Indonesia moves fast to replace upstream regulator BPMigas

Indonesia has moved rapidly to fill any vacuum left by the Constitutional Court’s abolition of upstream oil and gas regulator BPMigas and assure investors in the petroleum sector of the sanctity of their contracts, but suspicion of political motivations behind the court’s ruling lingers.

President Susilo Bambang Yudhoyono said on Wednesday that he had issued a presidential ruling establishing a new unit to take over BPMigas’ role and functions after the Constitutional Court dissolved the agency a day earlier.

“It shows a fast moving response and political will to resolve the issue,” said Shamim Razavi, a Jakarta-based oil and gas attorney working with Susandarini & Partners in association with Norton Rose Australia.

Prior to the announcement by the Indonesian president, Razavi had said: “The oil industry is heavily dependent on foreign investment and technology and cooperation … so I would be surprised if a solution is not found, and then it follows from that I would be very surprised if there was a kind of long-term chilling effect on [oil and gas investment].”

Indonesia’s annual oil and gas revenue is around Rupiah 300 trillion ($3.1 billion) on an average, and Yudhoyono said that inflow of funds could not be disrupted.

Announcing the establishment of a new unit that would work under the Energy and Mines Ministry, he said that it was essential to “provide certainty to the upstream oil and gas business.”

Investor Concerned about Court Decision: President

Yudhoyono said at a press conference that the court’s decision had caused concern among investors because of its relevance to legal certainty and predictability on policy and regulation. “If [BPMigas’ role] is not taken over immediately, the uncertainty issue will affect the investment climate which is currently in a better condition than 10 years ago,” he said.

The new unit will keep the function and role of the former BPMigas, while the ministry will conduct an audit of the former agency to ensure transparency, the president said. During the transition period, the government will draft a new law to keep the oil and gas business well-run and transparent, he added.

Constitutional Court Chief Justice Mahfud announced on Tuesday that BPMigas had been officially dissolved following the ruling, but that contracts signed under its jurisdiction would not be affected, meaning exploration and production activities could continue.

The Constitutional Court, or Mahkamah Konstitusi, ruled that BPMigas contravened the part of the 1945 constitution on state control of natural resources, and that its legal powers and responsibilities were revoked.

The judicial review came at the request of 42 organizations and individuals, including Muslim activists and politicians, who were concerned over the use of Indonesia’s oil and gas resources for the export market as opposed to being reserved for domestic consumption. The groups wanted a judgement on the constitutionality of oil and gas law number 22 enacted in 2001, which led to the establishment of BPMigas the following year.

“Under article 33 of the 1945 constitutional law the state’s natural resources should be used for the benefit of the people’s welfare,” said Hatta Taliwang, a former member of the Indonesian parliament (1999-2009) and one of those who applied to the court to review the law that set up BPMigas.

“Oil and gas are vital commodities, but I see that BPMigas prefers to sell them to foreign buyers rather than preserve them for domestic use. It’s against the constitution,” Taliwang said in a phone interview.

Some analysts and observers have noted that the decision plays to a populist, “resource nationalism” trend in Indonesia and should also be seen in the context of a presidential election coming up in 2014 — when Indonesia will be looking to pick a new president as Yudhoyono’s second and last presidential term winds down.

Among those who sough the court review were Islamic organizations — Muhammadiyah, Lajnah Siyasiyah Hizbut Tahrir Indonesia, Union of the Islamic Community, Indonesian Islamic Union, Islamic Union, Indonesian Muslim Brotherhood and Indonesian Muslim Youths — all of which could field a presidential candidate of their own or throw their support behind one.

Chief Justice Mahfud has been mentioned as a possible candidate, although commentators have been careful not to draw any direct lines between the court’s decision or the applicants and the jostling for position ahead of an election year.

Meanwhile, despite assurance from the court and the president that current investments will not be affected, some holdup is expected in projects that had been under discussion with BPMigas.

“The [court’s] decision will give foreign investors pause for thought, with many questions remaining unanswered, including how any successor to BPMigas might avoid its predecessor’s mistakes, whether the transition to new arrangements might be used to renegotiate the commercial terms of existing PSCs and whether there is a remedy at law for any losses suffered,” Razavi said in published comment.

Local law firm Hadiputranto, Hadinoto & Partners also commented on the impact of the court’s decision on the oil and gas sector.

“The current ruling poses real problems for oil and gas companies seeking to carry out their operations, until further light is thrown on how the Ministry of Energy and Mineral Resources will carry out its new tasks,” the law firm said.

Oil and Gas Majors wait for Developments

Most of the international oil companies, including BP, Chevron, Shell and ExxonMobil, operating in Indonesia have declined to comment directly on the court’s decision.

“We intend to monitor how the decisions will be executed going forward as part of our efforts to avoid any possible impact on our projects,” said a spokesman for Japanese explorer Inpex, declining to comment on how specific projects might be affected.

Inpex holds a 60% stake in the Abadi project in the Timor Sea’s Masela block, with Shell owning 30% and Indonesia-based Energi Mega Persada the remaining 10%. The development plan for a 2.5 million mt/year floating LNG facility at Abadi was approved by Jakarta in December 2010.

Inpex is in the final stage of selecting front-end engineering and design contractors for the Abadi project, the spokesman said, declining to elaborate. Since BPMigas would have needed to sign off on any development of the project — or any other projects at a similar stage — it could possibly hinder progress.

Other projects that would have needed BPMigas’ input are BP’s planned $12 billion expansion of its Tangguh LNG facility; Total’s Mahakam block where it and equal partner Inpex plan to invest $2 billion this year in a bid to arrest declining gas output; and ExxonMobil’s plan to increase output at its Cepu project to peak production of 165,000 b/d before the end of 2013.

“We are the monitoring the development [the court’s decision] and the situation, so we can’t comment further yet,” said Erwin Maryoto, ExxonMobil Oil Indonesia’s vice president of external relations.[]

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