Oil & Gas Regulation 2013

Transcription

1 The International Comparative Legal Guide to: Oil & Gas Regulation th Edition A practical cross-border insight into oil and gas regulation work Published by Global Legal Group, in association with Ashurst LLP, with contributions from: Agmon & Co., Rosenberg, Hacohen & Co. Anastasios Antoniou LLC Bell Gully Bloomfield-Advocates & Solicitors CMS Cameron McKenna Cogan & Partners LLP Criales, Urcullo & Antezana Abogados DLA InterJuris Abogados S.C. Estudio Beccar Varela González Calvillo, S.C. Gorrissen Federspiel JeantetAssociés AARPI Koep & Partners Law Group Argument Loyens & Loeff N.V. Mohamed Ridza & Co. Pachiu & Associates Project Lawyers Schjødt Schoenherr SNR Denton Soewito Suhardiman Eddymurthy Kardono TGC Corporate Lawyers Uría Menéndez Zaka & Kosta Attorneys at Law

2 The International Comparative Legal Guide to: Oil & Gas Regulation 2013 General Chapters: 1 The Legacy of Deepwater Horizon: the UK Experience - Peter Roberts & Renad Younes, Ashurst LLP 1 2 Moving Towards an African Lex Petrolea - Nicolas Bonnefoy, Ashurst LLP 5 Contributing Editor Geoffrey Picton-Turbervill, Ashurst LLP Account Managers Brigitte Descacq, Dror Levy, Maria Lopez, Florjan Osmani, Samuel Romp, Oliver Smith, Rory Smith, Toni Wyatt Sub Editors Beatriz Arroyo Fiona Canning Editor Suzie Kidd Senior Editor Penny Smale Group Consulting Editor Alan Falach Group Publisher Richard Firth Published by Global Legal Group Ltd. 59 Tanner Street London SE1 3PL, UK Tel: Fax: info@glgroup.co.uk URL: GLG Cover Design F&F Studio Design GLG Cover Image Source istockphoto Printed by Information Press Ltd December 2012 Copyright 2012 Global Legal Group Ltd. All rights reserved No photocopying ISBN ISSN Stategic Partners Country Question and Answer Chapters: 3 Albania Zaka & Kosta Attorneys at Law: Dr. Av. Tefta Zaka & Av. Holta Ymeri 8 4 Argentina Estudio Beccar Varela: Roberto A. Fortunati & Isabel Amadeo 20 5 Australia Ashurst Australia: Peter Vaughan & Graeme Gamble 30 6 Austria Schoenherr: Christian Schmelz & Bernd Rajal 47 7 Belarus Law Group Argument : Maryna Dymovich 57 8 Bolivia Criales, Urcullo & Antezana Abogados: Adrián Barrenechea B Bulgaria CMS Cameron McKenna: Kostadin Sirleshtov & Pavlin Stoyanoff Croatia Schoenherr: Bernd Rajal & Matthias Wahl Cyprus Anastasios Antoniou LLC: Anastasios A. Antoniou & Niki Trapezari Czech Republic TGC Corporate Lawyers: Jana Jesenská & Andrea Majerčíková Denmark Gorrissen Federspiel: Michael Meyer & Anne Kirkegaard France JeantetAssociés AARPI: Thierry Lauriol & Valeria Vidoni Gabon Project Lawyers: Jean-Pierre Bozec Soewito Suhardiman Eddymurthy Kardono: Fitriana Mahiddin & Syahdan Zainoel Aziz Israel Agmon & Co., Rosenberg, Hacohen & Co.: Dan Hacohen & Eddie Ashkenazi Kazakhstan SNR Denton: Marla Valdez Kuwait SNR Denton: Stuart Cavet & Nora Al Haroun Malaysia Mohamed Ridza & Co.: Mohamed Ridza Abdullah & Mohamad Nazran Basirun Mexico González Calvillo, S.C.: Jorge Cervantes Trejo Namibia Koep & Partners: Irvin David Titus & Hugo Meyer van den Berg Netherlands Loyens & Loeff N.V.: Roland W. de Vlam & Max W.F. Oosterhuis New Zealand Bell Gully: David Coull & Angela Bamford Nigeria Bloomfield-Advocates & Solicitors: Bimbo Agboade Norway Schjødt: Olav Kolstad & Amund Bjøranger Tørum Poland TGC Corporate Lawyers: Artur Rogozik & Patrycja Osińska-Schroeijers Qatar SNR Denton: Stuart Cavet & Martin Goggins Campos Romania Pachiu & Associates: Delia Vasiliu & Florin Dobre Slovakia TGC Corporate Lawyers: Kristína Drábiková & Soňa Pindešová Spain Uría Menéndez: Juan Ignacio González Ruiz & María José Descalzo Turkmenistan SNR Denton: Marla Valdez & Kenyon Weaver Ukraine CMS Cameron McKenna: Olexander Martinenko & Vitaliy Radchenko UAE Ashurst LLP: Mhairi Main Garcia & Kylie Boston United Kingdom Ashurst LLP: Geoffrey Picton-Turbervill & Julia Derrick USA Cogan & Partners LLP: John P. Cogan, Jr. & Elizabeth Molino Uzbekistan SNR Denton: Marla Valdez & Mouborak Kambarova Venezuela DLA InterJuris Abogados S.C.: Juan Jose Delgado & Gabriela Maldonado 376 Further copies of this book and others in the series can be ordered from the publisher. Please call Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

3 Chapter 16 Fitriana Mahiddin Soewito Suhardiman Eddymurthy Kardono Syahdan Zainoel Aziz 1 Overview of Natural Gas Sector 1.1 A brief outline of s natural gas sector, including a general description of: natural gas reserves; natural gas production including the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and re-gasification facilities ( LNG facilities ); natural gas pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales and trading. had the thirteenth largest natural gas reserves in the world and the third largest in the Asia-Pacific region in 2011, reaching TcF (104.7 TcF proven and TcF probable). The natural gas reserves are mainly located offshore, including in the Natuna Islands, East Kalimantan, South Sumatra and West Papua. In 2011, natural gross gas production reached 75.6 BCM: 50.7% of the natural gas produced in is exported, while the remaining 49.3% of the produced natural gas is used domestically. 333,993 MMSCF of s natural gas is exported via pipeline, amounting to 19% of total exports. The remaining 81% of the 1,761,910 MMSCF of total exports is exported in the form of LNG. LNG shipments abroad have made the secondbiggest exporter of LNG in the world, after Qatar. Last year, s revenue from gas exports amounted to $12.96 billion, an increase of up to 38% from Currently, has three main LNG export facilities: the Arun; Bontang; and Tangguh facilities, which produce 60,818, MMBTU, 747,235, MMBTU and 331,695, MMBTU, respectively. The total production, approximately 1,139,749, MMBTU, is exported mainly to Japan, South Korea and Taiwan. also exports natural gas via pipelines from the West Natuna fields to Singapore and Malaysia, and from South Sumatra to Singapore. In 2011, 37.9 BcM of natural gas was used domestically. The fertiliser, petrochemical and power generation industries are the principal domestic consumers of natural gas in. In 2008, enacted Minister of Energy and Mineral Resources (Minister) Regulation No. 36 of 2008, in order to facilitate the development of the coal-bed methane (CBM) business. The CBM market is promising as demand for gas in the domestic market is growing. holds an estimated 435 TcF of CBM reserves. Production sharing contracts (PSCs) have been awarded since 2008, but currently most are still in the exploration phase. Currently, around 50 (fifty) cooperation contracts for CBM have been executed. Recently, the Minister issued Minister Regulation No. 5 of 2012, which regulates the undertaking of nonconventional oil and natural gas, such as shale gas. It is estimated that has approximately 574 TcF of potential shale gas. The first shale gas cooperation contract is planned to be executed at the end of In an attempt to utilise LNG domestically for power generation in, Floating Storage and Regasification Units (FSRU) are being developed for the storage and regasification of LNG. The FSRU in West Java is the first unit in Asia and the twelfth in the world. FSRU facilities are built usually because gas pipeline infrastructure is time-consuming and costly to construct. There are three FSRU facilities being developed in, in North Sumatra (PGN), West Java (Pertamina and PGN) and Central Java (Pertamina). 