B&A News Brief – Quo Vadis Participating Interest 10% in PSC Under Soon-To-Be Revised Law No.22 / 2001

The application the “10% Participating Interest” (PI 10%) provisions as set out in Government Regulation Number 35 in 2004, concerning oil and gas upstream business activities (PP 35/2004) has been an issue for some time now. PP 35/2004 governs the management of the ‘upstream’ oil and gas industry in Indonesia, including exploration and exploitation activities in a Working Area of Production Sharing Contract (PSC). Article 34 of PP 35/2004 requires PSC contractor(s) to offer 10% of its working interest to regional-owned enterprises, or BUMDs. The purpose of this regulation is to open up business opportunities in the oil and gas industry for BUMDs and to assist oil and gas producing-regions to directly participate in managing oil and gas sites located within their territories.

PP No.35/2004 gives BUMDs the ‘pre-emptive’ right to participate in the PSC after a Plan of Development is approved. However, BUMDs must respond to the PSC’s offer of 10% of its working interest within 60 (sixty) days. Any BUMD wishing to take up the offer must also confirm its financial capacity to do so. If the BUMD does not submit a letter of intent within the 60 day period, the PSC can offer the PI 10% to national companies.

The main issue for BUMDs is the capacity to finance its portion of the PSC. BUMDs are funded by local governments which have limited funding capacity. Other issues that BUMDs face when considering offers purchase PI 10% include the capital-intensive, high-technology, and high-risk nature of the oil and gas industry, as well as a lack of experience in the industry.

An advantage of PP 35/2004 is that it allows BUMDs to be flexible in structuring their financial deals to acquire PI 10% in a PSC. For example, the regulation does not prohibit BUMDs from transferring PI 10% to other parties such as affiliates or non-affiliates. However, while this is attractive, it is a high risk option for investors. Additionally, there are no prohibitions on the types of financing structures or cooperation that BUMDs can enter into with investors (for example, foreign investors) for the financing of PI 10%.

The anticipated revisions to Law No. 22 year of 2001 concerning Oil and Gas (Law No.22/2001) could clarify many of the issues regarding the application of PI 10%. While the revision process has been very slow, it is likely to result in key changes to how PI 10% is applied. The fact that provisions regarding PI 10% will likely be inserted into revised Law No. 22/2001 is a signal that the issue has gained the attention of the national government. Revised Law No. 22/2001 is likely to include stricter transferring of PI 10% and the prohibition on transfers of PI 10% partially or to other parties, except to government-owned enterprises. The revised law will also likely set the criteria for BUMDs to be eligible to acquire PI 10%. Sanctions for violations of provisions concerning PI 10% (other than revoking an entitlement to PI 10%) are also likely to be included in the revised law. These are some of the likely revisions to Law No. 22/2001 which will provide for greater clarity on the implementation of PI 10%.

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