Development of Oil and Natural Gas in Indonesia

Development of Oil and Natural Gas in Indonesia

Indonesia's oil and gas sector is governed by Law No. 22 of 2001 regarding
Oil and Gas (the "Oil and Gas Law"). The state retains mineral rights
throughout Indonesian territory and the Government holds the mining
authority.

The oil and gas sector comprises upstream and downstream activities, which
are separately regulated and organized. Upstream activities include
exploration and exploitation, and are regulated under Government Regulation
No. 35 of 2004 regarding Upstream Oil and Natural Gas Business Activities as
has been amended several times, the latest by Government Regulation No. 55
of 2009 ("GR 35"). The upstream sector is managed and supervised by the
Special Task Force for Upstream Oil and Natural Gas Business Activities
("SKK Migas").

Due to the unique territorial composition of the archipelagic state of
Indonesia, upstream oil activities may be undertaken in onshore and offshore
areas. Work areas for onshore and offshore operations are determined by the
Ministry of Energy and Mineral Resources ("MEMR") based on consultations
with and recommendations from the respective regional governments.

Downstream activities encompass processing, transportation, storage and
trading, and are regulated under Government Regulation No. 36 of 2004
regarding Upstream Oil and Natural Gas Business Activities as has been
amended by Government Regulation No. 30 of 2009 ("GR 36"). Downstream
operations fall under the auspices of the MEMR and Downstream Oil and Gas
Regulatory Agency ("BPH Migas").

Through Government Regulation No. 79 of 2014, the Government has stipulated
national energy policy to be implemented from 2014 to 2050, focusing
primarily on energy availability for national needs, prioritization of
energy development, utilization of national energy resources, and national
energy reserves. The target for the availability of primary energy, which
includes natural oil and gas, is approximately 400 million tonnes of oil
equivalent ("MTOE") in 2025 and approximately 1,000 MTOE in 2050.

In early 2016, the President of Indonesia announced a list of national
strategic projects, which include several downstream oil and gas projects,
namely the development of the Bontang and Tuban refineries, upgrading
existing refineries, and construction of the Banten LPG terminal,
Belawan-Sei Mangkey gas pipelines, an LNG mini-refinery, and an LNG-LNCG
station on Java island. A Presidential Decree and Presidential Instruction
seek to accelerate these projects and mandate enhanced cooperation among
relevant Government institutions in ensuring the achievement of these
objectives.

Right to Develop Oil and Natural Gas Reserves

Private companies earn the right to explore and exploit oil and gas
resources by entering into cooperation contracts, mainly based upon a
production sharing scheme, with the Government (through SKK Migas), thus
acting as a Contractor to SKK Migas. One entity can hold only one Production
Sharing Contract ("PSC"), and a PSC is normally granted for 30 years,
typically comprising six plus four years of exploration and 20 years of
exploitation. All financial risks of operations under the PSC are borne by
the Contractor. If a work area proceeds to the exploitation stage, the
Contractor is entitled to cost recovery.

Except for certain types of non-conventional oil and gas PSCs, the
production output is typically subject to a first tranche petroleum
requirement, cost recovery and certain taxes, and the remaining portion is
distributed among the Contractor and the Government in the proportions set
out in the PSC. Recent Government tenders have adopted the "open bid split"
model, in which investors may offer or bargain the signature bonus and
production split. For non-conventional PSCs, the sharing proportion is not
always fixed at the beginning of the contract, but floats on a sliding scale
based on production rate.

Throughout the PSC term, expenditures are planned ahead by the Contractor in
an annual Work Plan and Budget to be approved by SKK Migas. A Contractor
must also prepare an Authorization for Expenditure ("AFE") for specific work
and can only execute the work upon SKK Migas' approval of the relevant AFE.

When a commercial discovery is made, the Contractor must prepare a Plan of
Development ("POD") for the relevant field. The first POD is approved by the
MEMR based on the considerations of SKK Migas and kicks off the exploitation
stage. Subsequent PODs are approved by SKK Migas.

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com