1.2 To what extent are s energy requirements met using natural gas (including LNG)? does not import natural gas. In 2011, produced an estimated 75.6 BCM of natural gas. Approximately 21.15% of s energy needs are met by natural gas. is aiming to increase natural gas usage to 30% of its total energy consumption by To what extent are s natural gas requirements met through domestic natural gas production? Under Government Regulation No. 35, PSCs are subject to a domestic market obligation, under which the contractor can be required, by the Minister, to supply 25% of its gas production to the domestic market. Under Minister Regulation No. 002 of 2008 and Minister Regulation No. 3 of 2010, the contractors, upon commencement of commercial production, are obligated to deliver 25% of their gas production to meet domestic demand at a certain price. 1.4 To what extent is s natural gas production exported (pipeline or LNG)? In 2011, approximately billion MMBTU of LNG was exported. LNG is mainly exported to Japan, South Korea and Taiwan. also exports natural gas via pipelines from the West Natuna fields to Singapore and Malaysia and from South Sumatra to Singapore, to the amount of 400 billion cubic feet per year ICLG TO: OIL & GAS REGULATION 2013

4 2 Overview of Oil Sector 2.1 Please provide a brief outline of s oil sector. s oil sector ranks twenty-first among the world s oil producers and accounts for approximately 1.2% of the world s oil production. However, s oil production is declining while oil consumption is rising. s oil resources in 2011 were 7.73 billion barrels, or 0.1% of the world s resources, with proven oil reserves of 4.04 billion barrels. In order for to become a net oil exporter, the President issued Presidential Instruction No. 2 of 2012 regarding increasing National Oil Production to achieve a target of 1,010,000 barrels of oil per day (BOPD). In 2011, s crude oil production was million barrels per day, which reflects a significant 34% decrease since Most of the oil exploration and production activities are carried out in western. 2.2 To what extent are s energy requirements met using oil? In 2011, 47% of s energy consumption was derived from oil, or approximately 1,200,000 to 1,350,000 BPOD. s oil production, which is around 900,000 per BPOD, cannot meet this demand, and as a result, must import oil. 2.3 To what extent are s oil requirements met through domestic oil production? Under the applicable regulations, oil producers must also comply with domestic market obligations. A PSC contractor is required to supply 25% of total oil production from the contract area to the domestic market out of its equity share of production. 2.4 To what extent is s oil production exported? Although the domestic demand for oil cannot be fulfilled by domestic oil production, in 2011 was still exporting oil. The main destination countries for oil exports in 2011 were Japan, the United States, South Korea, Taiwan and Singapore. Japan was the main destination country. 3 Development of Oil and Natural Gas 3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production ( development ) of oil and natural gas reserves including: principal legislation; in whom the State s mineral rights to oil and natural gas are vested; Government authority or authorities responsible for the regulation of oil and natural gas development; and current major initiatives or policies of the Government (if any) in relation to oil and natural gas development. Oil and natural gas development is governed by Law No. 22 of 2001 regarding Oil and Natural Gas (Law 22) and its implementing regulations, Government Regulation No. 35 of 2004, most recently amended by Government Regulation No. 55 of 2009 regarding Upstream Oil and Gas Business Activities (GR 35), and Government Regulation No. 36 of 2004 regarding Downstream Oil and Gas Business Activities, as amended (GR 36). Law 22 and these government regulations substantially changed the existing business structure for both oil and gas activities, especially for downstream oil and gas activities. While Law 22 changed the regulatory framework for the oil and gas sector in a number of significant respects, two changes need to be highlighted. Law 22 dramatically changed the role of the stateowned oil and gas enterprise, Pertamina, and it liberalised the downstream natural gas business. Law 22 grants the government the exclusive rights for oil and gas exploitation and requires all private companies wishing to explore for and exploit oil and gas resources to enter into cooperation contracts, based upon a production-sharing scheme with the government (through the Minister). These cooperation contracts were previously entered into with BP Migas. Exploration, development and production (i.e., upstream) activities are conducted by foreign or domestic companies acting as contractors to the government under cooperation contracts. Cooperation contracts grant contractors exclusive rights for up to 30 years to conduct upstream activities within a defined area under the control of the government (through the Minister). This right does not encompass any surface rights to land, which must be acquired through negotiations with owners and occupiers. All the financial risks of operations conducted under the cooperation contract are to be borne by the contractor. Any oil and natural gas produced is shared between the contractor and the government in the proportions specified by the cooperation contract. The cooperation contract may be extended for up to 20 years. As the production, transmission, distribution and supply of natural gas can be considered as either upstream activities or downstream activities, they may be regulated and supervised by the government, as well as either SKSPMIGAS, as defined below, under the Minister (upstream), or BPH Migas (downstream). The government (represented by the Directorate General of Oil and Gas (Migas)) issues the required business and technical licenses, while