OPINION: Turmoil?but no Oil: Constitutional Court Decision No. 36/PUU-X/2012
By: Hadiputranto, Hadinoto & Partners (www.hhp.co.id)
Tuesday, November 13 2012 - 11:55 PM WIB
Introduction
The Constitutional Court has issued decision 36/PUU-X/2012 on 13 November 2012. This effectively annuls and partly amends the following provisions of the Oil and Gas Law No. 22 of 2001 ("Oil and Gas Law"):
1. Art. 1. 23 and 4.3 (defining BPMIGAS and setting out the basis for its establishment);
2. Art. 11.1 - this Article, which has been partly amended, stipulates that upstream oil and gas activities will be carried out between business entities and BPMIGAS, on the basis of a PSC;
3. Art. 20.3 - this Article, which has been partly amended, requires oil and gas contractors to hand back data to the Ministry of Energy and Mineral Resources ("MEMR") through BPMIGAS at the end of the term of the PSC;
4. Art. 21.1 - this Article, which has been partly amended, stipulates BPMIGAS' involvement in the approval process for 1st PODs;
5. Art. 41, 44 and 45 (establishing BPMIGAS' supervisory powers, authorities and duties, and setting out how it is constituted);
6. Art. 48.1 and 49 (establishing BPMIGAS' budget, the need for further implementing regulation ); and
7. Art. 59(a), 61 and 63, stipulating when BPMIGAS will be established and the transitional provisions from Pertamina to BPMIGAS.
It is clear from the above that the decision of the Constitutional Court aims to annul BPMIGAS as of the date of its decision. The reasoning for this is set out in more detail below.
Impact on Oil and Gas Companies
What does the Constitutional Court's decision mean for oil and gas contractors?
The Constitutional Court's decision stipulates that pending a new law being issued to incorporate the above changes in the existing Oil and Gas Law, BPMIGAS' functions should be carried out by the MEMR or by a State-owned Enterprise (Badan Usaha Milik Negara / "BUMN") (to the extent that these relate to BPMIGAS' status as a PSC counterparty), such entity to be appointed by the MEMR. The Constitutional Court's decision recognizes that existing contracts are preserved - but see comments below.
It is still very early to say what the impact of the Constitutional Court's decision will be. No doubt, the current contractual arrangements will somehow continue to be recognized, albeit that the basis for doing so is legally very unclear. However, the decision does throw up the following questions:
1. Pending further clarification, will the MEMR actually carry out the day to day functions previously carried out by BPMIGAS - e.g. approving WPBs, AFEs, PODs (after the initial POD), large value goods/services contracts during production etc. If so, how, given that this expertise sits within BPMIGAS? In this connection, the Minister of Energy and Mineral Resources has stated that BPMIGAS will not be dissolved just yet. According to the Minister, therefore, the Government has time to implement the decision of the Constitutional Court. This seems to contradict Article 47 of the Constitutional Court Law (lastly amended by Law No. 8 of 2011) which provides that the Constitutional Court's decision will take effect immediately upon its announcement in a public plenary session. That being said, in the absence of further clarifying legislation, it is not entirely clear to us on what basis the MEMR assumes the rights and obligations delegated to BPMIGAS.
Accordingly, we would expect the decision-taking process for all these functions to be effectively jammed.
2. Under Government Regulation No. 42 of 2002 on BPMIGAS, BPMIGAS' assets constitute separated state assets; does the dissolution of BPMIGAS mean that, once again, the oil and gas budget used by it is now part of the state budget? If so, will we once again see the Indonesian Parliament (DPR) attempting to set caps on cost recovery through the state budgeting process?
3. What entity will be appointed to carry out BPMIGAS' role in the PSCs, and when? Clearly, it may be far from satisfactory for oil and gas companies if this function is assumed by Pertamina. If another entity is appointed, will this entity have the same authority as BPMIGAS to effectively ensure the sanctity of contract of the PSCs, or will, as the Constitutional Court's decision suggests, the devolved BUMN structure make it easier for other ministries to ignore the terms of the PSC when passing legislation?
4. What happens to the implementing regulations of the Oil and Gas Law, e.g. Government Regulation No. 35 of 2004, mentioning BPMIGAS? Presumably these will all need to be amended to delete references to BPMIGAS. Likewise, the guidelines and other regulations passed by BPMIGAS, e.g. BPMIGAS Procurement Guidelines 007, will need to be adopted by MEMR. Pending such adoption by MEMR, the status of these guidelines and regulations, and hence of the activities governed by them, is far from clear.
