Gas Regulation

in 35 jurisdictions worldwide
Contributing editor: Craig Spurn

2009
Published by Getting the Deal Through in association with:
LEX Legal Practitioners and Arbitrators Antonio Pascual Oko Ebobo y Asociados Arthur Cox Bech-Bruun Blake Cassels & Graydon LLP Buzescu Ca Cavelier Abogados Chandler and Thong-Ek Law Offices Ltd CMS Adonnino Ascoli & Cavasola Scamoni Dr Jamal Seifi & Associates Dr Kamal Hossain and Associates Fiebinger Polak Leon & Partner Rechtsanwlte GmbH Grata Tashkent Law Firm Hoet Pelaez Castillo & Duque J D Sellier + Co Kermel & Scholtka Rechtsanwlte KGDI Law Firm Kluge Advokatfirma DA Kocin olc Balatk Ledingham Chalmers LLP Lopez Velarde, Heftye y Soria, SC Lovells LLP Lydian Martelli Abogados Mohamed Ridza & Co Moreno Baldivieso Estudio de Abogados Pillsbury Winthrop Shaw Pittman LLP Rizvi Isa Afridi & Angell Rodrigo Elas & Medrano Abogados RPA Rui Pena, Arnaut & Associados Salans Spaczyn ski Szczepaniak Wsplnicy SSEK TozziniFreire Advogados Yukov Khrenov & Partners

contents

Gas Regulation 2009

Contributing editor Craig Spurn, Blake, Cassels & Graydon LLP Business development manager Joseph Samuel Marketing managers Alan Lee Dan Brennan George Ingledew Edward Perugia Robyn Hetherington Dan White Tamzin Mahmoud Elle Miller Marketing assistant Ellie Notley Subscriptions manager Nadine Radcliffe Subscriptions@ GettingTheDealThrough.com Assistant editor Adam Myers Editorial assistants Nick Drummond-Roe Charlotte North Senior production editor Jonathan Cowie Subeditors Jonathan Allen Kathryn Smuland Sara Davies Laura Ziga Ariana Frampton Sarah Dookhun Editor-in-chief Callum Campbell Publisher Richard Davey Gas Regulation 2009 Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910 Law Business Research Ltd 2009 No photocopying: copyright licences do not apply. ISSN 1740-7826
The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyerclient relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of March 2009, be advised that this is a developing area.

Argentina Hugo C Martelli Martelli Abogados Bangladesh Sharif Bhuiyan and Abdullah Mahmood Hasan Dr Kamal Hossain and Associates Belgium David Haverbeke Lydian Bolivia Luis Moreno Gutierrez Moreno Baldivieso Estudio de Abogados Brazil Luiz Antonio Maia Espnola de Lemos TozziniFreire Advogados Canada Craig Spurn and Selina Lee-Andersen Blake Cassels & Graydon LLP Colombia Gabriela Mancero and Oscar Vela Cavelier Abogados Czech Republic Vclav Rovensk and Tom Sequens Kocin olc Balatk Denmark Per Hemmer, Morten Lau Smith, Johan Weihe and Rania Kassis Bech-Bruun Equatorial Guinea Javier Lasa, Nuria Encinar and Antonio Pascual Salans / Antonio Pascual Oko Ebobo y Asociados European Union Matthew Levitt Lovells LLP Faroe Islands Per Hemmer, Morten Lau Smith, Johan Weihe and Rania Kassis Bech-Bruun Germany Solveig Hinsch and Boris Scholtka Kermel & Scholtka Rechtsanwlte Greece Gus J Papamichalopoulos KGDI Law Firm Indonesia Michael D Twomey and Fitriana Mahiddin SSEK Iran Jamal Seifi and Mir Shabiz Shafe Dr Jamal Seifi & Associates Ireland Alex McLean, Patrick McGovern and Geraldine Kearney Arthur Cox Italy Pietro Cavasola and Matteo Ciminelli CMS Adonnino Ascoli & Cavasola Scamoni Malaysia Mohamed Ridza Abdullah Mohamed Ridza & Co Mexico Rogelio Lopez-Velarde and Amanda Valdez Lopez Velarde, Heftye y Soria, SC LEX Legal Practitioners and Nigeria Gbite Adeniji, Olusina Sipasi and Gloria Iroegbunam Arbitrators Norway Jane Wesenberg and Sondre Dyrland Kluge Advokatfirma DA Pakistan Ahsan Zahir Rizvi, Farhat Naz, Zehra Rajani and Mayhar Kazi Rizvi Isa Afridi & Angell Poland Piotr Spaczyn ski and Maria M Nowicka Spaczyn ski Szczepaniak Wsplnicy