the government (through the Minister and BPH Migas, among other activities, supervise and regulate the distribution, transportation and marketing of natural gas through pipelines. Under Law 22, as implemented by GR 36, downstream activities are carried out by private entities based on licences issued by the government under the supervision of the government and BPH Migas. In addition, BPH Migas issues special rights required by private companies intending to distribute or transport natural gas through pipelines. In late 2010 the government issued Government Regulation No. 79 of 2010 (GR 79) on operating costs that can be recovered and the income tax treatment of the upstream oil and natural gas sector. This regulation came into effect as of December 20, 2010, in order to implement Article 31d of the n Income Tax Law. While initially questioned by the oil and gas industry, this regulation is now expected to encourage investment in the oil and gas industry in. However, some provisions of GR 79 may create uncertainties for the existing PSCs. GR 79 is applicable to PSCs and service contracts in the upstream oil and natural gas business sector. GR 79 aims to further govern what costs can and cannot be recovered. GR 79 also regulates the calculation of income tax associated with PSCs, service contracts and other income outside of PSCs. Importantly, GR 79 provides contract sanctity for existing PSCs signed before GR 79 was enacted. However, matters that have not been regulated in such PSCs must be adjusted to comply with GR 79 within three months (i.e., March 20, 2011). In a recent unexpected development, the n Constitutional ICLG TO: OIL & GAS REGULATION

5 Court issued Decision No. 36/PUU-X/2012 (Constitutional Court Decision 36/2012) that annulled several provisions in Law 22 and disbanded BP Migas. In response to the Constitutional Court Decision, the President issued Presidential Regulation No. 95 of 2012 that temporarily transfers the responsibilities of BP Migas to the Minister while the government amends Law 22 or issues a new regulation. The Constitutional Court Decision provides that existing PSCs remain in effect until they expire or until such other date as may be agreed. The Presidential Regulation similarly provides that all existing PSCs remain in effect until their expiration. The Presidential Regulation also provides that all operating processes handled by BP Migas will forthwith be handled by the Minister. The Minister also issued two decrees that transferred the responsibilities of BP Migas to the Temporary Unit of Upstream Oil and Gas Activities (Satuan Kerja Sementara Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi or SKSPMIGAS ) under the Ministry of Energy and Mineral Resources. PSC provides that annual expenditure requirements for the initial six years and the four-year extension and the related work programme and budget must be approved by the government (through the Minister) until a new oil and gas law is issued. In addition, the contractor is required to prepare an Authorization for Expenditure (AFE) for each of the projects in the exploration and exploitation phase for approval. The first Plan of Development (POD) for a commercial discovery of a particular field must obtain approval from the Minister, based on the considerations of SKSPMIGAS (previously BP Migas). Please see question 3.1 above with regard to the rights of the PSC contractors. 3.4 To what extent, if any, does the State have an ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether as a matter of law or policy)? 3.2 How are the State s mineral rights to develop oil and natural gas reserves transferred to investors or companies ( participants ) (e.g. licence, concession, service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of those rights or interests under domestic law? As the exploration and exploitation of oil and natural gas are upstream activities, the only government authorisation required to carry out such activities is a cooperation contract with the government through the Minister (previously BP Migas). Due to the recent Constitutional Court Decision, there are still uncertainties about who will be signing new or amendments to cooperation contracts. The determination of the contract area is subject to the cooperation contract and the initial development of the field must be approved by the Minister and in consultation with the relevant provincial government. Any subsequent development must be approved by the Minister. Notification of executed cooperation contracts must be sent to the House of Representatives (DPR) and the People s Legislative Assembly, even though they have no approval authority. The day-to-day conduct of exploration and production activities requires obtaining permits and approvals from agencies within the applicable regional and provincial governments, as well as the national government. As pointed out above, mineral rights (i.e., the right to mine oil and gas) remain with the government. Private companies may engage in the exploration and exploitation of oil and gas through a cooperation contract with the government through the Minister (previously BP Migas). However, such cooperation contracts do not transfer the mineral rights to the private entities. 3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration appraisal or production arrangements), please specify those authorisations and briefly summarise the most important (standard) terms (such as term/duration, scope of rights, expenditure obligations). The PSC includes exploration and production stages. The initial term of the exploration period is six (6) years and may be extended for a maximum of four (4) years, which is subject to the approval of the government (through the Minister) until a new oil and gas law is issued. The PSC itself is valid for a period of thirty (30) years and may be extended for a maximum of twenty (20) years. The As mentioned above, ownership of oil and natural gas remains with the n government throughout production until delivery to a third-party purchaser. With regard to the right of the government to participate in the development of s natural gas reserves, Law 22, GR 35 and the PSC require the contractor to offer a 10% participating interest to a Regional Government-Owned Enterprise (BUMD) after the first POD has been approved. 