Law360

Authors: David Adelman

Type: Articles Published

Legislators in Indonesia have recently suggested that all petroleum production operations should effectively be state-controlled, making many foreign investors in Southeast Asia’s largest country fear that their assets could in effect be nationalized or "expropriated."

Background

Indonesia has a long history of oil exploration, with the Dutch drilling in the late 1800s. Companies such as Shell have been operating in Indonesia for over 100 years. In the 1960s, under former President Suharto, Pertamina (currently the main Indonesian state-owned oil and gas company) was set up to function as both an oil company and as the state’s chief energy regulator. Pertamina both controlled and supervised oil and gas operations under the various production sharing contracts (PSCs). During this time, most of the companies exploring and producing oil in Indonesia were foreign companies, having invested billions of dollars setting up their operations.

In 2001, former President Susilo Bambang Yudhoyono, who at the time was the energy minister, introduced a new law that split Pertamina apart, making Pertamina a state-owned oil company focusing only on oil and gas operations. All of Pertamina’s regulatory functions were moved into the independent oil and gas regulatory agency called BPMIGAS (Badan Pelaksana Minyak dan Gas Bumi, or the Upstream Oil and Gas Regulatory Agency).

Under the new 2001 oil and gas law, BPMigas supervised and controlled the exploration blocks that were allocated to third parties. It did this independently, although reporting to the Ministry of Energy.

In 2012, a nationalistic group allied with former Pertamina power holders challenged the 2001 oil and gas law at the Constitutional Court, arguing that the supervision of oil and gas should reside with the state, not an independent regulatory agency. In a controversial decision, this group was ultimately successful, and the court struck down the 2001 law, disbanding BPMigas. However, rather than reverting power to state-owned Pertamina, the government reformatted BPMigas into SKKMigas (Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi, or the Special Unit of the Upstream Oil and Gas Regulatory Agency), which sits directly under the energy minister.

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