3 15 19 24 30 36 43 51 56 62 69 76 81 86 94 101 108 115 120 128 137 142 148 161

Austria Thomas Starlinger and Stefan Korab Fiebinger Polak Leon & Partner Rechtsanwlte GmbH 9

Peru Maria Teresa Quiones and Maria del Rosario Quiroga Rodrigo Elas & Medrano Abogados 155 Portugal Mnica Carneiro Pacheco, Marisa Apolinrio and Joo Novais RPA Rui Pena, Arnaut & Associados 168 Romania Magda Alexandru, Corina-Maria Papuzu and Adrian Tomescu Buzescu Ca Russia Alexander Khrenov and Tatyana Boyko Yukov Khrenov & Partners Thailand Albert T Chandler, E T Hunt Talmage III and Chantima Limpananda Chandler and Thong-Ek Law Offices Ltd Trinidad and Tobago Luana Boyack and Donna-Marie Johnson J D Sellier + Co United Kingdom Neil Anderson Ledingham Chalmers LLP United States Joseph H Fagan, Michael S Hindus, Robert A James and Susan O Berry Pillsbury Winthrop Shaw Pittman LLP Uzbekistan Umid Aripdjanov and Anvar Ikramov Grata Tashkent Law Firm Venezuela Miguel Rivero and Patrick Petzall Hoet Pelaez Castillo & Duque 174 181 190 196 201 209 216 223

Printed and distributed by Encompass Print Solutions Tel: 0870 897 3239

Law Business Research

www.gettingthedealthrough.com

indonesia

SSEK

Indonesia
Michael D Twomey and Fitriana Mahiddin SSEK
Description of domestic sector
1 Describe the domestic natural gas sector, including the natural gas production, liquefied natural gas (LNG) storage, pipeline transportation, distribution, commodity sales and trading segments.

Law 22 of 2001 regarding oil and natural gas (Law 22) and its implementing regulations (Government Regulation No. 35 of 2004 as amended by Government Regulation No. 34 of 2005 regarding upstream oil and gas business activities (GR35) and Government Regulation No. 36 of 2004 regarding downstream oil and gas business activities (GR36), substantially changed the existing business structure for oil and gas activities, especially downstream gas activities. While Law 22 outlines the governments objectives and policies for the natural gas sector, details of the new regulatory scheme will be established by a series of government regulations to be issued under Law 22. So far, six of these regulations have been enacted. GR35 and GR36 aim to regulate details of upstream and downstream oil and gas business activities in Indonesia, while the remaining three government regulations deal with the establishment of government agencies to supervise the upstream and downstream oil and gas sectors BP Migas and BPH Migas, respectively and the establishment of PT Pertamina (Persero). While Law 22 changed the regulatory framework of the oil and gas sector in a number of significant respects, two changes need to be highlighted: Law 22 dramatically changed the role of the state-owned oil and gas enterprise, Pertamina; and it greatly liberalised the downstream natural gas business by granting the government exclusive rights over oil and gas mining and requiring all private companies wishing to explore and exploit oil and gas to enter into cooperation contracts based on a production-sharing scheme with BP Migas. This has promulgated a form of cooperation contract substantially similar to the production-sharing contract (PSC) previously used by Pertamina, with one significant exception; under Law 22, the cooperation contract imposes a domestic market obligation for natural gas. The role of Pertamina as holder on behalf of the government of all oil and gas mining rights and as a party to, and regulator of, PSCs with private-sector companies (such parties to a PSC, contractors) has been phased out. With the issuance of Government Regulation No. 31 of 2003, Pertamina has been converted from a state-owned enterprise to a state-owned limited liability company, PT Pertamina (Persero), which will function like any other private-sector commercial oil and gas company. It will hold all of Pertaminas commercial contractual interests while BP Migas will succeed to all of Pertaminas interests in PSCs and other contracts in which Pertamina acted on behalf of the government, except for Pertaminas interests in contracts other than PSCs or related contracts, such as LNG sales contracts. Notwithstanding this general rule, for production-sharing arrangements with contractors under technical assistance contracts