3.5 How does the State derive value from oil and natural gas development (e.g. royalty, share of production, taxes)? Contractors are required to pay the State taxes and non-tax revenues. The taxes consist of income taxes, VAT, import duties and tariffs, regional taxes and other levies. Non-tax State revenues consist of the State s share of fixed fees, exploration and exploitation fees and bonuses, which consist of a signature bonus and production bonus, regulated by the relevant PSC. The proceeds from the sale of oil and natural gas produced under a PSC are shared between the government and the contractor. Historically, the general after-tax split between the government and contractors for oil has been 85:15, while for natural gas it has been 70:30 after a contractor has recovered its costs in accordance with the provisions of a given PSC. Generally, the split for oil is between 65:35 and 85:15, while for natural gas it is between 60:40 and 70:30, and, at least theoretically, the split for any given cooperation contract is subject to negotiation. 3.6 Are there any restrictions on the export of production? As mentioned in questions 1.3 and 2.3 above, PSC contractors are required to make 25% of their share of produced oil and gas available for domestic market obligations. 3.7 Are there any currency exchange restrictions, or restrictions on the transfer of funds derived from production out of the jurisdiction? On June 28, 2011, the government enacted the Currency Law. The Currency Law provides that it is mandatory to use Rupiah in any transaction conducted within n territory, except for certain specified transactions that are normally associated with foreign currencies and involve foreign parties. There is no specific regulation on restrictions of the transfer of funds derived from production out of the jurisdiction ICLG TO: OIL & GAS REGULATION 2013

6 3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or interests? Under GR 35, any direct transfer of a contractor s participating interest in a PSC must be approved by the Minister, based on the recommendation of SKSPMIGAS (previously BP Migas). From 2007 onwards, PSCs have stipulated that transfers of participating interest to affiliates and a change of control in a party to a PSC require prior written consent of the Minister. GR 35 also imposes a requirement that if all or a portion of the rights of the contractor are transferred to a non-affiliate or to another company that is not a partner in the same working area, the Minister can request that the contractor offer the interest to a national company. In addition, during the first three years of the PSC (firm commitment), the initial contractor must remain a majority holder of the participating interest and remain the operator of the PSC. 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas development? Minister Regulation No. 35/2008 requires PSC contractors to provide a performance bond to guarantee the PSC s first three-year commitment in the exploration phase. The performance bond shall amount to 10% of the total first three-year firm commitment and is effective for a period of three years as of the date of the PSC. The value of the performance bond can be reduced in phases, in accordance with the work plan and budget, as well as the instruction of Migas. Migas is entitled to draw down the bond if the PSC contractors fail to fulfill the three-year firm commitment Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or booked for accounting purposes under domestic law? 3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical structures used in oil and natural gas development? If so, what are the principal features/requirements of the legislation? Upon the relinquishment or abandonment of any field or well, or the termination of a PSC, the PSC contractors must remove all equipment in a manner acceptable to the Minister, as well as perform all necessary site restoration activities. The PSC contractor is obligated to provide reserve funds for the abandonment and site restoration in a joint account with the government through the Minister (previously BP Migas). In the event that the total realisation cost of the well/mine plugging and restoration is smaller or larger than the reserve fund, the balance will be a deducted or added to cost recovery from the respective work areas or fields, upon approval by the government through the Minister (previously BP Migas) Is there any legislation or framework relating to gas storage? If so, what are the principle features/requirements of the legislation? There are no specific laws or regulations regulating gas storage facilities. Gas storage facilities are subject to the general law requirements relating to environmental management. 4 Import / Export of Natural Gas (including LNG) 4.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas (including LNG). There are no specific laws concerning cross-border sales of natural gas or LNG. As mentioned above, under the applicable laws, ownership of oil and natural gas remains with the government until the point of delivery. Therefore, a participating interest under a PSC cannot be pledged for security. Despite the fact that GR 35 and the PSC may permit a contractor to transfer and assign its participating interest to other parties with the Minister s approval, the government or the Minister will not approve a contractor pledging its participating interest for security In addition to those rights/authorisations required to explore for and produce oil and natural gas, what other principal Government authorisations are required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and from whom are these authorisations to be obtained? In conducting petroleum activities, PSC contractors are required to comply with the provisions of occupational health and safety, environmental management and community development regulations. In the exploration phase, PSC contractors must conduct an environmental monitoring/environmental management (UKL/UPL) report. During the exploitation of the proposed development, PSC contractors must further conduct an environmental assessment (AMDAL), which is subject to the relevant government authority s approval. The PSC contractors are also required to make periodic reports to the relevant government authorities regarding their compliance with the UKL/UPL and AMDAL. In addition, the Environmental Law enacted in 2009 also requires companies to obtain an environmental licence. 5 Import / Export of Oil 5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of oil and oil products. There are no specific laws concerning cross-border sales of oil and oil products. 6 Transportation 6.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation pipelines and associated infrastructure (such as natural gas processing and storage facilities). While private companies may own and operate pipelines and storage facilities, the Minister and BPH Migas will determine how those downstream activities are organised and conducted. With regard to the transportation of natural gas, the Minister is charged with developing a national gas transmission and distribution network master plan. BPH Migas may conduct auctions of special rights to transport natural gas by pipeline in certain regions based on the master plan and to stipulate what should be paid for the rights granted. These rights are limited to a certain pipeline network. BPH Migas may also: regulate the transportation through pipelines and distribution of natural gas; ICLG TO: OIL & GAS REGULATION

