Further developments in the supervision of Indonesian energy and resources companies

Further developments in the supervision of Indonesian energy and resources
companies

The Minister of Energy and Mineral Resources ("MEMR") recently issued MEMR
Regulation No. 42 of 2017 ("MEMR 42/2017") which largely increased the
supervision (and bureaucracy) of companies engaging in the energy and
mineral resources sector. In response to the strong industry criticisms of
MEMR 42/2017, wiser heads have prevailed and on 3 August 2017 (less than a
month after the issuance of MEMR 42/2017), MEMR issued MEMR Regulation No.
48 of 2017 on the Supervision of Business Activities in the Sector of Energy
and Mineral Resources ("MEMR 48/2017") which revokes and replaces MEMR
42/2017. MEMR 48/2017 should, in general, be welcomed by the industry as
MEMR 48/2017 seeks to simplify and clarify the regulatory supervision of the
energy and mineral resources sector in relation to changes of
ownership/control, transfers of shares/participating interests and changes
to the composition of boards of directors ("BODs") and boards of
commissioners ("BOCs"). As discussed further below, in several circumstances
where MEMR 42/2017 previously required prior MEMR approval for certain
corporate actions, MEMR 48/2017 now provides that only submitting reports to
MEMR is necessary.

1. Upstream oil and gas industry

Transfer of participating interests

Consistent with the terms of most production sharing contracts ("PSCs") (as
well as the existing regulatory regime and MEMR 42/2017), MEMR 48/2017
expressly requires contractors to obtain MEMR approval (the application for
which will be considered by MEMR in consultation with SKK Migas) for the
transfer of any participating interest in a PSC. Similar to MEMR 42/2017,
MEMR 48/2017 includes detailed provisions in relation to the requirements
and procedures for obtaining such approval.

Change of control of PSC contractors

Numerous PSCs (particularly PSCs granted before 2008) do not expressly
require MEMR approval (or notification) for the change of control of PSC
contractors. However, MEMR 48/2017 (similar to the provisions in MEMR
42/2017) states that any "direct" change of control of a PSC contractor must
obtain the prior approval of MEMR (the application for which will be
considered by MEMR in consultation with SKK Migas). MEMR 48/2017 has
clarified that a "direct" change of control means the direct transfer of
majority shares in a PSC contractor (i.e. at one shareholder level above the
PSC contractor) pursuant to which the controlling shareholding with valid
voting rights in the PSC contractor transfers it shares to a third party.
While MEMR 48/2017 no longer prohibits any "direct" change of control to
non-affiliated parties, the provisions of MEMR 48/2017 could, strictly
speaking, still require prior MEMR approval for a "direct" change of control
which involves a transfer of majority ownership to an affiliated party (for
example, due to an internal restructuring).

In addition (and mirroring the provisions in MEMR 42/2017), MEMR 48/2017
requires any "indirect" change of control of a PSC contractor to be reported
to MEMR (through the Head of SKK Migas). MEMR 48/2017 is silent on the
timeframes applicable for such report to be submitted (and it is unclear
whether such report should be made prior to or after the relevant "indirect"
change of control). Under MEMR 48/2017, an "indirect" change of control is
where the control of a PSC contractor is transferred to a third party other
than through the direct transfer of shares in the PSC contractor.

Changes to BOD and BOC

MEMR 42/2017 sought (somewhat impractically) to require any change to the
BOD or BOC of a PSC contractor to be subject to prior approval from MEMR.
However, MEMR 48/2017 has now significantly alleviated this requirement by
only requiring such changes to be reported to MEMR through the Director
General of Oil and Gas ("DGOG"). Again, MEMR 48/2017 is silent on the
timeframes applicable for such report to be submitted (and it is unclear
whether such report should be made prior to or after the relevant change to
the BOD and BOC).

2. Downstream oil and gas industry

MEMR 42/2017 also sought to require prior MEMR approval for any transfer of
majority shares in, or any changes to the BOD or BOC composition of, the
holder of downstream oil and gas licenses. However, under MEMR 48/2017, any
transfer of shares in, or any changes to the BOD or BOC composition of, the
holder of downstream oil and gas licenses are now only required to be
reported to MEMR through the DGOG. Such reports are required to be submitted
to MEMR (though the DGOG) after the relevant Ministry of Law and Human
Rights ("MOLHR") approval/notification is issued for such actions.

3. Electricity industry

Similar to the downstream oil and gas industry, MEMR 42/2017 sought to
require prior MEMR approval for any transfer of shares in, or any changes to
the BOD or BOC composition of, the holders of Electricity Supply Business
Licences ("IUPTLs"). However, under MEMR 48/2017, such actions are now only
required to be reported to MEMR through the Director General of Electricity
("DGE") (and, in the case of renewable energy projects, copied to the
Director General of New Renewable Energy and Energy Conservation ("EBTKE")).
These reports are required to be made within five working days from the date
that the relevant MOLHR approval/notification is issued for such corporate
action. In addition (and while the relevant provisions are somewhat
unclear), it appears that MEMR 48/2017 requires all holders of IUPTLs to
submit a report to MEMR, by no later than 3 November 2017, setting out it
latest composition of shareholders, BOD and BOC (unless there have been no
changes to such compositions since the relevant company's establishment).
MEMR 48/2017 has also now helpfully clarified that the holders of IUPTLs who
do not sell electricity to PLN will not be subject to any such reporting (or
approval) requirements.

In addition, and consistent with the previously issued MEMR Regulation No.
10 of 2017 (MEMR 10/2017), MEMR 48/2017 re-confirms the restriction on the
direct transfer of shares in the holders of IUPTLs (who sell electricity to
PLN) until the project achieves its Commercial Operation Date. This general
transfer restriction is generally consistent with the provisions typically
seen in Indonesian power project sponsors' agreements. However, importantly
and unlike most sponsors' agreements, neither MEMR 10/2017 nor MEMR 48/2017
provides any exception for this restriction in relation to pledges or
assignments pursuant to project financing arrangements. As a result, this
could continue to affect the bankability of Indonesian power projects.
However, consistent with MEMR 10/2017, MEMR 48/2017 does provide a very
limited exception to this transfer restriction for transfers to affiliates
(which remains subject to written approval from PLN) whereby the affiliate's
shares are more than 90% owned by the sponsor wishing to transfer the
shares. This very limited 90% ownership threshold is significantly higher
than the 25% or 50% ownership threshold typically applied in Indonesian
power project sponsors' agreements with PLN previously.

4. Geothermal industry

Similar to MEMR 42/2017, MEMR 48/2017 requires prior MEMR approval for any
initial public offering of, or the transfer of shares through the Indonesian
Stock Exchange in, the holder of a geothermal license ("IPB"). However, MEMR
48/2017 expands the applicability of this approval requirement to also
include the holders of geothermal mining authorisations and geothermal
mining license holders as well as contractors under geothermal mining joint
operation contracts (together with IPB holders, "Geothermal Companies").

Under MEMR 48/2017, any transfer of shares (other than through the
Indonesian Stock Exchange) in, or any changes to the BOD or BOC composition
of, Geothermal Companies now only requires the submission of reports to (and
not approval from) MEMR, through EBTKE. These reports are required to be
made to MEMR (through EBTKE) within five working days from the date that the
relevant MOLHR approval/notification is issued for such corporate action.
Similar to the requirements applicable to the electricity industry, it
appears that MEMR 48/2017 requires all Geothermal Companies to submit a
report to MEMR, by no later than 3 November 2017, setting out it latest
composition of shareholders, BOD and BOC (unless there have been no changes
to such compositions since the relevant company's establishment).

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com