(TACs), GR35 provides that Pertaminas rights under the TAC will be transferred to PT Pertamina (Persero) for the balance of the term of the TAC. PT Pertamina (Persero) has entered into three cooperation contracts with BP Migas to continue activities in the areas it had been granted authority to explore for and exploit oil and natural gas. Law 22 ended Pertaminas dominant position in downstream activities except in the provision of certain fuel oils. Under Law 22, as implemented by GR36, downstream activities are now carried out by private entities based on licences issued by the government under the supervision of the government and BPH Migas, the regulatory body established by Government Regulation No. 67 of 2002. BPH Migas also issues the special rights required by private companies intending to distribute or transport natural gas through pipelines. Total production of LNG in 2008 was 906.591 million MMBTU, with 706.670 million MMBTU of LNG being exported, mainly to Japan, Korea and Taiwan. Indonesia also exports natural gas via pipeline to Singapore and Malaysia from the West Natuna fields and from south Sumatra to Singapore. The fertiliser, petrochemical and power generation industries are the principal domestic consumers of natural gas in Indonesia. Indonesia recently enacted Regulation of the Minister of Energy and Mineral Resources (Minister) No. 36 of 2008, to facilitate the development of the coalbed methane (CBM) business. CBM is defined in GR35 as natural gas (hydrocarbon) with methane gas as its main component and a natural by-product of the coalification process, trapped in coal and/or coal layers. CBM can be used for electricity power generation, household and industry use. The CBM market is promising as demand for gas in the domestic market is growing. CBM operations comprise both exploration and exploitation and can only be conducted by a business entity or permanent establishment based on a cooperation contract with BP Migas. Seven of these cooperation contracts have been awarded so far.
2 What percentage of the countrys energy needs are met directly or indirectly with natural gas and LNG? What percentages of the countrys natural gas needs are met through domestic production and imported production?

Indonesia does not import natural gas. In 2008, Indonesia produced an estimated 2.41 trillion standard cubic feet of natural gas. Between 20 to 25 per cent of Indonesias energy needs are met by natural gas.
Government policy
3 What is the governments policy for the domestic natural gas sector and which bodies set it?

One of Law 22s aims is to ensure effective implementation and control of upstream and downstream activities. One of its purposes is to
Getting the Deal Through Gas Regulation 2009

94

SSEK
encourage the further development of Indonesias substantial natural gas reserves. Another is to ensure that sufficient natural gas is available to meet domestic demand. Meeting this demand is hampered at present by insufficient natural gas transmission and distribution infrastructure. At the same time, the Law aims to encourage competitive activity (eg, by the conversion of Pertamina into a commercial oil and gas company competing with private-sector companies and by opening downstream activities to private investment). Under GR35, for PSCs executed after 23 November 2001, the contractor is subject to a domestic market obligation under which the contractor can be required, by the minister, to supply up to 25 per cent of its gas production to the domestic market. Under Regulation of the Minister No. 002 of 2008, the contractors, upon commencement of commercial production, are obligated to deliver 25 per cent of their gas production to meet domestic demand at a certain price. As for use of gas for power generation, PT PLN, the state-owned electricity utility, has indicated it intends to have gas fired stations power 1,400MW of its new 10,000MW expansion.
Regulation of natural gas production
4 What is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?

