When Indonesia’s parliament reconvenes for the new-year, few pieces of legislation up for debate will be more important for the trajectory of the country’s development than the new oil & gas law. The government circulated a draft copy of the new law last year, which will replace the old law, Law No. 22 of 2001 on Oil and Gas whose status has been undermined by various legal challenges in the courts.

The new draft law, if enacted, offers few sources of comfort for foreign developers, which will see their activities in the upstream sector significantly curtailed at the expense of the state-owned oil & gas company Pertamina, and will be fretting about the implications of certain provisions under the law in the downstream sector. 

“Indonesia has always been very protective of its resources, not just in the oil & gas sector but in the mining industry also,” said one adviser who declined to be named. “The new draft law amplifies this trend and this is especially worrying now that oil prices have fallen as you would think that the government would recognise the need to engage with international developers.”

Upstream sector

The new law significantly strengthens Pertamina’s privileges in the upstream sector. Under the proposed draft copy, the new law will establish a new upstream cooperation organiser, BUMN-K, replacing SKKMIGAS. SKKMIGAS was only established after a ruling in the constitutional court led to the dissolution of BPMIGAS and its legal status remains shaky.

Under the new law, the energy ministry will issue an upstream licence for a particular working area to BUMN-K, which will then enter into a cooperation contract with either Pertamina or a private oil & gas developer. Not only does this mean that licences will no longer be awarded to foreign oil & gas exploration companies directly, but their opportunities will likely be severely restricted under the new law.

Pertamina will have a right of first refusal for any oil & gas concessions awarded and the role of private developers is restricted to the provision of technological or financial assistance under the condition it does not lessen Pertamina’s total production in the working area. If for whatever reason Pertamina is unable or unwilling to take up a concession this will only be awarded to private developers on the condition that the concession is transferred to Pertamina after 50 years.

The new law is likely to scare off foreign investment in Indonesia’s upstream sector, which has already been dwindling for several years. Of even greater concern is the fact that the new law is silent on whether or not it will apply to existing oil & gas concessions and although the expectation is that the new provisions will be grandfathered to allow private developers to adjust slowly to the new regulatory framework, this is still not certain to be the case.

Downstream sector 

The changes proposed by the new law in the downstream sector are far less controversial, although this is partly a reflection of Pertamina’s already dominant market position in this sector. Pertamina’s retail monopoly for petroleum products officially ended in July 2004 with the granting of licences for the retail sale of petroleum products to Shell and Petronas, although Pertamina remains the dominant distributor of fuel products.

Pertamina owns and operates eight of the country’s nine oil refineries – the other is owned by the Research and Development Agency of the Department of Energy and Mineral Resources – and although the state-owned company signed agreements in 2014 with Saudi Aramco, Sinopec, PTT and Nippon Oil & Energy Corporation to upgrade its refineries, foreign investment in this sector remains scarce. 

The new law establishes a new entity, BUP, which will be responsible for overseeing the compulsory sale and purchase of oil & gas based on ‘domestic market needs.’ This new provision aims to boost the portion of petroleum products sold to the domestic market due to rising demand in Indonesia, although at the expense of creating high levels of uncertainty since it is unclear how much exactly will have to be set aside and how this will be calculated.

Resource nationalism

The new law is clearly in the spirit of a rising tide of resource nationalism across the region and also forms part of the Indonesian government’s attempts to transform Pertamina into a state-owned oil & gas company to rival the likes of Petronas of Malaysia and others in the region. 

The problem is that Pertamina does not have the required technical capabilities to exploit all of Indonesia’s oil & gas reserves and at a time when the oil price remains stubbornly low, Indonesia is in great need of harnessing the sophistication of foreign developers. This law, at least in draft form, does little to encourage foreign developers to invest in the country.

Although Indonesia has had some moderate success in the last few years in developing its gas reserves, investment in the country’s oil & gas sector has been on a downward trend for about the last decade. The country suspended its membership of OPEC in 2004 after it became a net importer of oil and majority of the oil production now comes from mostly ageing fields. Unfortunately the new law suggests Indonesia is unlikely to reverse this trend anytime soon.