Legal Alert: Sharing of Existing Upstream Oil and Gas Facility Operated by another PSC Contractor

Author: Anton Latief, Johanna Devi

Facility sharing is a common practice in the upstream oil and gas activities. The practice is guaranteed under Article 44(2) of the Government Regulation No. 35 of 2004 on the Upstream Oil and Gas Business Activity (“GR No. 35/2004”). In facility sharing, one Production Sharing Contract contractor (“PSC Contractor”) can utilize the excess capacity in the facility (“Facility”) operated by another PSC contractor (“Facility Operator”) pursuant to a Facility Sharing Agreement, based on proportional cost-sharing principle and upon the approval from the Oil and Gas Special Working Unit (Satuan Kerja Khusus Migas/ “SKK Migas”).

Despite being commonly practiced, the detailed mechanism of Facility sharing has not been regulated until the recent issuance of Ministry of Finance Regulation No. 89/PMK.06/2019 on the Management of State Owned Property Deriving from the Operation of Production Sharing Contract of the Upstream Oil and Gas Activity (“MoF Reg. 89/2019”).

The MoF Reg. 89/2019 sets forth the following as objects of Facility sharing:

1. Idle capacity or excess capacity of a Facility;
2. Part of land or building which is temporarily not utilized by the PSC Contractor; and/or
3. Part of Right of Way for upstream oil and gas pipeline which is temporarily not utilized by the PSC Contractor.

In accordance with GR No. 35/2004, the PSC Contractor shall obtain approval from SKK Migas for the Facility sharing before entering into a Facility Sharing Agreement. It shall be noted that under the MoF Reg. 89/2019, the Facility Sharing Agreement shall be executed at the latest one month after the approval from SKK Migas.

The MoF Reg. 89/2019 also sets limitation of Facility Sharing Agreement period to 20 (twenty) years from its execution, which is extendable upon approval from SKK Migas. Nevertheless, the period of Facility sharing shall not extend the period of each party’s PSC.

Additionally, consistent with GR No. 35/2004, Facility sharing should not be intended to create any profit for the Facility Operator. Consequently, MoF Reg. 89/2019 regulates that lease mechanism shall not be used between the Facility Operator and another PSC Contractor wanting to use such Facility Operator’s Facilities.

In conclusion, the MoF Reg. 89/2019 clarifies the mechanism and limitation in the practice of Facilities sharing. Consequently, it is expected to encourage more Facility sharing which may result in the optimization of Facilities utilization in the operation of upstream oil and gas business activities to save costs and enhance efficiency in operation activities.

******