indonesia
activities, they may be regulated and supervised by the government and either by BP Migas (upstream) or BPH Migas (downstream). The government issues the required business and technical licences while BP Migas supervises contractors under cooperation contracts and BPH Migas, among other things, supervises and regulates the distribution, transportation and marketing of natural gas through pipelines. BP Migas was established by Government Regulation No. 42 of 2002 (GR42) as a state-owned legal entity directly responsible to the president. BPH Migas was established by Government Regulation No. 67 of 2002 (GR67), and further implemented by Presidential Decree No. 86 of 2002 (PD86), as an independent government institution that is also directly responsible to the president. The head of BP Migas is appointed by the president upon consultation with the Peoples Representative Council (DPR) with the vice chairman and other deputies of BP Migas are appointed by the minister. The head and all members of the BPH Migas committee are appointed by the president upon prior approval of the DPR. As the exploration and exploitation of natural gas are upstream activities, the only government authorisation required to carry out such activities is a cooperation contract with BP Migas, though determination of the contract area subject to the cooperation contract and the initial development of the field must be approved by the Minister upon the recommendation of BP Migas and in consultation with the relevant provincial government. Any subsequent development must be approved by BP Migas. Executed cooperation contracts must be notified to (but are not approved by) the DPR and the Peoples Legislative Assembly. The day-to-day conduct of exploration and production activities requires the obtaining of permits and approvals from agencies within the applicable regional and provincial governments, as well as the national government. As pointed out above, mineral rights (ie, the right to mine oil and gas) remain with the government. Private companies may engage in the exploration and exploitation of oil and gas through a cooperation contract with BP Migas. Such cooperation contracts do not however transfer the mineral rights to the private entities. There are no direct regulatory restrictions on the quantity of natural gas that can be produced by contractors under cooperation contracts, but all work programs (whether for exploration, drilling or production) are subject to the prior approval of the minister based on the recommendation of BP Migas and plans of development are subject to the prior approval of BP Migas or the minister. There are several government authorities that monitor drilling activities, namely the Directorate General of Oil and Gas, the Department of Resettlement and Regional Infrastructure, the Department of Forestry, the National Land Agency and the State Ministry of Environment. Any decisions made by the regulators can be challenged and appealed by affected parties by submitting an application to the relevant state administrative court (PTUN). The grounds for challenging or appealing a regulators decision are as follows: the decision is contrary to law;  the state administrative agency or official has used its power for purposes other than those intended; or  the state administrative agency or official should not have reached the state of making or not making such decision. To appeal, the concerned party must file an application to the PTUN within 90 days from the date of the decision.

Ownership of natural gas remains with the government through production until delivery to a third-party purchaser. Exploration, development and production (ie, upstream) activities are conducted by foreign or domestic companies acting as contractors to the government under cooperation contracts with BP Migas. Existing PSCs will remain effective until expiry, except that Pertaminas rights and obligations under these PSCs will be assumed by BP Migas through an amendment to the PSC. As for productionsharing arrangements in the form of TACs, the governments interests under TACs are transferred to Pertamina and remain effective until they expire. Pertamina has entered into three cooperation contracts with BP Migas to continue exploration and exploitation in its own areas, including areas covered by TACs. Cooperation contracts grant contractors exclusive rights for up to 30 years to conduct upstream activities within a defined area under the control of BP Migas. This right does not encompass any surface rights to land, which must be acquired through negotiation with owners and occupiers. All the financial risks of operations conducted under the cooperation contract are to be borne by the contractor. Any oil and natural gas produced is shared between the contractor and the government in the proportions specified by the cooperation contract. The cooperation contract may be extended once for up to 20 years. The proceeds of sale of natural gas produced under a PSC are shared between the government and the contractor. Historically, the general after-tax split between the government and contractors for natural gas has been 70:30 after a contractor has recovered its costs in accordance with the provisions of a given PSC. Generally, the current split is between 60:40 and 70:30, and, at least theoretically, the split for any given cooperation contract is subject to negotiation. In addition to sharing production under cooperation contracts (which it, in turn, is required to share with local governments), the government also taxes profits of contractors and companies engaging in downstream business, as well as the profits of Pertamina.
5 Describe the statutory and regulatory framework and any material governmental or administrative authorisations applicable to natural gas exploration and production.

As the production, transmission, distribution and supply of natural gas can be considered as either upstream activities or downstream
www.gettingthedealthrough.com

95

indonesia
Regulation of natural gas pipeline transportation and storage
6 What is the ownership and organisational structure for pipeline transportation and storage of natural gas?

SSEK
of transportation systems and intervene in pipeline operator disputes, BPH Migas will likely play a key role in determining questions of access to natural gas transportation systems and the interconnection of, and cooperation between, pipeline systems. A holder of a licence from the minister and the special rights (the operator of gas pipeline) must allow third-party access to its natural gas transportation and storage facilities under the supervision of BPH Migas. BPH Migas has the authority to stipulate and supervise the tariff for transportation of natural gas through pipelines that will be charged by the operator of the pipeline to the users. The relevant operator must submit the proposed tariff to BPH Migas. BPH Migas will then verify and evaluate the proposed tariff. BPH Migas will discuss with the related pipeline operator and the users before determining the tariff.
10 Can customers, other natural gas suppliers or an authority require a pipeline or storage facilities operator to expand its facilities to accommodate new customers? If so, who bears the costs of interconnection or expansion?

