Nov 14, 2012

Indonesia - Break up of Indonesia's oil regulator body adds to legal uncertainty

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The Indonesian Constitutional Court ruled yesterday to disband the upstream oil and gas regulator BPMigas, adding further legal uncertainties to the country's oil and gas sector.

The court's chief justice, Mahfud MD, said the ruling was made in line with the request filed by 42 organisations including Muhammadiyah — Indonesia's second largest Muslim groups — and several scholars to review the 2001 law on oil and gas.

"As of today [Tuesday], the rights and authority of BPMigas over production sharing contracts [PSCs] will be taken over by the government, in this case, the Energy and Mineral Resources Ministry, until there is a new law that can be used as a foundation of the supervisory body," the chief justice said in his ruling.

"All of the existing oil and gas contracts will be unaffected until they expire."

Mahfud said that BPMigas had been dissolved because its existence was against Article 33 of the Constitution that stipulates the state should make the most benefits from the country's natural resources for the people's welfare.

The court’s panel of judges found that the agency did not directly run the country's oil and gas resources but rather handed it over to state-owned or private companies through production-sharing contracts.

Speaking following the issuance of the court's ruling, Hatta Rajasa, coordinating economic minister said that the government would issue a new regulation to ensure the functions of BPMigas would be carried out under the energy ministry.

Separately, Energy and Mineral Resources Minister Jero Wacik said the court's decision would not affect the existing PSCs awarded to oil and gas companies.

"All of the functions of BPMigas have been turned over to the energy minister, so business will go on as usual. I am also asking for all employees of BPMigas to remain calm and we will try to solve all of this by this evening," he said.

BPMigas was formed in July 2002 under Law No. 22/2001 on oil and gas as part of Southeast Asia's largest economy's restructuring scheme for its upstream oil and gas business.

The bureau took over the management and overseeing of the upstream oil and gas industry from state oil and gas firm PT Pertamina, which had previously possessed special controlling rights over the industry for decades.

Meanwhile, the disbanded body's chairman, R. Priyono, said many oil and gas projects would have to be halted following the court's decision, adding that it could also hinder liquefied natural gas (LNG) ship shipments from Indonesia.

"We have calculated that the potential losses from the ongoing contracts — around 60 PSCs — will be about US$70 billion, due to this legal situation," he said.

The court's verdict added more twists to ongoing legal uncertainties faced by companies in the oil and gas sector over the government's unresolved stance over 29 concessions slated to expire between 2013 and 2021 such as Mahakam Block in East Kalimantan.

Indonesian Petroleum Association (IPA) vice chairman Sammy Hamzah said the ruling would distress investors who remain uninformed over the effect it will have on existing PSCs.

"We are shocked to hear this as many contracts were signed by BPMigas and [with the disbandment] what will happen to the status of the ongoing projects … There are so many things the government needs to clarify to us," he said in a telephone interview.

The association has 52 members with many of being global oil and gas giants, which account for about 90 per cent of Indonesia's production.

Amahl S. Azwar

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