MEMR Issues Regulation on Management of Oil and Gas Working Areas for Expiring Cooperation Contracts

This article is supported by Mochtar Karuwin Komar

The Minister of Energy and Mineral Resources (the “MEMR”) Regulation No. 23 of 2021 on Management of Oil and Gas Working Areas for Expiring Cooperation Contracts (“MEMR 23/2021”), which is intended to  optimise  the  management  of  oil  and  gas working  areas  to  maintain  oil  and  gas  production  in  working  areas where  there  are  still  reserves,  became  effective  on  19  July  2021.  MEMR  23/2021  replaces  and  revokes  MEMR  Regulation  No.  23  of 2018 as lastly amended by MEMR Regulation No. 3 of 2019 (“MEMR 23/2018”).

Both MEMR 23/2018 and MEMR 23/2021 provide four (4) alternatives for an  oil  and  gas  working  area  where  the  existing cooperation contract is due to expire :-

(a) the existing  cooperation  contract can be extended with the existing contractors;

(b) upon expiry of the existing cooperation contract, the working area can be managed by PT Pertamina (Persero);

(c) upon expiry of the existing cooperation contract, the working area can be managed jointly by PT Pertamina (Persero) and the existing contractors; or

(d) the working area can be tendered to new contractors/investors.

There  are,  however,  some  important  differences  between  MEMR 23/2018 and MEMR 23/2021 :

1. The  main  difference  relates  to  the  transfer  of  participating interests under cooperation contracts:

  • MEMR  23/2018  provided  that,  during  the  initial  three (3) years after the effective date of the extended cooperation  contract  or  the  new  cooperation  contract (as the case may be), contractors could not assign their majority  participating  interest  to  other  parties  other than their affiliates.
  • It is, however, provided in MEMR 23/2021 that contractors  may  transfer  their  majority  participating interest in cooperation contracts to other parties in the event that there is a significant economic change in the operation  of  the  working  area  or  new  reserves  are discovered and such new reserves require capital, technology or human resources which cannot be provided by the original contractors.  The transfer of a majority participating interest in a cooperation contract  will  be  subject  to  the  approval  of  the  MEMR based  on  a  recommendation  from  the  Special  Task Force for Upstream Oil and Gas Business Activities (“SKK Migas”).

2. Similar  provisions  to  the  provisions  outlined  in  paragraph  1 above apply where PT Pertamina (Persero) is the contractor/operator  under  a  working  area  which  has  been returned to the Government upon expiry of the initial cooperation contract.  Whereas MEMR 23/2018 provided that PT Pertamina (Persero) must maintain a minimum participating  interest  of  fifty  one  per  cent  (51%)  until  the expiration of its cooperation contract, MEMR 23/2021 provides  that  PT  Pertamina  (Persero)  (and  its  affiliates)  may transfer more than fifty one per cent (51%) of its participating interest :

  1. In  the  event   that   there   is  a   significant   economic change  in  the  operation  of  the  working  area  or  new reserves are discovered and such new reserves require capital, technology or human resources which cannot  be  provided  by  PT  Pertamina  (Persero)  (or  its affiliate); or 
  2. In  order  to  implement  a  strategic  partnership  for  the operation of  one or more  working  areas overseas through a partnership arrangement between Indonesia and another country or through a partnership agreement between PT Pertamina (Persero) (or its affiliate) and the national oil company of another country.

The  transfer  of  the  participating  interest  of  PT  Pertamina (Persero) (or its affiliate) will, again, be subject to the approval of the MEMR based on a recommendation from SKK Migas.

3. Both  MEMR  23/2018  and  MEMR  23/2021  refer  to  the  “Firm Work Commitment” of contractors under cooperation contracts  i.e.  the  commitment  by  contractors  to  invest  to increase  reserves  and/or  oil  and  gas  production  within  the first five (5) years through exploration and exploitation activities based on the cooperation contract.  However, MEMR 23/2021 permits contractors  to revise their “Firm Work Commitment” to become a commitment for non-conventional  oil  and  gas  (which  includes  shale  oil,  shale  gas, tight sand gas, coal methane gas and methane hydrate).  This change can be viewed as the Government providing flexibility to contractors with regard to fulfilling their obligations under cooperation contracts while also evidencing the Government’s intention to promote the non-conventional oil and gas sector.

4. MEMR 23/2021  also provides flexibility to  contractors  by providing  that  PT  Pertamina  (Persero)  and  other  contractors can  apply to  the MEMR  to change  the  form of  cooperation  contract from  a contract based on  a cost recovery scheme to a  contract  based  on  a  gross  split  or  vice  versa  (prior  to  2017 all cooperation contracts were based on a cost recovery scheme  pursuant  to  which  contractors  would  be  reimbursed for  their  operating  costs  through  oil  and  gas  production  –  in 2017, the Government introduced gross split contracts pursuant to which all costs would be borne by the contractors but  the  contractors  would  be  entitled  to  receive  a  higher production  split).    The  application  to  change  the  form  of contract can only be submitted to the MEMR after PT Pertamina (Persero) or the other contractor (as the case may be)  has  fulfilled  its  five  (5)  year  Firm  Work  Commitment  as described in paragraph 3 above.