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21 March, 2018
On 21 February 2018, the Minister of Energy and Mineral Resources ("Minister of Energy") issued Regulation Number 15 of 2018 concerning post-operation activities for upstream oil and gas businesses (the "Regulation").
The Regulation requires all Production Sharing Contract ("PSC") contractors in Indonesia to carry out abandonment and site restoration ("ASR") operations, and to establish and contribute to an ASR fund. Under the Regulation, these obligations extend to PSC contractors who do not have an express obligation to carry out ASR related obligations under the terms of their existing PSCs.
The Regulation revokes Minister of Energy Regulation Number 1 of 2011 on technical guidelines for dismantling of offshore oil and gas installations, including removing specific technical requirements set out in the regulation relating to cutting, dismantling and sealing of conductor, piling and sleepers, transmission pipeline, and top side facilities.
The Regulation reinforces the main architecture in BPMIGAS Working Guideline Number 040/PTK/XI/2010, dated 24 November 2010, on Abandonment and Site Restoration ("PTK 040"), the provisions in the most recent Indonesian PSCs and the current policy of the Government, under which a PSC contractor must submit an ASR program and fund estimate as well as an ASR operations plan. Certain new procedural aspects have also been included in the Regulation to reflect the change from BPMIGAS to SKK Migas, as the current upstream oil and gas Governmental supervisory agency.
Under the Regulation, PSC contractors are obliged to perform ASR operations in accordance with the Indonesian National Standard (e.g. SNI Manual on drilling operation for safe conduct on shore and offshore in Indonesia) and relevant International Standards. In addition, prior to carrying out ASR operations, PSC contractors must, amongst others:
(a) socialise their ASR operation plan with the local community and relevant authorities;
(b) ensure that all infrastructure connected to the installation has been disconnected; and
(c) ensure that all pipeline systems and other equipment are free from hazardous and toxic materials.
The Regulation requires all PSC contractors, including contractors whose PSCs do not expressly provide for ASR related obligations, to reserve an ASR fund and to utilise such fund when carrying out ASR operations. Contributions made to the ASR fund by a PSC contractor are to be treated:
(a) under a conventional PSC, as operating costs and therefore should be cost recoverable; and
(b) under a gross split PSC, as a tax deductible cost when determining the PSC contractor's corporate income tax.
In the event the ASR fund is not sufficient to fully cover the cost of performing the ASR operations, the Regulation provides that the shortfall if approved by the Head of SKK Migas shall be treated as operating costs and, in this case, would be cost recoverable. This is a positive development for PSC contractors, as previously there has been some doubt over whether or not additional costs over and above those reserved for in the ASR fund would be cost recoverable, especially as some PSCs have expressly provided that such excess costs would be for the PSC contractors own account.
There are, however, no specific provisions on how the Minister of Energy requires PSC contractors who have not established an ASR fund, to establish ASR funds for fields that are already producing under an approved Plan of Development.
Similar to when PTK 040 was issued, the transition provisions under PTK 040 require PSC contractors, who have entered into the production phase at the time, to establish an ASR Fund from the issuance of PTK 040 (i.e. 24 November 2010). However, based on our experience, SKK Migas (previously BPMIGAS) had not necessarily insisted on compliance with PTK 040 from the date of its issuance. Instead, the ASR Fund requirement tended to be implemented in practice by BPMIGAS (and SKK Migas) progressively via the Plan of Development approval mechanics.
Lastly, consistent with the terms of PTK 040, the Regulation requires contractors to perform ASR operations until the expiry of the relevant PSC. In the event after a PSC expires, the Minister of Energy appoints a new contractor for the relevant contract area, the obligation to perform ASR operations and reserve an ASR fund for the contract area will be performed by the new contractor and such new contractor would be entitled to utilise the balance of the ASR fund that had previously been funded by the previous contractor.
Whilst we understand that it was included in certain drafts of the Regulation, one material point that was not ultimately dealt with in the Regulation, is the potential ASR liability of a PSC contractor who has transferred its PSC interest to a third party (e.g. through the sale of its participating interest). As a result, there continues to be some uncertainty on whether or not the Government would seek to have recourse against a transferring contractor after the transfer of its participating interest has been approved by the Government. Whilst this point would usually be agreed in the sale documentation, some certainty as to the Government's treatment of this issue would be welcome.
The issuance of the Regulation further augments and confirms the Government's position that abandonment and site restoration obligations apply to all PSC contractors, notwithstanding whether or not a PSC expressly requires the contractors to carry out ASR related obligations. This has been an ongoing point of contention between the Government and PSC contractors in Indonesia, especially those who signed PSCs before the issuance of Law Number 22 of 2001 on Oil and Gas ("Oil and Gas Law"). Many PSC contractors have argued that they have no obligation to perform ASR operations and establish an ASR fund as this is not expressly required under the terms of their PSC, and because of the "grandfathering" provisions under the Oil and Gas Law. For these reasons, many contractors under a PSC signed before the Oil and Gas Law have maintained that they are not subject to abandonment and site restoration obligations.
For further information, please contact:
Daniel Reinbott, Partner, Ashurst
daniel.reinbott@ashurst.com
