Oil & Gas Sector – Regulatory Developments, Opportunities and … · 2012-09-12 · ©2005...

transcript

Indonesian Energy and Infrastructure Seminar

Luke Devine

Hadiputranto, Hadinoto & Partners is a member of Baker & McKenzie International, a Swiss Verein 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.

Oil & Gas Sector –Regulatory Developments,

Opportunities and Challenges

Oil & Gas Sector - Regulatory Developments, Opportunities and Challenges

• New Oil and Gas Law– BP Migas has taken over the role of

executing body for upstream oil and gas– Downstream liberalised

• Processing• Transport• Storage• Trading

– BPH Migas regulates aspects of downstream business, principally tariffs for domestic sales and pipeline transport

• New Oil and Gas Law– Pertamina’s status changed:

• Upstream: just another contractor• Downstream: continues monopoly in oil based

fuel supply until Nov 2005, then market opened• Pertamina in the process of undergoing corporate

restructuring– Must separate upstream and downstream business– Must spin-off geothermal assets into separate sub– Must place existing Work Areas in separate subs– Will need to put in place new intra-group contracts

New Upstream Regulation

• Offer of Work Areas– Determined by the Minister– Special preferential rights given to Pertamina

• If Pertamina submits a proposal to take up a Work Area, Minister may grant Work Area to Pertamina

– Scope for Pertamina to be used as a front for “real” purchaser– May develop an active secondary market for Pertamina

properties• If a PSC for a Work Area has expired, Pertamina can

request the Minister re-grant the area to Pertamina

• Extensions of PSCs– General rule is that you can only apply not earlier

than 10 years and not later than 2 years prior to expiry date

– Concerns raised regarding longer gas contracts (e.g. would not be willing to sign a 15 year gas deal with only 12 years left of the term)

– Regulation now provides that if earlier extension is required due to long term gas contract, then request can be made earlier

• Transfer of PSC Participating Interests– Approvals

• Previously– Transfers to Affiliates: notification to BP Migas– Transfer of part of interest: BP Migas approval– Transfer of entire interest: Minister and BP Migas approval

• Now– All transfers require Minister approval

» not clear if this is still applicable for affiliates• Share transfers not restricted (but clean company option

seems to be no longer available without consent)

• Transfer of PSC Participating Interests– Pre-emptive Rights

• If Contractor is selling interest to a non-affiliate or someone other than an existing PSC partner, Minister may request Contractor to offer in advance to a local company

– Local company = State company, Regional company, national company whose shares are owned entirely by Indonesian citizens

– Offer to be made based on “business customs”• This is a new requirement which may delay sales

• Transfer of PSC Participating Interests– 10% offer on approval of Plan of Development

• Previous requirement was to offer to Pertamina or a Pertamina nominee

• New requirement is to first offer to a Regional Government company

– If no Regional Government company accepts, then to Central Government or Indonesian companies owned by Indonesians

• Domestic Market Obligation– Large area of concern and uncertainty– Previously

• Compulsory supply of portion of oil to Pertamina • Heavily subsidised price

– Now• Compulsory obligation for oil and gas up to 25% maximum• Price to be set at market price• Government to provide explicit subsidy to affected groups

• Duplication of Authority– Powers of Minister and BP Migas overlap– Minister involved in operational matters which

are best left with BP Migas• Minister required to approve the Plan of

Development for first production from a Work Area

• Sale of State’s Share– Under the PSCs, the Government is entitled to lift a

percentage of oil and gas exploited– Previously, Pertamina sold this share on behalf of the

Government (and in the case of gas, also sold the remaining share belonging to the PSCs)

– Now, BP Migas must appoint a seller for the State’s portion

• Could be the lead PSC from the relevant field• Could be any other third party (e.g. Pertamina)

– Confusion amongst LNG buyers

• Sale of State’s Share– Government Regulation provides that

nominated Seller shall be “fully responsible”to the buyer for the continuity of the sale of oil and/or gas

• Usual position is that the other PSC participants agree to take on this liability jointly

• Not clear what is intended by the regulation

• Transition of Contracts– Key upstream contracts are clear

• BP Migas takes over PSCs• JOAs/JOBs (supervisory role) are taken over by

BP Migas and Pertamina retains participant rights and obligations

• TAC and EOR contracts remain with Pertamina

• Transition of Contracts– Major confusion with other contracts which were

originally entered into by Pertamina• “third party funding contracts, offtake agreements, supply

agreements, transportation agreements, plant processing agreements” are transferred to BP Migas

