Legal Alert: Important Updates on Policies for Companies in Energy and Mineral Resources Sectors

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Authors: Narada Kumara, Fikri Mohammad Ilyasa

Following the controversial issuance of Minister of Energy and Mineral Resources (“MEMR”) Regulation No. 42 of 2017 on Supervision of Business Activities in Energy and Mineral Resources Sectors (“Regulation 42/2017”), recently the MEMR issued new regulation No. 48 of 2017 (“Regulation 48/2017”) to replace Regulation 42/2017, which also regulates the same matter. Regulation 48/2017 came into effect on 3 August 2017.

Previously, Regulation 42/2017 seemed to burden companies engaging in the energy and mineral resources sector, due to the requirement of obtaining prior approval for certain corporate actions, which consequently added bureaucracy and non-effective processes. Regulation 42/2017 only lasted less than a month, as it was highly criticized by the industry. It is expected that Regulation 48/2017 can accommodate investors’ concerns on ease of doing business, as it is intended to simplify the requirements.

In essence, Regulation 48/2017 simplifies requirements for certain corporate actions of companies in oil and gas[1], electrical power[2], minerals and coal[3], and geothermal energy[4] sectors that were previously stipulated under Regulation 42/2017. For example, the previous Regulation 42/2017 imposed obligations on oil and gas companies (upstream and downstream) to obtain prior approval for changes in the Board of Directors (“BoD”) and/or Board of Commissioners (“BoC”), as well as transfer of shares. Regulation 48/2017 made these requirements less stringent by only obliging the report of such changes to the MEMR, except for transfer of shares that results in direct change of control.

Further, we set out the salient features of Regulation 48/2017 below.

Transfer of Shares Requirement

 

In connection with the above, particularly for power project companies, it appears that the restriction on the transfer of shares would create conflict, when it comes to the enforcement of pledge of shares. As individuals closely following the development of such policies may already be aware, typically the financing of power projects will involve pledge of shares as one of the most common securities provided in favor of the financiers/lenders. If a power project company defaults and the pledge of shares needs to be enforced before the COD, then it is arguable that the enforcement could not be completed due to the transfer to affiliated party restriction, as applied by Regulation 48/2017.

 

Transfer of Participating Interest

Regulation 48/2017 regulates that any transfer of participating interest of a PSC Contractor in upstream oil and gas business activities, either partially or entirely, to other parties shall obtain prior approval from the MEMR based on consideration of Special Task Force for Upstream Oil and Gas Management (SKK Migas). The PSC Contractor is also prohibited from transferring its majority participating interest to other parties within the first 3 (three) years as of the exploration period.

 

Changes of BoD and/or BoC

Regulation 48/2017 requires the companies (other than mineral and coal companies) to provide a written report to the MEMR in making changes to its BoD and/or BoC. Meanwhile, Regulation 48/2017 still requires mineral and coal companies to obtain prior approval from the MEMR.

 

Mechanism of Biodiesel Procurement

For the Biodiesel Business Entity (Badan Usaha BBN Jenis Biodiesel), which desires to join biodiesel procurement, they shall register with the Fuel Oil Business Entity (Badan Usaha BBM) in order to obtain approval from the MEMR.

In order to prevent conflict with other regulations, Regulation 48/2017 revokes the following provisions/regulations:

  1. Minister of Mining and Energy Regulation No. 10/P/M/PERTAMBEN/1981 of 1981 on Guidelines and Requirements of Joint Operation Contract between Pertamina and Contractor in terms of Implementation of the Power of Geothermal Resource Utilization, as long as it governs the transfer of rights and obligations of Contractors to third parties, conducted other than through the Indonesian stock exchange.
  2. MEMR Regulation No. 10 of 2017 on Principles of Power Purchase Agreement as long as it governs the transfer of shares; and
  3. Regulation 42/2017.

Based on the foregoing, it is important to highlight that Regulation 48/2017 does not provide a significant change for mineral and coal mining companies, as it does not change previous requirements that were imposed by Regulation 42/2017 for mining companies, such as the requirement to obtain approval for changes to the BoD and/or BoC and transfer of shares. However, it shows that the MEMR is proactive in responding and accommodating to the needs of investors and/or aspirations of business practitioners when it comes to simplification of the supervision process in concerned industries by the local government. It is hoped that the MEMR could be more responsive in addressing other issues or concerns surrounding the energy and mining sector by providing solution-oriented regulations.

 


[1]Applies to upstream (PCS Contractors) companies and downstream oil and gas business licenses holders.

[2] Applies to the holders of Power Supply Business Licenses (IUPTL).

[3] Applies to the holders of: Mining Business License (IUP) or IUP Production Operation Special for Processing and/or Refining issued by the MEMR; Special IUP; Contract of Work; and Coal Mining Business Work Agreement.

[4]Applies to the holders of Geothermal Licenses (IPB) which includes holders of geothermal-resource concessions, join-operation contractors for geothermal resource concession or geothermal resource concession.

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