21 515 5090/91/92/93
luke.devine@bakernet.com

Norman Bissett
Foreign Legal Consultant
+62 21 515 5090/91/92/93
norman.bissett@bakernet.com

Muhammad Karnova
Partner
+62 21 515 5090/91/92/93
muhammad.karnova@bakernet.com

John P. Sitepu
Associate
+62 21 515 5090/91/92/93
john.p.sitepu@bakernet.com

Alamanda Vania
Associate
+62 21 515 5090/91/92/93
alamanda.vania@bakernet.com