• BPMIGAS Broken
  • November 15, 2012
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Introduction

    Indonesia’s Constitutional Court has dissolved the government’s upstream oil and gas agency, BPMIGAS, with immediate effect, ruling that its existence and actions were unconstitutional.

    The Court’s decision creates uncertainty for the oil and gas industry in Indonesia, initially upstream but also with inevitable consequences for the downstream sector. While the Production Sharing Contracts (PSCs) issued by BPMIGAS will continue unaltered in the interim, an attempt to change their terms cannot be excluded. Moreover, the regulation (and possibly the very nature) of upstream exploration and exploitation rights may change as a result of the decision.


    Background

    BPMIGAS was established in 2002 as the government’s implementing agency for the 2001 Oil and Gas Law, bringing together under one roof the executive, technical, administrative and commercial aspects of the government’s involvement in, and oversight of, PSCs. Since then, all PSCs have been between BPMIGAS and the relevant private enterprise acting as contractor. BPMIGAS also played a key role in approving Plans of Development and cost-recoverable expenditure under the PSCs. In short, BPMIGAS was a central body in all oil and gas exploration and exploitation activities in Indonesia.


    Decision

    The Indonesian Constitution vests ‘control’ of Indonesia’s natural resources in the State. The complainants in the case - a coalition of religious political parties and other interested individuals - submitted in their pleadings that in BPMIGAS awarding PSCs to private (and, in particular, foreign-owned) enterprises, the State had ceded such ‘control’. The Court, while not citing foreign ownership concerns, held that BPMIGAS had indeed ceded State ‘control’ by:

    • depriving State-owned enterprises the opportunity to exploit oil and gas in Indonesia;

    • handing over day-to-day management of oil and gas production to private enterprise; and

    • denying the State a fuller share of the profits from oil and gas.

    Accordingly, the Court dissolved BPMIGAS with immediate effect, assigning all of its powers and functions to the Ministry of Energy and Mineral Resources. There was one dissenting opinion amongst the panel of eight judges, contending that the plaintiffs may not have had sufficient standing to bring the case before the Court.


    Implications

    The Court’s decision has been implemented with alacrity. Within hours of the decision being handed down, BPMIGAS’s website was taken offline and the process of clearing its offices commenced.

    While the decision is silent on the status of extant PSCs, the Chairman of the Constitutional Court in speaking to the press has stated that PSCs currently in force will continue unaffected for the time being. The basis for that statement remains to be seen, as do matters such as who the counterpart will be in place of BPMIGAS, and how any transfer will be effected.

    However, the decision suggests that the Court favours the Government issuing exploration and exploitation licences, rather than using PSCs that create contractual obligations (this would be similar to the transition from Contracts of Work to IUPs seen in the Indonesian mining sector). In any case, existing PSCs are private contracts under Indonesian law, meaning that any forced amendments are likely to be fiercely resisted by the oil companies and investors which are parties to them.

    Until now, the regulatory environment for oil and gas in Indonesia had been relatively stable. This decision will inevitably lead in the short term to delays and uncertainty over oil and gas exploration and exploitation activities, and we expect at least a temporary halt to the issuing of new PSCs.

    The 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. Indonesia has a remarkable track-record of putting in place “work-around” solutions but the fact that the country fast approaches a Presidential election year should not, of course, be forgotten.

    The Court’s decision does not appear to be susceptible to appeal, and the Minister for Energy and Mineral Resources has indicated that he accepts it as final and binding, and that the government must put in place a transition plan - which may provide some clarity on the way forward.