7 stipulate the joint use of transportation, distribution and storage facilities; determine the obligations of private entities engaging in downstream activities where market mechanisms are not functioning; in remote areas, set tariffs for pipeline use; and set the price of natural gas for households and small-scale consumers. Companies engaging in the transportation of natural gas through pipelines or by trading natural gas must pay a defined contribution or toll to BPH Migas, based on volumes transported or sold. The contribution is for BPH Migas s working plan and budgetary purposes. 6.2 What Governmental authorisations (including any applicable environmental authorisations) are required to construct and operate oil and natural gas transportation pipelines and associated infrastructure? transmission and distribution network for natural gas under Minister Decree No. 2700/K/II/MEM/2012. With regard to the distribution of oil, the government only regulates the availability and distribution of certain types of fuel oil. 6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and associated infrastructure. For example, can the regulator or a new customer wishing to transport oil or natural gas compel or require the operator/owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility expansions) allocated? Generally, a specific business licence is required from the Minister. Specifically, to transport natural gas through pipelines, the authorised entity must also obtain special rights for such pipeline from BPH Migas. Construction and operation of these facilities will be subject to the regional, provincial and national regulations generally applicable to the construction and operation of industrial facilities. The pipeline operator is also required to prepare an Environmental License. 6.3 In general, how does an entity obtain the necessary land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? Do Government authorities have any powers of compulsory acquisition to facilitate land access? Generally speaking, land rights will be obtained by negotiating with owners and occupiers, in accordance with prevailing laws. To the extent these facilities are used for upstream activities within the framework of a co-operation contract, the contractor will have to comply with Law 22, GR 35 and the relevant implementing regulations to be issued thereunder. Contractors are responsible for the payment of these rights. Land that is purchased for a facility will become the property of the State, while land that is leased for a facility will be leased in the name of the contractor. Title to land purchased for facilities used for downstream activities outside of a cooperation contract may be held in the name of the business entity engaging in the transportation or storage activity. 6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised? Under Law 22, as stated above, the Minister will establish the master plan and, given its general authority over the transmission and distribution of oil and natural gas, determine joint use of transportation systems and intervene in pipeline operator disputes. BPH Migas is given the authority to determine questions of access to oil and natural gas transportation systems and interconnection of, and cooperation between, pipeline systems. A holder of a licence from the Minister and the special rights (the operator of a gas pipeline) must allow third-party access to its natural gas transportation and storage facilities under the supervision of BPH Migas. 6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is cooperation between different transportation systems established and regulated? The Minister has stipulated a master plan for an integrated A pipeline or storage facility operator cannot be required to expand its facilities to accommodate new customers. While expansion may not be mandated directly, given that development plans for natural gas requires the approval of the Minister (previously BP Migas) and the operation of pipelines is regulated by BPH Migas, it is conceivable that either might require a contractor or pipeline operator to develop facilities in excess of their needs. BPH Migas could then use its authority to compel such excess to be shared, especially given the law s stated objective of ensuring sufficient natural gas is available to meet domestic demand. With regard to facilities and transportation in the oil sector, as mentioned in question 6.5, there is only a specific regulation regarding the distribution of certain types of fuel oil. 6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) regulated? In general, and subject to BPH Migas s authority to set the tariffs for transportation of natural gas through pipelines, parties may agree on the terms of the agreement for the transportation and storage of natural gas. A contractual regime is in its early stages of evolution. BPH Migas has the authority to stipulate and supervise the tariff for the transportation of natural gas through pipelines that will be charged by the operator of the pipeline to the users. The relevant operator must submit the proposed tariff to BPH Migas. BPH Migas will then verify and evaluate the proposed tariff. BPH Migas will discuss with the related pipeline operator and the users before determining the tariff. For the transportation of natural gas, the applicable regulation provides that the agreement between the operator and the user of gas pipelines must be set forth in a gas transportation agreement. BPH Migas must approve the tariff to be stipulated in the agreement. The regulation also requires the operator of the gas pipeline to prepare an access arrangement outlining the terms and conditions for the joint use of the pipelines owned by the operator. This must also be approved by BPH Migas. The access arrangement will include management guidelines, and technical and legal rules. The gas transportation agreement must be in accordance with the access arrangement. With regard to the oil industry, there are no general requirements or regulations on the tariff and transportation of oil. However, as mentioned in question 6.6, the government issues regulations on the market mechanisms for the distribution, pricing and availability of fuel oil ICLG TO: OIL & GAS REGULATION 2013

