BPMigas is dissolved after court ruling

Jakarta takes road to change: the winding-up of BPMigas has sparked uncertainty in Indonesia

Indonesia’s Constitutional Court has ruled that the functions of upstream regulator BPMigas are unconstitutional and the industry watchdog that had awarded and overseen production sharing contracts is no more.

The court’s decision 36/PUU-X/2012 issued on 13 November annulled and partly amended some of the provisions of the Oil and Gas Law Number 22 of 2001 and, with it, BPMigas was annulled with immediate effect.

The court’s decision stipulated that, pending a new law being issued to incorporate its proposed changes to the existing Oil & Gas Law, BPMigas’ functions will be carried out by the Ministry of Energy & Mineral Resources, or a state-owned company to be appointed by the ministry.

While the court’s decision recognises that existing contracts will be preserved, several questions remain for those with upstream operations in Indonesia, according to international law firm Baker & McKenzie.

“It is still very early to say what the impact of the Constitutional Court’s decision will be,” said Baker & McKenzie member firm Hadiputranto, Hadinoto & Partners.

“No doubt, the current contractual arrangements will somehow continue to be recognised, although the basis for doing so is legally very unclear.

“However, the decision does throw up questions, not least, will the ministry actually carry out the day-to-day functions previously carried out by BPMigas?”

The decision, and the uncertainty it has created, has threatened the attractiveness of Indonesia’s investment climate for upstream oil and gas ventures, at least in the short term.

“Although Indonesia is still highly prospective, the decision has shown that even a relatively stable regulatory regime, such as the upstream oil and gas industry in Indonesia, is not safe from significant overhauls, which may deter potential investors, and slow down the decision-taking process,” said Norman Bissett, a foreign legal consultant with Hadiputranto, Hadinoto & Partners.

“The concern now is that this decision will be an opportunity to open up discussions and the oil and gas regime will, once again, become a focus of regulatory activity, in the same way that the mining industry has been impacted by a succession of regulatory changes.”

BPMigas carried out a range of functions including approvals of plans of further development, approvals for expenditure, and approvals of high value goods and services contracts.

Another possible problem for operators could be if the Indonesian parliament were to attempt to set caps on cost recovery for oil and gas ventures through the state budget process following the dissolution of BPMigas.

“Also, what entity will be appointed to carry out BPMigas’ role in the production sharing contracts, and when?

“Clearly, it may be far from satisfactory for oil and gas companies if this function is assumed by Pertamina,” said Hadiputranto, Hadinoto & Partners. The constitutional review was raised by 42 applicants, mostly public interest organisations that had argued over the role of BPMigas, claiming that the government’s role as controller of Indonesia’s natural resources should be placed above PSC contractors’ commercial interests.

Also there were said to have been “inherent flaws” in the structure of BPMigas, such as the absence of a supervisory board.

“The Constitutional Court was of the view that under Article 33.3 of the Indonesian Constitution, which stipulates that natural resources belong to the people of Indonesia, the state’s regulatory and commercial roles should not be held by the same entity,” added Bissett.

“According to the court’s decision, as a PSC counterparty, the state would not be able to issue regulations in the public interest that are inconsistent with the terms of the PSCs it is subject to.”

Decisions made by the Constitutional Court are final and binding.

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