Does this decision affect oil and gas goods/services companies?
Aside from the uncertainties surrounding the application of the tender rules, and the GOI's authority over tender processes, BMIGAS' dissolution would not seem to directly impact oil and gas goods/services companies.
The Decision Explained
Background
The constitutional review was raised by 42 applicants, e.g. Pimpinan Pusat Muhammadiyah, Pimpinan Pusat Persatuan Ummat Islam, Solidaritas Juru Parkir, Pedagang Kaki Lima, Pengusaha dan Karyawan (SOJUPEK) ; these are primarily public interest organisations.
The concerns raised by these organisations, among other things, were as follows:
1. The bulk of the public interest arguments revolved around the role of BPMIGAS. Firstly, the GOI's role as the controller of the State's natural resources should be placed above PSC parties' commercial interests. It was argued that the GOI's regulatory and commercial roles should not be conflated.
2. It was also argued that the PSC favoured international oil and gas companies; accordingly, as there was a possibility of the State (in the form of BPMIGAS) losing out in any dispute settlement proceedings, this might jeopardize the State's standing and dignity.
3. The public sector organisations also raised concerns that the Oil and Gas Law permits both PSCs and ?other types of contracts". The organisations felt that the absence of details concerning these other types of contracts opens the possibility of their provisions not being in line with the spirit and intention of the Indonesian Constitution (UUD 1945).
4. (i) There are inherent flaws in the structure of BPMIGAS, e.g. the absence of a supervisory board. (ii) Further, as a state legal entity, it should have a higher standing than business entities such as international oil and gas companies.
5. The provisions of the current rules that: (i) restrict upstream oil and gas companies in conducting downstream activities, and vice versa; and (ii) require ring-fencing with regard to contract areas, are deemed to be inefficient and costly for BUMNs.
What were the principal considerations of the Constitutional Court?
The Constitutional Court upheld the applicants arguments set out in paragraphs 1, 2, and point (i) of paragraph 4 above. Although it did not uphold the second argument set out in point (ii) of paragraph 4, it agreed that the State's regulatory role should be separate from its commercial one.
The Constitutional Court was of the view that in light of Article 33.3 of the Indonesian Constitution - on natural resources belonging to the people of Indonesia - the State's regulatory and commercial roles should not be held by the same entity. This is because having a state organ as a PSC counterparty may hinder the GOI from fully carrying out its role as a controller and regulator of the State's natural resources.
According to the Constitutional Court's decision:
" ?the State would not be able to issue regulations in the public interest that are inconsistent with the terms of the PSCs that it is subject to".
Accordingly, in the opinion of the Constitutional Court, the current functions of BPMIGAS are inconsistent with the Indonesian Constitution.
The only dissenting judgment queried the standing of the applicants, given that they had not suffered any loss, and went on to confirm that the establishment of BPMIGAS did not contravene the Indonesian Constitution, given in particular that the PSCs were established by law.
Conclusions
The decision of the Constitutional Court, we believe, is highly significant. Since the introduction of the "new" Oil and Gas Law in 2001, the oil and gas regulatory regime has been fairly settled (albeit that the contractual certainty underpinning the regime has been whittled away over time). The concern now is that the oil and gas will, once again, become a focus of regulatory activity, in the same way that the mining industry has been impacted by a succession of regulatory changes.
In addition, the current ruling poses real problems for oil and gas companies seeking to carry out their operations, until further light is thrown on how the MEMR will carry out its new tasks.
What is the Constitutional Court?
The Constitutional Court and the Supreme Courts are the highest judicial bodies in Indonesia.
What does it do?
The Constitutional Court's roles are as follows:
1. Carry out judicial reviews of the validity of laws under the Indonesian Constitution (UUD 1945);
2. Settle disputes between state organs and/or bodies having powers granted by the Indonesian Constitution;
3. Dissolve political parties; and
4. Settle disputes concerning general election results.
In addition, the Constitutional Court has the authority to decide on any DPR allegations of wrongdoing against the President and/or Vice President.
What is the effect of the Constitutional Court's Decision?
The court has the power to annul legislation that is contrary to the Constitution. In our view, once the law, or the relevant provisions of the law, are annulled, then it is difficult to see on what basis BPMIGAS could be said to still be in existence, in order to transition its functions to the MEMR.
It should be noted that decisions of the Constitutional Court are final and binding.
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