Outgoing President Megawati Sukarnoputri signed on Friday (15/1/04) two government regulations intended to boost investment in the oil and gas industry by liberalizing the upstream and downstream sectors.

The first regulation, covered the upstream sector, allows oil and gas companies to enter production-sharing contracts with the government for up to 30 years.

The second regulation, covering the downstream sector, allows foreign investment in the distribution, refining, storage and sale of oil and gas. Government Regulation Number 36 of 2004 on Downstream Oil and Gas Business Activities (the “Regulation” or “GR 36/2004”) was issued to facilitate the implementation of the provisions contained in Articles 8(1), 30, 43, and 49 of Law Number 22 of 2001 on Oil and gas (the “Oil and Gas Law”). The Regulation consists of 19 (nineteen) Chapters and 100 (one hundred) Articles.

Downstream Activities shall be conducted by licensed Business Entities. The Minister has overall responsibility to regulate and foster downstream activities which include licensing, manufacturing, transportation, storage, and commercial aspects such as wholesale and trading activities in oil and gas, determining types and quality standards for oil and gas products, preparation and maintenance of distribution networks, utilization of natural gas for domestic needs, and the planning of a national gas distribution and transmission network. The minister will supervise type, standard and quality of oil and gas products, health and safety of the working environment, utilization of national workforce, products, services and technologies, development of neighboring societies, development and implementation of oil and gas technology and the usage of equipments. 

Regulatory Agency for Downstream Oil & Gas Business Activities (“BPH-Migas”) will regulate and supervise licensed companies for their performance in providing and distributing petroleum and transporting of natural gas through pipes (Article 7).  BPH Migas may require companies to guarantee the availability of oil and gas for Indonesian domestic use, distribute oil and gas to remote areas or regions, detremine minimum reserves to fulfill national oil reserves, determine joint utilization of distribution network including deciding appropriate tarrif, calculate and determine mandatory fees from downstream business entities and settling disputes arising out of oil-related commercial activities. Paragraph two of Article 8 stipulates that in cases where the parties objected to the settlement forwarded by BPH-Migas, they may refer their dispute to the District Court of Central Jakarta.

BPH Migas is also authorized to determine the transmission width and distribution network areas of natural gas, render special right in transmitting natural gas, decide appropriate tarrif, determine prices for household use, determine mandatory fees for business entities in the natural gas downstream sector and settling disputes arising among or against holders of special transmission rights (Article 9). In cases where the parties objected to the settlement forwarded by BPH-Migas, they may refer their dispute to the District Court of Central Jakarta.

Downstream Business Activities comprise of four components, namely (i) processing (purification and improvement of standard quality and value added oil and gas products), (ii) the transportation of oil and gas (whether by land, air, or pipes), (iii) storage activities which includes acceptance and stockpiling of oil and gas products for commercial purposes and, (iv) commercial activities associated with the purchase, sale, export and import of oil and gas (wholesale). Each of the components mentioned above will require business licenses respectively. An exception to this rule is for Processing activity which includes limited transportation and storage in its chain of activity, the company is not required to apply for additional transportation and storage licenses. However, if such company wish to undertake sale, export and import of oil and gas, it will be required to obtain wholesale and/or trading license respectively.

The Minister may appoint and task particular downstream company doing the Processing activity to intensify its production when the situation requires.

Transportation/Transmission of Oil and Gas Products

BPH Migas will regulate, determine and supervise tariff of transportation/transmission companies in the downstream sector. Companies are required to obtain Special Right issued by BPH-Migas to transmit natural gas through pipes. Existing companies who had operated with pipe-transmission may increase its facilities and capacities subsequent to adjusting its Special Right.

Transportation of oil and gas products through non-pipes shall prioritize the utilization of services owned by cooperatives, small enterprises and/or other national or private business entities through a selection process (Article 29).

The Minister will determine National Natural Gas Transmission and Distribution Network Master Plan which shall be adhere by Transmission companies. BPH-Migas will grant Special Rights to transporting or transmit natural gas based on this master plan.

Storage of Oil and Gas Products

All companies operating in downstream storage sector must obtain a Storage Business License to be issued by the Minister. It must also report the type, amount and quality of the commodities it stored every three monthly of each time requested by the Minister. When the situation demands, BPH-Migas may require companies to allow other parties to use its storage facilities. Companies operating in the storage of Liquified Natural Gas (LNG) are required to obtain a specific license called LNG Storage License.

Commercial Activity

Companies operating in commercial activities associated with the purchase, sale, export and import of oil and gas must obtain either a Wholesale Business License or a Limited (Trading) Business License. Wholesale License is applied for companies equipped with commercial facilities and instruments. Article 47 obliges Wholesale companies to have its own storage facility and supply guarantee from either national or international parties. The Minister will determine a minimum storage capacity applicable for all wholesale companies. Distribution of oil and gas products to end users must be conducted by dealers appointed by the company through a selection process. The company must prioritize cooperatives or small enterprises in appointing its dealer. Every appointment of dealer must be reported to the Minister. The dealers may only merchandise oil or gas products of one wholesale company. Dealers must obtain licenses in accordance with prevailing regulation. Responsibility of the Wholesale Companies ceases at the transfer of the oil and gas products to the dealer.   

Companies operating in the commercial activities relating to Liquefied Petroleum Gas (LPG) are required to have its own storage and filling facility (bottling plant). Such Companies will be responsible for the quality of the LPG it sells, the LPG tube and its storage and bottling plant (Article 51). Minimum technical standard of LPG tubes will be determined by the Minister.

The sanctions that may be imposed toward the breach of this GR include written warnings, the freezing of business activities, and the cancellation of licenses. After a written warning a company has 60 days to ensure that they are in compliance with the Regulation or the conditions stated in the warning letter. If after 60 days the relevant company has not complied with the demands of the warning letter the Minister may cancel the license issued.

The Regulation also includes criminal provisions with respect to certain breaches of the provisions. For activities carried out by an unlicensed operator the criminal provisions are those contained in the Oil and Gas Law and other related regulations. For companies and individuals that deceive or fabricate oil and gas products are liable for a maximum term of imprisonment of 6 years and a maximum fine of IDR 60 billion. The term of imprisonment and fine noted above also apply with respect to the misuse of oil and gas products that are the subject of government subsidies.

Indonesian government in February gave licenses to Royal Dutch/Shell Group and five local companies to directly import and sell certain types of fuel from 2005. Shell’s local subsidiary for the planned fuel sales is PT Krida Petragraha. The five local companies awarded licenses are PT Sigma Rancang Perdana, PT Pandu Selaras, PT Elnusa Petrofin, PT Elnusa Harapan and PT Raven Sejahtera.

BPH Migas has also said that US-based ChevronTexaco is interested in teaming up with Pertamina to join the soon to be liberalized retail fuel market. Other foreign firms that have applied for licenses to open gas stations in Indonesia include British oil major BP and Malaysia's Petronas.

The 2001 Oil and Gas Law transfer the authority for sales of petroleum products from Pertamina to BPH Migas. Under the law, foreign firms wanting to open gas stations in Indonesia will have to operate with local partners. The new regulations are aimed at boosting legal certainty in order to attract greater foreign investment. Officials hope the legislation will lead eventually end years of declining oil and gas production. (mma)