8 7 Gas Transmission / Distribution 8 Natural Gas Trading 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas transmission/distribution network. To date, the local distribution of natural gas has been extremely limited in. The distribution of natural gas is a downstream activity subject to regulation by BPH Migas. BPH Migas has awarded special rights to companies to operate transmission and distribution pipelines. 7.2 What Governmental authorisations (including any applicable environmental authorisations) are required to operate a distribution network? Please see question How is access to the natural gas distribution network organised? As stated in question 6.4, BPH Migas may control access to the natural gas grid, subject to the master plan, and will grant special transmission or distribution rights on pipelines. 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to accommodate new customers? Please see question What fees are charged for accessing the distribution network, and are these fees regulated? The tariff that shall be paid by the business entity holding the business licence and special rights for natural gas transportation is calculated by multiplying the total annual volume of the natural gas transported via pipeline with the percentage of the natural gas transportation tariff per thousand cubic feet. 8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas trading. Please include details of current major initiatives or policies of the Government or regulator (if any) relating to natural gas trading. To engage in trading, an entity must obtain a trading business licence from the Minister for a certain trading area. As stated above, the price of natural gas for households and small-scale customers will be determined by BPH Migas. The trading business licence granted will be either a wholesale business licence or a limited trading licence. A wholesale business licence entitles the licensee to serve large customers. These licensees must have a guaranteed gas supply from domestic or overseas sources and they must maintain minimum operational reserves, as stipulated by BPH Migas. They must also own or control their own storage facilities and infrastructure. The ownership of natural gas remains with the government up until the point of delivery or sale. Direct negotiation of gas sales contracts by sellers and buyers and the trading of natural gas are possible under Law 22. Under the law and the cooperation contract, the seller of the gas produced under a cooperation contract will be appointed by the government (through the Minister). To our knowledge, the appointed seller has usually been the operator of the cooperation contract. 8.2 What range of natural gas commodities can be traded? For example, can only bundled products (i.e., the natural gas commodity and the distribution thereof) be traded? This will depend on how BPH Migas regulates distribution and trading activities and whether the government will issue multiple trading and distribution licences for a given area. Bundling of several products is possible since one entity may hold both a distribution and a trading licence. 9 Liquefied Natural Gas 7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network (whether directly or indirectly)? Special rights for operating a distribution network area cannot be transferred directly. If a party wants to acquire the operation rights of the area, the special rights must first be revoked by BPH Migas and then be reapplied for by the company intending to acquire the rights. BPH Migas does not regulate whether an indirect transfer of special rights (e.g., through a transfer of shares or change of control) would require BPH Migas approval. 9.1 Outline broadly the ownership, organisational and regulatory framework in relation to LNG facilities. This depends on how the LNG business is carried out. If, under the applicable contractual arrangements, the natural gas is to be sold as LNG, then the owner of the LNG will be the government until the point of delivery or sale and the facilities will be developed within the framework of the cooperation contract. If the natural gas to be liquefied has been purchased by a private party, then the LNG and related processing and other facilities will be owned by the purchaser. Currently, has three main LNG export facilities: the Arun; Bontang; and Tangguh facilities. 9.2 What Governmental authorisations are required to construct and operate LNG facilities? If conducted within the framework of a cooperation contract, the chief approval required will be the approval of the development plan by the government (through the Minister). If conducted outside the framework of a cooperation contract, the processing entity will need one or more downstream business licences, ICLG TO: OIL & GAS REGULATION

9 depending on the scope of its operation. To establish and operate private LNG facilities, the approval of s Capital Investment Coordinating Board (BKPM) is required if the project is to be undertaken by a processing company with foreign ownership. In addition to these approvals, other technical, safety and environmental licences are required to be obtained from the Ministry of Energy and Mineral Resources, the other departments having jurisdiction over major construction projects, as well as from the relevant regional and provincial governments. Depending on the structure of the project, financing could also be subject to government approval. 9.3 Is there any regulation of the price or terms of service in the LNG sector? There are no regulations concerning the determination of the prices and terms of service in the LNG sector. The price of LNG will vary depending on the contractual arrangements between the sellers and buyers. If the LNG is sold within the framework of a cooperation contract, its sale and pricing will be subject to the provisions of the cooperation contract and the government regulations applicable to the sale of natural gas. 9.4 Outline any third-party access regime/rights in respect of LNG Facilities. There is no specific regime or regulations on third-party access to LNG facilities. 