The State Secretariat recently issued Government Regulation Number 35 of 2004 on Upstream Oil and Gas Business Activities (the “Regulation”, “Upstream Oil and Gas Regulation”, or “GR 35/2004”). The Regulation -- which consisted of 14 Chapters and 105 Articles – was issued to further implement provisions of  Articles 8, 18, 19(2), 20(6), 21(3), 22(2), 31(5), 37, and 43 of Law Number 22 of 2001 on Oil and Gas (the “Oil and Gas Law”).

Chapter II regulates matters relating to upstream sector’s working area. A working area is a particular area within Indonesian territory allocated for exploration and exploitation (Article 1.16 of the Oil and Gas Law). The Regulation specifically stipulates that the Minister of Mining and Energy (“Minister”) is authorized to perform planning and allocation of working areas (Article 2.2 of the Regulation).  

Working Areas will be determined and announced to Indonesian or Foreign Business Entities. In determining Working Areas the Minister shall coordinate and consult with relevant regional Governors in order to elaborate and exchange information concerning certain areas deemed to have potential oil resources.

The Minister may then offer Working Areas to Indonesian or Foreign Business Entities through auction or direct offer. When direct offer is carried out, the Minister will use evaluation result from an appraisal team it had formed. Executive Agency for Upstream Oil & Gas Business Activities (“BP-Migas”) may issue recommendation to the Minister concerning the track record of the Business Entities interested in obtaining Working Area. The Business Entities themselves may submit a request for obtaining Working Areas to the Minister. The Government will allocate only one Business Area for each Business Entity

Determination of Business Entities as Contractors is conducted by the Minister after coordinating with BP-Migas. Contractors must return its Working Area to the Minister through BP-Migas in accordance to the Joint Work Contract. Prior to returning the Working Area contractors must fulfil its exploration commitments or other obligations as stipulated on the Joint Work Contract. Upon the returning of Working Areas to the Minister, the status of the Working Area automatically transforms into Open Areas. In cases where there exist part of Working Areas not utilized by Contractors, the Minister, under the recommendation of BP-Migas, may determine appropriate utilization of the site.  

Chapter III of the Regulation enumerate General Survey activities in Open Areas within the mining zones, which may be in the form of geological, geophysical and geochemical surveys. General Surveys can be conducted across the contractor’s own Working Areas subsequent to coordination with BP-Migas.

Business Entities performing the General Surveys may store and utilize information obtained from General Survey until its license elapsed. All information derived from General Surveys, Explorations and Exploitations is state possession administered by the government. The Minister shall manage the utilization of such information. All delivery or transfer of this information may only be conducted subsequent to the Minister’s approval.

At the event of cessation of Joint Work Contract or upon the returning of Working Areas to the Minister via BP-Migas, all information obtained from Exploration and Exploitation must be transferred to the State. Storage and utilization of the information by contractors are allowed subsequent to Minister’s approval. Exchange of such information among Contractors can only be conducted through approval from the Minister. 

With regard to its confidentiality, data is classified into 4 categories; namely, Public Data; Primary Data; Processed Data; and Interpreted Data. General data has no associated secrecy or confidentiality component. Primary Data is protected for 4 years, processed data is protected for 6 years, and interpreted data is protected for 8 years. However, if the relevant upstream sector is returned to the Minister prior to the expiration of these protected periods then the relevant data is no longer classified as secret or confidential.

