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26 September, 2018
Pertamina has first right of offer over all domestically produced Crude Oil and Condensate
On 6 September 2018, the Minister of Energy and Mineral Resources issued Regulation Number 42 of 2018 concerning Prioritisation of the Use of Crude Oil for the Fulfilment of Domestic Demand ("Reg 42/2018").
The regulation requires all Production Sharing Contract ("PSC") contractors in Indonesia or their affiliates to offer their "Contractor Share" of crude oil and condensate to PT Pertamina (Persero) ("Pertamina") and/or domestic refineries (and other Indonesian entities holding a downstream oil and gas processing licence ("Domestic Refineries" or "Domestic Refinery").
The main purpose of the regulation is to require Pertamina and Domestic Refineries to prioritise the use of domestic crude oil (and condensate) over import of these commodities.
The offer to Pertamina and/or Domestic Refineries must be carried out by PSC contractors no later than three months prior to the commencement of the period of the export recommendation for the PSC contractors' share of crude oil and condensate1.
Upon issuance of an offer by a PSC contractor to Pertamina and/or Domestic Refineries, the PSC contractor (or its affiliate) is obliged to carry out negotiations with Pertamina and/or the relevant Domestic Refinery on a customary "business to business" basis.
If the PSC contractor (or its affiliate) and Pertamina reach agreement on the terms and conditions for the sale, Pertamina will be able to directly enter into a offtake contract for a period of 12 months with the PSC contractor (or its affiliate) without having to carry out a tender. The result of all negotiations must be reported to the Directorate General of Oil and Gas by Pertamina and/or the Domestic Refinery.
Implementing regulations relating to the requirements under Reg 42/2018 will be issued by either the Directorate General of Oil and Gas or SKK Migas, as applicable.
Notwithstanding that Reg 42/2018 is effective from the date it was issued to the public (i.e. 6 September 2018), it is unclear how the requirements applicable to PSC contractors (and their affiliates), Pertamina and the Domestic Refineries will be applied in the absence of the issue of more detailed implementing regulations by the Directorate General of Oil and Gas and SKK Migas, which we expect would include details of: (a) what PSC contractors must do to discharge their obligation to make an offer; (b) required timelines for acceptance or rejection of an offer and for carrying out negotiations; (c) who should the offer be addressed to; (d) what should the offer contain; and (e) what is the interplay between the offer requirement and the export recommendation application.
Whilst the issuance of Reg 42/2018 is viewed as the Government's measure to pair back on the country's crude oil imports in a bid to resolve the worsening of the country's current account deficit, the regulation does create fundamental concerns for PSC contractors as the requirements set out in the regulation does seem to limit a PSC contractor's unequivocal right under its PSC to "freely lift, dispose of and export its share of Crude Oil, and retain abroad the proceeds obtained therefrom".
Export of LNG, Crude Oil and Condensate are once again subject to Letter of Credit Requirements
On 7 September 2018, the day after Reg 42/2018 was issued, the Minister of Trade issued Regulation Number 94 of 2018 concerning Provision of the use of Letter of Credit for Export of Certain Commodities ("Reg 94/2018"), which revised the list of commodities which were subject to the letter of credit requirements of Minister of Trade Regulation Number 4 of 2015 ("Reg 4/2015").
Export of certain commodities from Indonesia, pursuant to Reg 4/2015 must be paid for by way of a letter of credit and that the proceeds of the letter of credit be paid into an account with a foreign exchange bank located in Indonesia ("L/C Obligation").
The L/C Obligation under Reg 4/2015 applies to a range of commodities however does not apply to LNG, crude oil, condensate, propane and butane.
Our previous briefings on Reg 4/2015 can be accessed here: February 2015, April 2015 and September 2015.
Reg 94/2018, which comes into effect 30 days after its date of issue2, replaces Reg 4/2015 and as a result also replaces the list of commodities that are subject to the L/C Obligation. Notably, the revised list includes LNG, crude oil, condensate as well as propane and butane. Accordingly, after the first week of October 2018, the export of these commodities will require settlement by L/C.
Aside from the changes highlighted above, Reg 94/2018 generally reiterates the operative provisions of Reg 4/2015, including requirements to:
- reflect the price of the relevant commodities in the L/C being at least equivalent to the global market price at the time of the transaction;
- ensure that the proceeds of the letter of credit be paid into an account with a foreign exchange bank located in Indonesia;
- have the fulfilment of the L/C Obligation verified by a Surveyor; and
- submit an application for suspension of the L/C Obligation if the Exporter is not able to fulfil the L/C Obligation.
We anticipate that the application of the L/C Obligation to exports of LNG, crude oil, condensate as well as propane and butane will result in push-back from the industry, similar to when these commodities where first included in the initial version of Reg 4/2015. We understand that the rationale of the Government for including crude oil, condensate as well as propane and butane is to reduce the export of these commodities and to apply pressure to have these commodities offered to and purchased by domestic buyers (including Pertamina and Domestic Refineries), which will in turn assist to alleviate the deterioration of the country's current account deficit. With regards to LNG on the other hand, as Indonesia is historically a significant LNG exporter and does not import LNG, the L/C Obligation in respect of LNG is surprising, as such requirement is likely to: (i) upset good faith commercial relationships that Indonesian LNG sellers have with existing LNG buyers, who generally have very strong credit ratings; and (ii) increase the cost to the LNG buyer associated with a LNG cargo or decrease the LNG seller's profit margin.
The L/C Obligation and its application for different commodities has been elaborated in our previous briefing published in February 2015.
For any specific question regarding the regulations discussed in this briefing or the application of these regulations to individual circumstances, please do not hesitate to contact members of our Indonesia focussed Oil and Gas team.
For further information, please contact:
Daniel Reinbott, Partner, Ashurst
daniel.reinbott@ashurst.com
1Typically export recommendations are issued by the Directorate General of Oil and Gas on a quarterly or, sometimes, semi-annual basis.
2The regulation was issued on 7 September 2018.
