Indonesian Oil and Gas Sector: Role of the State

Indonesian Oil and Gas Sector: Role of the State

Extracted oil and gas in Indonesia remains owned by the State until it
passes the point of export or other delivery point. Thereafter, the
Government is entitled to a certain percentage of the production output as
apportioned under the Production Sharing Contract ("PSC"), as is the
Contractor.

Under the Oil and Gas Law (Law No. 22 of 2001 regarding Oil and Gas),
entities in the form of a state-owned enterprise ("SOE"), regional-owned
enterprise ("BUMD"), a cooperative, small business or private business
entity may enter into a PSC with Special Task Force for Upstream Oil and
Natural Gas Business Activities ("SKK Migas") to undertake upstream oil and
gas business activities. Pertamina, as an SOE and the state oil company, can
hold participating interests in numerous PSCs as a Contractor of SKK Migas.
There is no maximum limit on the participating interest that an SOE, BUMD or
Pertamina may hold.

Upon the first Plan of Development ("POD") approval, a Contractor is
required to offer 10% Participating Interest ("PI") in its PSC to a BUMD.
The BUMD may accept or decline based on its financial capability, and in the
latter event the offer must be tendered to an SOE. As of the preparation of
this article, Indonesia's Ministry of Energy and Mineral Resources ("MEMR")
is anticipated to issue a regulation on the requirements and procedures
relevant to this 10% PI offer.

In addition, a 2015 MEMR regulation issued in light of the imminent expiry
of several old-generation PSCs, as amended in 2016, stipulates that
Pertamina may elect to resume the operations of a work area whose PSC is
expiring, irrespective of whether the initial Contractor has applied for an
extension. If both Pertamina and the initial Contractor express a
willingness to operate a work area, the MEMR would have the authority to
decide whether the operation would be resumed by Pertamina, the initial
Contractor, or jointly between the two.

FTP and Taxes

Indonesia does not impose royalties on PSCs, but secures the State's minimum
income through the first tranche petroleum ("FTP") mechanism in later
generation PSCs. FTP is the first take of oil or gas immediately after
production in a work area in one calendar year that is received by the State
prior to cost recovery and profit calculation. FTP therefore secures the
State's minimum income. The amount of FTP is determined in the PSC.

Taxes applicable to PSCs include income tax, VAT, import duties, regional
taxes and other levies. The PSC may stipulate whether the tax laws and
regulations applicable at the time of the PSC execution shall apply
(stabilized) or whether the PSC shall follow every tax law and regulation
issued over time. In addition, Contractors are required to pay non-tax state
revenues such as exploration and exploitation fees and bonuses, including
signing bonus and production bonus.

The sharing proportion between the Government and the Contractor is
typically 85:15 for oil and 70:30 for gas, respectively. For
non-conventional oil and gas, the production sharing is progressive based on
annual cumulative production, with or without an operational cost-recovery
mechanism. This is one of the Government's recent moves to encourage
investment in non-conventional oil and gas activities, as contained in MEMR
Regulation No. 38 of 2015 regarding Expediting Non-Conventional Oil and Gas
Operations.

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com