Chapter four of the GR enumerates the performance of upstream activities. Article 24 of the GR stipulates that Upstream Activities must be conducted by either local Business Entities or foreign Business Entities through a joint working contract. The GR requires that the joint working contract entails at least the provision clarifying that (i) ownership of oil and gas resources is with the government until transfer is made (ii) management of the operation performed by contractors is in the hand of BP-Migas and that (iii) capitals and risks fully becomes the liability of the Contractors. Article 26 of the GR specifies minimum provision of the Joint Work Contract, which shall embody: (i) state revenue, (ii) Working Area and its return to the government, (iii) disbursement obligations, (iv) transfer of ownership of oil and gas resources, (v) term and conditions of contract’s extension, (vi) dispute settlement, (vii) obligation to supply national need of oil and gas, (viii) cessation of contract, (ix) obligations for post mining operations, (x) work health and safety, (xi) environmental protection and management, (xii) transfer of rights and obligations, (xiii) report necessitated by the government, (xiv) field development planning, (xv) priority in utilizing national products and services, (xvi) development of neighboring societies and assurance toward the rights of adapt societies and (xvii) priority toward the utilization of Indonesian workers.

The maximum period of validity for a joint work contract is 30 years which includes both the exploration and exploitation. However, the maximum period for the exploration component is 10 years consisting of an initial grant of 6 years which may be extended on application for a further 4 years. The joint work contract may be extended for a maximum of 20 years each time an extension application is made. Article 28(9) clearly stipulates that PT. Pertamina (“Pertamina”) may submit an application to the Minister for any sector where the joint work contract has expired. Minister may approve Pertamina’s request after considering its working program, technical abilities and financial capabilities.

Within 180 days of the effective date of the joint work contract contractors must commence their activities. If no activity is commenced within this period, the Minister may cancel the relevant contract. A contractor may delegate, surrender, or transfer their participating interest to a third party on the agreement of the Minister.

To conform with prevailing regional governments regulations, Article 34 specifically requires Contractors to offer 10% of the participating interest to Regional Business Entities. Should no statement of acceptance is received within 60 days after the offer is made, Contractors must offer the remaining portion of participating interest to national companies.

Article 36 obliges Contractors to allocate funds for post upstream activities operations. Appropriation of such funds shall be detailed in the joint work contract. Article 38 stipulates that governing law of every joint work contract shall be Indonesian Law.

Contractors must report all findings and certification of oil and gas reserves to BP-Migas. In cases where oil or gas reservoirs expands so as to enter other contractor’s Working Area or continental shelves of other states, the Contractor would be required to report and unitize the reservoir.

Chapter VI contain provisions regulating state revenues. State revenues comprise of taxes, excise and custom duties as well as regional taxes and retributions. Chapter VII contain provisions pertaining settlement mechanism of state lands or privately owned lands. Article 62 obliges individuals holding land titles to allow Contractors to undergo their operations once they have shown the joint work contract and settle the negotiation with land owner. Elucidation of Article 62 elaborated that settlement toward land owners would include settlements against certified or uncertified land owners, adat societies,  tenants, building owners and individuals mandated with donated lands.

Land owners must express their consent in written, by signing a clarification letter and delivering land certificates and other relevant documentation to the contractors. Lands who has been settled by contractors becomes state-owned lands, except for rented lands.

Chapter VIII regulates work health and safety requirements. Chapter IX regulates priority toward national products and services. It is interesting to note that Article 78 of this Chapter stipulates that all goods and equipments bought by contractors during its activities become state assets.

Chapter XI regulates supervision of the upstream activities. Article 86 states that the Minister is charged with the duty to foster upstream activities. Upstream activities is administered and controlled through joint work contracts by BP-Migas. In performing such duties BP-Migas may sign other contracts related to the joint work contract. Supervision and Control of BP-Migas towards upstream activities are employed through management control on the performance of joint work contract.

Article 94 clarifies that BP-Migas is a contracting party in joint work contracts. Signing of all joint work contracts can only be performed subsequent to approval from the Minister. BP-Migas shall notify the House of Representative in written with regard to the signing of joint work contracts by attaching its copies.

All current contracts in the upstream oil and gas sector such as the Joint Operating Agreements (“JOA”), Joint Operating Body (“JOB”), Technical Assistance Contract (“TAC”), and Enhanced Oil Recovery agreements (“EOR”) will remain valid until the relevant date of expiry of each of the individual contracts. (mma)