Indonesia: Omnibus Law - Impacts on oil and gas

In brief

On 5 October 2020, the Parliament approved the job creation law (RUU Cipta Kerja or the "Omnibus Law"), which introduces key amendments to several sectors, including the oil and gas sector by amending Law No. 22 of 2001 on Oil and Gas ("Oil and Gas Law").


Contents

Comments

The amendments to the Oil and Gas Law made by the Omnibus Law revolve around the introduction of a business license (perizinan berusaha) for both upstream and downstream activities. Although the government claims that the amendments aim to boost investment, it remains to be seen how they will do so (particularly with regard to upstream investments).

We anticipate further revisions will be made to the Oil and Gas Law, to reflect the establishment of an oil and gas state-owned enterprise to replace SKK Migas as the implementing body for upstream oil and gas activities[1].  It is against this background that the changes to the licensing regime may need to be viewed.

Key amendments 

1. Licensing Requirements and Procedures

Upstream Business Activities Now Require a Business License

The Omnibus Law provides that business entities[2] must secure a business license (perizinan berusaha) from the central government before engaging in any oil and gas business activities.  This requirement applies to upstream and downstream business entities. However, the Omnibus Law does not amend Article 6 of the Oil and Gas Law, which requires any upstream business activities to be conducted and managed through a cooperation contract (kontrak kerjasama)[3]

The criteria for applying for the license, and the timing of that application (i.e., before or after the award of the Production Sharing Contract ("PSC")) or whether this applies to all parties to the PSC or only the operator, have not been spelt out.  More substantively, it is unclear what the implications of this licensing regime are, particularly when combined with a contract between the business entity and any new oil and gas state-owned enterprise replacing SKK Migas, for example, in relation to traditional concepts of lex specialis (i.e., the concept that the PSC acts as protection against subsequent changes in laws and regulations).

Only One Business License for All Downstream Business Activities

Business entities engaging in downstream business activities still need to obtain a business license. Previously, one business license was required for each downstream activity (processing, transportation, storage or trading) that generated revenue on its own.   

Under the Omnibus Law, business entities will secure an integrated business license (perizinan berusaha) granted by the central government.  This will cover all downstream activities.  As a result, separate business licenses will no longer be needed for each revenue-generating activity.  That being said, we expect the relevant license to specify the business carried out by the relevant entity. 

Previously, questions have been raised as to whether storage and regasification activities are subject to the same foreign ownership restrictions as warehousing (which is subject to a 67% foreign ownership cap). Hopefully, the integrated license is an indication that any such restriction might no longer apply.

2. Sanctions

Criminal Sanctions in Upstream Business Activities Remain

The Omnibus Law does not amend the criminal sanctions for failure to enter into a cooperation contract before conducting exploration and/or exploitation activities, i.e., imprisonment for up to six years and a maximum fine of IDR 60 billion. However, these criminal sanctions will now also apply to the failure to obtain a business license.

Further Sanctions in Downstream Business Activities

The Omnibus Law provides that failure of a downstream business entity to obtain a business license, or to comply with it, is subject to administrative sanction. Previously, the Oil and Gas Law only regulated administrative sanctions for failure to comply with the requirements of a business license.

The Omnibus Law further provides that failure to obtain a business license that causes harm to other parties or the environment, may be punished by imprisonment of up to five years or a fine of up to IDR 50 billion.

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This Client Alert was prepared based on a draft of the Omnibus Law that we received from different sources. We have not been able to obtain confirmation that the draft we received is the final text of the Omnibus Law. Even though the House of Representatives passed the Omnibus Law on 5 October, the government has not issued the official final text of the Omnibus Law. We assume the draft that we have received materially reflects the final version of the Omnibus Law, but we are waiting for the government to issue the final ratified Omnibus Law. Therefore, this Client Alert is subject to change and will be updated accordingly.

This client alert was issued by HHP Law Firm (Hadiputranto, Hadinoto & Partners), a member firm of Baker McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner or equivalent in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as "Attorney Advertising" requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome."


[1] As mandated by Constitutional Court Decision No. 36/PUU-X/2012, which effectively decreed that the State should take over the direct management of upstream oil and gas.

 

[2] This includes state/regional-owned companies, cooperatives, small businesses, private entities and permanent establishments.

[3] Presumably, further amendments will be included in the revision to the Oil and Gas Law that the state-owned enterprise replacing SKK Migas will enter into a cooperation contract (kontrak kerjasama/KKS) with relevant stakeholders, among others, regional enterprises, private legal entities, or permanent establishment (badan usaha tetap/BUT).

 


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