11 Competition 11.1 Which Governmental authority or authorities are responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural gas sector? While BPH Migas can impose penalties on business entities engaged in the natural gas sector, the Commission for the Supervision of Business Competition (KPPU) is responsible for implementing s Anti-Monopoly Law. The KPPU may issue decisions that certain agreements, conduct or positions in the relevant market (including the natural gas market) are anticompetitive and therefore in violation of the Anti-Monopoly Law. The decisions of the KPPU can be appealed in district courts and then in the Supreme Court To what criteria does the regulator have regard in determining whether conduct is anti-competitive? The general prohibitions set forth in the Anti-Monopoly Law will be applied. These prohibitions can be categorised as follows: prohibited agreements; prohibited conduct; and abuse of a dominant position in a given market sector What power or authority does the regulator have to preclude or take action in relation to anti-competitive practices? 10 Downstream Oil 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. Under Law 22, downstream business activities include the processing, storage, transportation and trading of oil. In order for a business entity to carry out downstream business activities in the oil sector, it must have the required licences issued by the government, i.e., the Minister. These licences consist of a processing business licence, transportation business licence, storage business licence and/or trading business licence. One business entity may possess more than one business licence. The specific requirements for downstream business licences depend on the type of downstream business activities regulated by GR 36. Downstream business activities may be carried out by a state-owned company, a regional government-owned company, a co-operative, a small-scale business or an n private company. Downstream business activities may not be conducted by a foreign legal entity through a branch, representative office or permanent establishment. A business entity carrying out downstream activities is not permitted to carry out upstream activities, although its affiliates may do so Outline broadly the ownership, organisation and regulatory framework in relation to oil trading. As discussed above, an entity must obtain a trading business licence from the Minister for a certain trading area. With regard to fuel oil trading, the Minister has the authority to stipulate a certain distribution area for the sale of specified fuel oil and stipulate a retail price for certain types of fuel oil, while BPH Migas has the authority to determine joint usage of transportation and storage facilities in areas that are remote or where the market mechanisms are not yet effective. Should the KPPU determine that a violation of the Anti-Monopoly Law has occurred, it may, among other things, order the termination of the prohibited agreement or cessation of the prohibited conduct or abuse of dominant position. Though administrative sanctions are within the KPPU s authority, if the case is appealed to a district court, the court may, among other penalties, impose criminal sanctions, revoke a company s business licence or require the termination of conduct that causes damage to other parties Does the regulator (or any other Government authority) have the power to approve/disapprove mergers or other changes in control over businesses in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long does it typically take to obtain a decision approving or disapproving the transaction? The transfer of shares in any company with foreign ownership requires the approval of the BKPM. This approval is usually granted routinely, but for the natural gas sector, the BKPM may require a recommendation from Migas or BPH Migas. Once any required recommendation letter is obtained, the BKPM s approval should be issued within two weeks. For the transfer of assets, generally speaking, no approval is required, although the purchasing company would have to obtain all the requisite licenses before engaging in business and the selling company may have to obtain approval to transfer assets it had imported with tax or customs facilities. Please see question 3.8 with regard to requirements for the transfer of a participating interest in a PSC. With regard to the transfer of interest in the downstream sector, please see question 7.6. For mergers, acquisitions and consolidations, while the Anti- Monopoly Law does not give the KPPU the authority to pre ICLG TO: OIL & GAS REGULATION 2013

10 approve such transactions, the KPPU must be notified of all mergers, acquisitions and consolidations involving assets and sale values exceeding certain stipulated thresholds within 30 days after closing. To implement the Anti-Monopoly Law, the government has issued Government Regulation No. 57 of 2010 (GR 57). GR 57, among other things, stipulates further the thresholds, exceptions to the notification requirement, pre-acquisition or merger reporting to the KPPU and the assessments that must be made by the KPPU for mergers and acquisitions. 12 Foreign Investment and International Obligations 12.1 Are there any special requirements or limitations on acquisitions of interests in the oil and natural gas sector (whether development, transportation or associated infrastructure, distribution or other) by foreign companies? Upstream oil and gas business can be carried out directly by foreign entities. Foreign companies may not directly engage in downstream activities, although they may establish subsidiaries to engage in these activities, the establishment of which requires the approval of the BKPM and obtaining the requisite downstream business licenses. If the acquisition is made by acquiring an interest in an existing n company, then it would require the approval of the BKPM. The conditions for obtaining the BKPM s approval of either the establishment or acquisition of an n company will depend on the regulations and policies in effect. The BKPM s current internal guidelines seem to indicate that it will permit maximum foreign ownership of 100% in a company engaged in downstream oil and gas business activities. Furthermore, there are no special requirements or limitations imposed on foreign companies. Law 22, however, restricts companies from engaging in both upstream and downstream activities at the same time and provides that a company (whether foreign or domestic) may hold an interest in only one cooperation contract To what extent is regulatory policy in respect of the oil and natural gas sector influenced or affected by international treaties or other multinational arrangements? The most recognised treaties that would affect regulatory policy are those tax treaties to which is a party. Multinational agreements may also affect regulatory policy where these agreements have been ratified by the n Government. 