• LNG sale and transport agreements remain with Pertamina– Not clear why distinction– Intent is that BP Migas should not act as commercial

counterparty in any contractual arrangements

• Transition of Contracts

Pertamina

PSCs in relevant field

LNGBuyer

LNG Sales Agreement

LNG Supply Agreement

BP Migas

GasBuyer

Gas Sales Agreement

Gas Supply Agreement

Pertamina

GasBuyer

Gas Sales Agreement

Gas Supply Agreement

Old and New LNG Contract Structure

Old GasContract Structure

New GasContract Structure

• Key Features of GR 36 – Downstream Regulation– Each downstream activity requires separate

business license from the Minister• Downstream business license may only be issued

to Indonesian legal entities• Foreign permanent establishments may not

conduct downstream activities unless they are integrated into the upstream activities

• Key Features of GR 36 – Downstream Regulation– Processing Activities

• BU which is involved in processing activities, and also conducts transportation and storing as a continuation/supporting activities, is only required to obtain processing business activities

– Transportation Activities• BU which conducts gas transportation through pipelines at

the Transmission Line or the Distribution Network Area must obtain a Special Right from BPH Migas

• If BU conducts storing activities as a support to the transportation activities, no storing license is required

• BU must use cooperatives, small scale business and local companies (through tender process) for land transportation activities (other than through pipes)

• Key Features of GR 36 – Downstream Regulation– Transportation (cont’d)

• Tariff is determined by BPH Migas• Profit oriented gas transportation activities is considered

downstream activities which require both business license and Special Right

– Storing• A BU which conducts transportation activities as a support

to the storing activities only requires storing business license

• Change in storing facility capacity requires amendment to the business license based on BPH Migas’ recommendation

– Trading• A BU which conducts storing and/or transportation activities

as support activities to the trading activities only requires trading business license

• Key Features of GR 36 – Downstream Regulation– Trading (cont’d)

• General Trading Licensee (i.e. trading business through a network of agent or distributors) may carry out retail sale of oil based fuels to transportation users thorough facilities owned/managed by BU

• However such direct retail may only be carried out in up to 20% company owned/managed facilities

• Retail activities at the remaining 80% facilities that are owned/managed by such BU will be conducted by cooperatives, small scale enterprise or a national entity which will be distributing using the relevant BU’s trademark through cooperation agreement

• BU holding a trading business license for LPG must own/ control storing and bottling facilities

• Current Issues– Inconsistencies with investment regulation

• Retail activities are still included in the negative list of investment so BKPM may be reluctant to issue investment licenses for fuel distribution

– Eradication of fuel subsidies by Government• Difficult for private companies to compete against

Pertamina’s subsidised prices

• Constitutional Court recent decision– BBM are commodities that are vital to the public

interest, and hence their pricing should be determined by the Government

– Retail fuel price cannot be determined by market, although Government in determining the price must consider the applicable price in a competitive market

– Impact of Court’s decision: • lessen Government’s ability to reduce subsidies and meet

state budget deficit target• Investor may want to reconsider their plan to distribute BBM

as sales price is set by Government and no longer up to market

– Waiting for Government revisions to law

BP Migas Procurement Regulation

• Were introduced to replace the previous Pertamina regulations in 2004

• A number of overlapping provisions, conflicting provisions

• Major criticism of oil and gas regulation has been micromanagement by BP Migas– Procurement regulations somewhat reinforce this

• Requirements for seeking BP Migas approvals for procurement contracts– Approval for tenders > $2m– Approval for selection of winning bidder >$5m– Approval required for scope of work changes

(and increase in price) of more than 10% or US$5m

• Goods and service providers– Small businesses

• Indonesian companies, net wealth of not more than Rp 200m or annual turnover not more than Rp 1bn and owned by Indonesian citizens

– Non-small businesses• Indonesian companies• More than Rp 200m value and Rp 1bn turnover

– Foreign companies• Companies not incorporated in Indonesia

• Goods and service providers– Qualification requirements

• Valid trade permit for relevant field of business• Not bankrupt• If a partnership or joint venture, must have a

partnership or joint venture agreement• Settled all tax obligations

• Which contracts can you bid for– Categories of contracts

• Supplying goods• Contracting services• Other services• Consultancy services

– Price limits restrict who can bid for what

>$1m***>$5m***>$5m**Foreign firms

>$50,000>$100,000*>$100,000*Non-small firms

<$50,000<$100,000<$100,000Small firms

Consulting Services

Other Services

Goods & Services

* must cooperate with small firms** must surrender 30% of services or 10% of price to local companies*** must form partnership with local company

BP Migas Procurement Regulation• Key requirements of procurement contracts

(often observed in the breach)– Payments into Indonesian bank account– Performance bond of 5% of contract price, reducing

over time– Local company appointed to sign the contract in the

event that the provider is a foreign company– Delay penalty of at least 1% of contract price per day

of delay, capped at 5%– No subcontracting entire/principal work to another– Dual language, Indonesian to prevail

Oil & Gas Sector – Regulatory Developments, Opportunities and … · 2012-09-12 · ©2005...

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