The Oil and Gas Upstream Regime Dualism

KOMPAS/BAHANA PATRIA GUPTA

Illustration

The important change introduced by the Job Creation Law in the oil and gas sector is the reapplication of the license/concession regime to oil and gas upstream business activity.

This change is contained in the Energy and Mineral Resources (ESDM) cluster, Article 40 (page 226), which amends Article 5 of the Oil and Gas Law of 2001 with an addition to Paragraph (1) stipulating: “Petroleum and natural gas business activity shall be executed on the basis of business licenses from the Central Government”.

The definition of oil and gas business activity is further detailed in Paragraph (2) reading: “Petroleum and natural gas activity shall comprise upstream business operation and downstream business operation”. With the above provisions, oil and gas upstream business activity is subject to two legal regimes, which are based on licenses/concessions and cooperation contracts pursuant to Article 6 (1) of the 2001 Oil and Gas Law.

The presence of the license/concession system causes regulatory dualism and overlap in oil and gas upstream management that weaken legal certainty.

The reapplication of the license/concession system constitutes a setback that will create problems in the management of oil and gas upstream operation. This system is vulnerable to abuse (corruption, collusion and nepotism) and has the potential to give rise to unhealthy business competition. The presence of the license/concession system causes regulatory dualism and overlap in oil and gas upstream management that weaken legal certainty. In order to function, this system still requires new and complex implementation rules as well as tight supervision.

Concessions

The license/concession system was once applied in the Dutch colonial era based on Indische Mijnwet (East Indies Mining Law), Statue Book of 1899 No.214. After Indonesia’s independence, this system was strongly rejected by national figures through the “Motion of Teuku Mohammad Hasan” and later it produced the Provisional House of Representatives’ Decision No.47/K/1951, by which the state on 13 September 1951 formed the State Committee on Mining Affairs (PNUP).

The PNUP’s investigation discovered regulatory and supervisory weaknesses in the license/concession system. As a result, concession holders were overly free in their operation and dishonest in reporting operational costs and oil and gas mining production.

The committee later also managed to formulate Law No.44/1960 on Oil and Gas. By the law, the license/concession system was replaced by “mining authorization” by applying “working contracts”, which further developed into “production sharing contracts” up to the present.

Kompas

Workers paint a gas pipeline belonging to PT Perusahaan Gas Negara that passes over the river Ciliwung river in the Kebon Pala area, Jakarta, some time ago. Painting and routine maintenance are carried out to prevent damage that has the potential to cause leaks that endanger the surrounding environment.

Formerly, the contract system was also rejected by oil and gas companies already enjoying the benefits of the concession system. The dispute could finally be settled in a negotiation between the Indonesian government and Caltex, Stanvac and Shell, which took place in Tokyo on 1 June 1963 and was known as Tokyo Heads of Agreement. The companies eventually were ready to have their concession rights changed into “working contracts” vis-à-vis PN Permina, PN Pertamin and PN Permigan representing the state.

Differences and shortcomings

The granting of licenses/concessions is a one-sided legal action of public administration in the form of approval from the authorities empowered by the law, under certain circumstances, to change matters that are prohibited into permissible ones (relaxation legislation). Licenses/concessions are monopolistic in nature as they are based on subjective reasons, licenses/concessions can be granted by their issuers to whomsoever they wish and can also be revoked by their issuers whenever they desire.

Consequently, licenses/concessions become a potential source of unhealthy business competition and high political risks for companies because they have to “smartly” maintain good relations with license/concession issuers (central government). In fact, the government has a limited term in comparison with the period of oil and gas upstream business operation that is long and demands legal certainty, so that this system is vulnerable to abuse of authority (detournement de pouvoir/power abuse).

On the other hand, in this system the state relinquishes concession areas to companies to be explored and exploited (relinquishment clauses). As a result, government control over concession areas weakens, while the position of companies strengthens, with the tendency to be closed and act fraudulently.

The inclusion of the license/concession regime in the Job Creation Law may have been influenced by the consideration of the Constitutional Court (MK) in point (3.14), case No.36/PUU.X/2012. According to the MK, “the relations between the state and the private sector in natural resources management cannot be established under civil dealings, but rather should be relations of a public nature, in the form of the granting of concessions or licenses that are fully under the control and authority of the state. Civil contracts will degrade the sovereignty of the state over natural resources, in this case oil and gas”.

A legal consideration is not a verdict, but it’s limited to the outlook of the MK on oil and gas upstream business activity that is not entirely true because it tends to rule out the economic aspect of the oil and gas world.

The legal relations suited to the character of oil and gas upstream business are civil dealings in the form of contracts.

Actually, oil and gas upstream operation is also business activity starting with the analysis of profit and loss. The legal relations suited to the character of oil and gas upstream business are civil dealings in the form of contracts. A contract is a business instrument representing a two-way consensus between parties that aim to make profits and are in mutual need (reciprocal ties).

In a contract, the relevant parties are on an equal footing and abide by contract clauses that bind them like the law (pacta sunt servanda/an agreement must be kept). Therefore, adherence to contract clauses cannot simply be interpreted as degradation of state sovereignty over oil and gas, but rather it is more meant as due respect for an agreement (contract sanctity).

The direction in which the times proceed shows that as an economic system, capitalism has such strong bearing on the methods of carrying out production, distribution and consumption of commodities of life.

The 2001 Oil and Gas Law affirms that oil and gas are commodities. As commodities, oil and gas are traded on the basis of effective norms on the global market and cannot be done under closed arrangements, unless the state can make it for its own consumption. It should be realized that today the pendulum of world civilization puts capitalism in such a dominant place in the world economy, beating socialism as the principal of the license/concession regime. The direction in which the times proceed shows that as an economic system, capitalism has such strong bearing on the methods of carrying out production, distribution and consumption of commodities of life.

The situation cannot sufficiently be faced with the spirit of nationalism, but it also demands Indonesia’s capability of surfing on the huge waves of civilization with an adaptive and flexible attitude.

Reconsideration needed

At present, oil and gas upstream business undertaken through cooperation contracts has become an established system. In order to make this system more productive, improvement is needed instead of overhauling the regulation. So, the presence of the license/concession regime in oil and gas upstream business should be reconsidered to prevent it from disrupting the harmony already created.

Junaidi Albab Setiawan, Advocate, Practitioner and Observer of Oil and Gas Laws