13 Dispute Resolution free to choose the venue and submit their claims to n courts or to foreign courts, or to choose arbitration as the means for dispute resolution. For service contracts, the BP Migas guidelines for procurements provide that any disputes arising out of or in relation to service contracts that are subject to arbitration must be settled by a reputable n arbitration institution, with the hearings held in. With the recent disbanding of BP Migas, it became uncertain as to the applicability of the BP Migas guidelines. However, the Minister issued a letter to PSC contractors stating that the existing BP Migas guidelines shall mutatis mutandis be in full force until SKSPMIGAS issues new guidelines. Pursuant to GR 36, BPH Migas has the obligation to settle disputes involving special rights holders of natural gas transportation and/or anything related to natural gas transportation via pipeline. In the event the dispute settlement proposed by BPH Migas is not accepted by the parties, the parties can file an objection claim with the Central Jakarta District Court Is a signatory to, and has it duly ratified into domestic legislation: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ( ICSID )? is a signatory to the New York Convention, which was ratified by Presidential Decree No. 34/1981. The Arbitration Law was then enacted in 1999 to adopt the provisions of the New York Convention and regulate the procedures for the registration and enforcement of foreign arbitral awards. is also a signatory to the ICSID Convention Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities or State organs (including any immunity)? There is no special difficulty in this matter. To our knowledge, there have been litigation cases against the government. However, there are no publicly available sources regarding this matter Have there been instances in the oil and natural gas sector when foreign corporations have successfully obtained judgments or awards against Government authorities or State organs pursuant to litigation before domestic courts? We are not aware of any such instances Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), including procedures applying in the context of disputes between the applicable Government authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in relation to the distribution/transmission of natural gas. PSCs provide the dispute resolution procedures and forum. The parties are free to elect the forum for dispute resolutions. Parties are 14 Updates 14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Oil and Gas Regulation Law in. As discussed above, the Constitutional Court recently issued Decision 36/2012 on the judicial review of Law 22, ruling that the status of BP Migas was unconstitutional and contrary to the 1945 Constitution, and therefore disbanding BP Migas. In response to the Constitutional Court decision, the President issued Presidential Regulation 95 of 2012 on the Transfer of Duties and Functions of BP Migas. The Constitutional Court Decision ICLG TO: OIL & GAS REGULATION

11 provides that existing Cooperation Contracts/PSCs remain in effect until they expire or until such other date as may be agreed. The Presidential Regulation similarly provides that all existing PSCs remain in effect until they expire. The Presidential Regulation also provides that all operating processes handled by BP Migas will forthwith be handled by the Minister. For further implementation, the Minister issued two decrees, transferring the staff, functions and duties of the former BP Migas to SKSPMIGAS, the new temporary unit under the Ministry of Energy and Mineral Resources. As a result of the foregoing change, until a new regulation is issued by the government, there is still uncertainty about the status of existing PSCs and the status of new PSCs or amendments to PSCs, particularly who will sign these PSCs representing the government. As to upstream operational approvals such as POD, Work Program and Budget, and AFE, the related approval processes are temporarily being handled by the Minister and SKSPMIGAS. Fitriana Mahiddin Soewito Suhardiman Eddymurthy Kardono Mayapada Tower, 14th Floor Jl. Jend. Sudirman Kav. 28, Jakarta Tel: Fax: fitrianamahiddin@ssek.com URL: Fitriana Mahiddin is a partner at SSEK. Her main areas of practice are oil and gas law, mining, coal-bed methane and private power, as well as acquisitions, foreign investment law and general corporate and commercial law. Since joining SSEK in 1999, she has represented numerous leading offshore and local upstream oil and gas companies, and has been involved in major oil and gas, coal-bed methane and mining projects. She graduated in 1999 from the University of Faculty of Law and in 2004 earned her LL.M. in International Business Law from Vrije Universiteit in Amsterdam, the Netherlands. She obtained her advocate licence in 2008 and is a member of the n Advocates Association (Peradi). She is also a member of the Association of n Legal Consultants. Syahdan Zainoel Aziz Soewito Suhardiman Eddymurthy Kardono Mayapada Tower, 14th Floor Jl. Jend. Sudirman Kav. 28, Jakarta Tel: Fax: syahdanaziz@ssek.com URL: Syahdan Aziz is a senior associate at SSEK. He received his Bachelor of Laws in Economic Law from the University of Faculty of Law in 2005 and earned his Master of Laws in 2009 after completing a one-year programme in International Economic and Business Law at the University of Groningen in the Netherlands. He is a licensed attorney and a member of the n Advocates Association (Peradi). Since joining SSEK in early 2005 as part of the firm s internship programme, Syahdan has represented both domestic and multinational companies, and has handled various kinds of transactions. He has been involved in numerous projects relating to oil and gas, energy and mining, mergers and acquisitions, and investment. His main practice areas include oil and gas, energy and natural resources, mergers and acquisitions, foreign capital investment, infrastructure and general corporate matters. SSEK was formed in 1992 by experienced lawyers with a vision of creating a modern n law firm capable of delivering legal services at the highest international standard. Today, SSEK is one of the largest law firms in and one of the most honoured. SSEK was named the n Law Firm of the Year for 2012 by Who s Who Legal, an honour it also received in 2006, 2007 and It was the Chambers Asia n Law Firm of the Year for 2011 and the Asian-Counsel Magazine Law Firm of the Year for 2011, 2010 and SSEK has the depth and breadth of n legal experience and knowledge to understand each client s problems, identify the local and international issues and develop appropriate solutions ICLG TO: OIL & GAS REGULATION 2013

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