New regulation in managing Working Area that will expire

Minister of Energy and Mineral Resources (MEMR) has issued  MEMR Reg. No. 15 Year 2015  dated 8 May 2015 regarding Management Of Oil and Gas Working Area Which Cooperation Contract (PSC)  Will Expire. This MEMR has been effective on 11 May 2015. 

Below is the highlight of MEMR-15

Consideration :

Referred to consideration part of MEMR,  MEMR-15  is issued in order to maintain and increase oil and gas production and maintain the sustainability of  investment in an oil and gas Working Area which contract (Production Sharing Contract/Cooperation Contract)  will expire.  

Who will be granted

Management of  a Working Area which contract has expired shall be conducted by way of:

       1)   management by PT Pertamina (Persero), a state owned company

       2)   management by previous Contractor through Cooperation Contract extension;

       3)   Joint management by Contractor and PT Pertamina (Persero).

The parties who will be granted to manage the expired Working Area shall be upon approval or stipulation by  Minister of EMR after taking into consideration the following aspects:

a.         potential reserves of oil and/or gas in the concerned Working Area;

b.         potential or the certainty of market/demand;

c.         technical and economic feasibility;

d.         prioritization commitment to meet domestic demand of oil and/or gas;

e.         Contractor’s performance; and
f.          maximum benefits for the State.

In the event that  PT Pertamina (Persero) is determined to manage the expired Working Area, the following provisions shall apply:

a.  the terms and conditions of the Cooperation Contract which is still profitable for the state;

b. during the period of Cooperation Contract, PT Pertamina (Persero) cannot transfer the participating interest by majority; and

c.  Local Government Owned Company may become a partner as a participating interest holder at the most ten percent (10%) based on proper business practice.

In the event that  Contractor is determined to manage the expired Working Area based on extension for Cooperation Contract, the following provisions shall apply:

a.      the terms and conditions of the Cooperation Contract which is still profitable for the state;

b.      PT Pertamina (Persero) may become a partner as a participating interest holder at the most fifteen percent (15%) based on proper business practice.

c.       Local Government Owned Company may become a partner as a participating interest holder at the most ten percent (10%) based on proper business practice.

When to submit request

·         The request for Cooperation Contract extension shall be submitted no sooner than 10 (ten) years and not later than 2 (two) years before the Cooperation Contract expires by fulfilling the requirements of the Cooperation Contract extension.

·         Notwithstanding the general provision, the request for Cooperation Contract extension may be submitted earlier than 10 (ten) years before the Cooperation Contract expires for the Contractor which has been bound to the gas sale and purchase agreement.

For PT Pertamina (Persero), they shall apply the request for management to the Minister through the Director General at the soonest 10 (ten) years and not later than 2 (two) years before the expiration of the Cooperation Contract.

Transition period:

In order to apply for request for management as mentioned above, PT Pertamina (Persero) may apply for a data opening and utilization permit on a Work Area which Cooperation Contract will expire to the Minister through  Director General.

Based on the data opening and utilization permit issued by Minister:

a.      Contractor (as facilitated by SKK Migas)  shall follow up the data opening and utilization at the latest thirty (30) calendar days since the data opening and utilization permit;

b.      PT Pertamina (Persero) shall keep the confidentiality of data acquired by signing a data confidentiality agreement with Contractor.

Contract Period

·         Extension of Cooperation Contract by the Contractor can be given with a maximum period of 20 (twenty) years for each extension.

·         No time frame stipulated in MEMR-15 for PT Pertamina (Persero). It may be interpreted as a new contract for PT Pertamina (Persero) and new contract generally covers 30 years period. 

Restrictions

Within a period of 3 (three) years from the effective date of the Cooperation Contract extension or new Cooperation Contract, the below provisions shall apply :

a.      the majority shareholder in the Contractor in the Work Area it is prohibited to transfer the majority of its shares to other parties who are not affiliates;

b.      Contractor in the Work Area shall be prohibited to transfer the majority of its interest to other parties who are not its affiliates.

Summary

Apparently, MEMR-15 gives some privileges to PT Pertamina (Persero) by granting access and utilization of a Working Area that will expire. If Pertamina is interested,  they may manage the Working Area by themselves or manage jointly with Contractor or participate in that Working Area as a participating interest holder. On the other hand, MEMR requires  Pertamina to maintain its  majority of participating interest  until the end of cooperation contract. 

Although transition period (for accessing and utilizing data) is not recognized under existing PSC, Contractors should follow laws and regulation in Indonesia as reflected in PSC clause that laws of Republic Indonesia shall apply to this (PSC) contract.  

On the other hand, MEMR gives restrictions by prohibiting transfer of participating interest  within a period of 3 (three) years from the effective date of the Cooperation Contract extension or new Cooperation Contract. Those transfer participating interest covers indirect transfer (transfer of shares) and direct transfer. It is inline with GR 79 that exemption for final tax on transfer of participating interest may be granted for Contractors who hold participating interest more than 3 years since the contract signed.