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Indonesia – New Regulation On Expiring PSCs.

26 May, 2015

 

Legal News & Analysis – Asia Pacific – Indonesia – Energy & Project Finance

 

The Indonesian Minister of Energy and Mineral Resources (Minister of Energy) has issued the much-anticipated regulation on the expiry of Indonesian Production Sharing Contracts (PSCs).

 

1. Options Post-PSC Expiry 

 

Minister of Energy Regulation 5/2015 (the Regulation) contemplates three options for operation of a contract area following the expiry of the current PSC:

 

(a) management of operations to be carried out by PT Pertamina (Persero) (Pertamina);

 

(b) extension of the PSC granted to one or more of the existing PSC Contractors; or

 

(c) joint operations between Pertamina and one or more of the existing PSC Contractors.

 

If the Minister of Energy does not approve any of the options in (a) to (c) above, the Regulation provides for the offer of the relevant contract area through a bid process.

 

2. Application Process 

 

Under the Regulation, the application for the future right to manage the relevant PSC contract area may be triggered by Pertamina or one or more of the existing PSC Contractors. Determination of the applications, together with the terms and conditions which will apply to the new PSC, rests with the Minister of Energy.

 

The Regulation sets out these application processes, including timing and content requirements, the various factors that the Minister for Energy must consider when determining the applications, and the timelines and decision-making process that the Minister of Energy must adopt and comply with when making its determination.

 

3. Some Key Points To Note 

 

Set out below is an overview of a number of key provisions and initiatives which are provided in the Regulation.

 

(a) Timing For Applications

 

Subject to certain exceptions, generally an application by Pertamina and/or the PSC Contractors to operate a PSC contract area that is due to expire may be submitted at the earliest ten years before the expiry of the PSC, and no later than two years before the expiry. These are similar timelines to those which apply for an initial extension to a PSC provided for under the 2001 Oil and Gas Law and the Government Regulation on Upstream Oil and Gas Business Activities (GR 35 of 2004, as amended).

 

The Regulation suggests that applications by Pertamina and the existing PSC Contractors may be run in parallel. However, further details may be required to clarify the operation of the parallel application process. 

 

(b) Applications By Existing Contractors

 

If there is more than one existing PSC Contractor (i.e. existing joint venture), then one application for future operation may be made by all of the PSC Contractors jointly. Alternatively, the application may be made by fewer than all of the existing PSC Contractors, if one or more of the existing PSC Contractors elects (by agreement with the other existing Contractors) not to participate in the application.

 

(c) Maximum PSC Extension Period

 

The maximum term of any extension granted to the existing PSC Contractors is 20 years. Notably, the Regulation does not prescribe a maximum number of extensions that may be granted and contemplates that it may be possible for more than one extension of the PSC in the future.

 

(d) Evaluation Of Application

 

The Director General of Oil and Gas will evaluate applications by Pertamina and the existing PSC Contractors (including with the assistance of SKK Migas), and may establish an evaluation team comprising representatives from various units within the Ministry of Energy and Mineral Resources as well as from other relevant institutions for the purposes of the evaluation.

 

(e) Timing For Minister Of Energy’s Determination

 

A determination by the Minister of Energy in relation to applications by Pertamina and/or the existing PSC Contractors must be made no later than one year prior to the expiry of the relevant PSC. If the Minister of Energy fails to do so, the applications will be deemed to have been rejected.

 

(f) Terms Of New PSC

 

If one or more of the existing PSC Contractors are granted an extension to the relevant PSC, the terms of the extension may include amendment to the previous PSC terms (without amendment to the form of the PSC), or the execution of a new PSC on new terms and conditions. If Pertamina is granted the right to operate the relevant contract area, the Minister of Energy will determine the new PSC terms that will apply, based on principles set out in the Regulation.

 

(g) Restrictions On Transfer Of Interest In New PSC

 

The Regulation imposes some restrictions on the ability of the PSC Contractors or Pertamina (as applicable) to transfer their participating interest in the new PSC. In particular:

 

(i) If Pertamina is appointed to manage the contract area operations, Pertamina is prohibited from transferring the majority of its participating interest to a third party at any time during the period of its new PSC.

 

(ii) If the existing PSC Contractors are granted an extension to an expiring PSC, during the first three years of the extension period:

 

(A) there are restrictions on changes in control of each PSC Contractor;

 

(B) no PSC Contractor may transfer more than 50 per cent of its initial participating interest to a third party.

 

(h) Pertamina And Local Government Company Participation

 

If both Pertamina and one or more PSC Contractors have applied to operate a contract area that is due to expire:

 

(i) If the Minister of Energy grants the PSC Contractors an extension to the PSC (rather than appoint Pertamina to operate the contract area), Pertamina shall still have the right to hold a maximum 15 per cent participating interest in the extended PSC.

 

(ii) If the Minister of Energy appoints both Pertamina and the PSC Contractors to jointly manage operation of the contract area, the Minister will determine the form as well as terms and conditions of the new co-operation contract, including Pertamina and the PSC Contractors’ respective participating interest percentages.

 

In the case of operation of the contract area by either of Pertamina or the existing PSC Contractors (but not joint operation), a local government-owned company may be permitted to take a participating interest of up to 10 per cent (if there is no existing local government-owned company participant in the new PSC).

 

(i) Obligations For Abandonment And Site Restoration

 

Importantly, the Regulation also specifically provides that any abandonment and site restoration obligations that have not been carried out prior to the expiry of a PSC shall be carried out by Pertamina and/or the PSC Contractors under the new or extended PSC, who may utilise abandonment and site restoration funds that were deposited by the PSC Contractor under the expired PSC.

 

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For further information, please contact:

 

Daniel Reinbott, Partner, Ashurst

daniel.reinbott@ashurst.com

 

Sean Prior, Partner, Ashurst 

sean.prior@ashurst.com
 

Avinash Panjabi, Ashurst 

avinash.panjabi@ashurst.com

 

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