26 August, 2014
Legal News & Analysis – Asia Pacific – Indonesia – Energy & Project Finance
Title Over Oil Reservoirs, Surface Rights And Subsurface Mineral Rights
The state holds mineral rights throughout the territory of the Republic of Indonesia. Private companies may engage in the exploration and exploitation of oil and gas through a cooperation contract with the government through the Special Task Force for Upstream Oil and Natural Gas Business Activities (SKK Migas). However, such cooperation contracts do not transfer the mineral rights to the private entities.
Under Law No. 5 of 1960 regarding Basic Regulations on Agrarian Principles (the Agrarian Law), surface land rights and subsurface mineral rights are national assets belonging to the state. Based on the Agrarian Law, while subsurface mineral rights remain with the state, surface land rights may be granted to private parties. However, under the Oil and Gas Law, the rights to oil and gas work areas do not include land surface rights. Generally speaking, land rights are obtained by negotiating with the landowners and occupiers, in accordance with prevailing laws.
To the extent these facilities are used for upstream activities within the framework of a cooperation contract, the contractor will have to comply with the Oil and Gas Law, Government Regulation No. 35 of 2004, as amended several times, lastly by Government Regulation No. 55 of 2009 regarding Upstream Oil and Natural Gas Business Activities (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.
Oil Exploration And Production And Off-Limit Areas
Due to the unique territorial composition of the archipelagic state of Indonesia, upstream oil activities may be undertaken in onshore and offshore areas. Work areas for onshore and offshore operations are determined by the Ministry of Energy and Mineral Resources (MEMR) based on consultations with and recommendations from the respective regional governments.
Under the Oil and Gas Law, certain areas are restricted for oil exploration and exploitation activities. These include cemeteries, sacred sites, cultural heritage areas, land belonging to indigenous people, areas and buildings used for state defense, historical sites and residential areas. In some cases, it is possible to obtain a license or permission from the relevant government authority or the concerned party to use an otherwise restricted area for oil exploration and exploitation activities.
Granting Of Rights To Explore And Produce, Applying For Such Rights
The government authorization required to carry out oil exploration and exploitation activities is a cooperation contract (PSC) with SKK Migas (representing the government). A contractor may only hold an interest in one PSC. A work area is stipulated by the MEMR after consulting with SKK Migas and the respective regional government. The procedure for stipulating and offering work areas is regulated in MEMR Regulation No. 35 of 2008 regarding Procedures for the Designation and Offering of Oil and Gas Work Areas (MEMR Reg 35/2008).
Pursuant to this regulation, a work area can be offered through either tenders or direct offers. In a tender, the participants purchase a bid information package from the Directorate General of Oil and Gas (DGOG) and official government data regarding the block that is being tendered for the purpose of technical evaluation and the preparation of an exploration program to be submitted together with the bid documents by the closing date. The cost of the bid information package and the official government data regarding the block varies. The winner of the tender is selected by the MEMR, which considers administrative compliance, financial and technical capability and previous performance. In a direct offer, a company proposes a work area to the DGOG and then performs a technical assessment through a joint study with the government. In this case, the proposing company has the right to match the highest bidder in the tender round.
The business entity or Permanent Establishment (PE) selected as contractor for the relevant work area must enter into a PSC with SKK Migas.
Related: Legal Guide to Oil Regulation: 1. Introduction, 2. Regulation Overview, 4. Licenses, Royalties And Contracts, 5. Local Content, Transfers, Decommissioning And Transportation, 6. HSE And Labor, 7. Taxation, Price Controls, Competition And Outlook.
For further information, please contact:
Fitriana Mahiddin, Partner, Soewito Suhardiman Eddymurthy Kardono
Syahdan Zainoel Aziz, Soewito Suhardiman Eddymurthy Kardono
Soewito Suhardiman Eddymurthy Kardono Energy & Project Finance Practice Profile in Indonesia