While private companies may own and operate pipelines and storage facilities, the minister and BPH Migas will determine how those downstream activities are organised and conducted under the Law. The minister is charged with developing a master plan for national gas transmission and distribution networks (the master plan) whereas BPH Migas may conduct auctions of special rights to transport natural gas by pipeline in certain regions, based on the master plan and also stipulate what should be paid for these rights. These rights are limited to a certain pipeline network. BPH Migas may also regulate the transportation through pipelines and distribution of natural gas; stipulate the joint use of transportation, distribution and storage facilities; determine the obligations of private entities engaging in downstream activities where market mechanisms are not functioning; in remote areas, set tariffs for pipeline use; and set the price of natural gas for households and small-scale consumers. Companies engaging in transportation of natural gas through pipelines or trading in natural gas must pay a contribution or toll to BPH Migas based on the volumes of transported or sold gas. The contribution is to be used by BPH Migas for its working plan and budgetary purposes as outlined in article 48(2) of Law 22.
7 Describe the statutory and regulatory framework and any material governmental or administrative authorisations applicable to the construction, ownership, operation and interconnection of natural gas transportation pipelines and storage facilities.

A pipeline or storage facilities operator cannot be required to expand its facilities to accommodate new customers. While expansion may not be mandated directly, given that development plans for natural gas require BP Migass approval and the operation of pipelines is regulated by BPH Migas, it is conceivable that either might require a contractor or pipeline operator to develop facilities in excess of their needs. BPH Migas could then use its authority to compel such excess to be shared, especially given the Laws stated objective of ensuring sufficient natural gas is available to meet domestic demand.
11 Describe any statutory and regulatory requirements applicable to the processing of natural gas to extract liquids and to prepare it for pipeline transportation.

Generally, a specific business licence is required from the minister, while to transport natural gas through pipelines the authorised entity must also obtain special rights for such pipeline from BPH Migas. Construction and operation of these facilities will be subject to the regional, provincial and national regulations generally applicable to the construction and operation of industrial facilities. Uncertainty exists concerning the authority of BPH Migas over pipelines that contractors require to transport natural gas to delivery points under natural gas sales contracts. See also question 5.
8 How does a company obtain the land rights to construct a natural gas transportation or storage facility?

To date, there is no specific regulation covering the extraction of natural gas liquids, which may be conducted either within or outside the framework of a cooperation contract. If conducted outside such a framework, it would be viewed as a downstream processing activity for which the processing entity must obtain a processing business licence from the minister.
12 Describe the contractual regime for transportation and storage.

Generally speaking, land rights will be obtained by negotiating with owners and occupiers in accordance with prevailing laws. To the extent that these facilities are used for upstream activities within the framework of a cooperation contract, the contractor will have to comply with Law 22, GR35 and the relevant implementing regulations to be issued thereunder. Contractors are responsible for the payment of these rights and the land that is purchased for the facility becomes the property of the state, title to which will be held in the name of BP Migas, while land that is leased for the facility will be leased in the name of the contractor. Title to land purchased for facilities used for downstream activities outside of a cooperation contract may be held in the name of the business entity engaging in the transportation or storage activity.
9 How is access to the natural gas transportation system and storage facilities arranged? How are tolls and tariffs established?

In general, and subject to BPH Migass authority to set the tariff for transportation of natural gas through pipelines, parties may agree on the terms of the agreements for the transportation and storage of natural gas. A contractual regime is in its early stages of evolution. For the transportation of natural gas, the applicable regulation provides that the agreement between the operator and the user of gas pipelines regarding the joint use of the natural gas transportation facility must be set forth in a gas transportation agreement. BPH Migas must approve the tariff to be stipulated in the gas transportation agreement. The regulation also requires the operator of the gas pipeline to prepare an access arrangement outlining the terms and conditions for the joint use of the pipelines owned by the operator. This must also be approved by BPH Migas. The access arrangement will include management guidelines, and technical and legal rules. The gas transportation agreement must be in accordance with the access arrangement.

Under Law 22, as stated above, the minister will establish a master plan and, given its general authority over transmission and distribution of natural gas, and its specific authority to determine joint use

96

Getting the Deal Through Gas Regulation 2009

SSEK
Regulation of natural gas distribution
13 What is the ownership and organisational structure for the local distribution of natural gas (transportation from pipeline to consumer)?

indonesia
Regulation of natural gas sales and trading
18 What is the ownership and organisational structure for the supply and trading of natural gas?

To date, the local distribution of natural gas has been extremely limited in Indonesia, and there is as yet no developed regulatory system for natural gas distribution. The distribution of natural gas will be a downstream activity subject to regulation by BPH Migas (see question 6).
14 Describe the statutory and regulatory structure and governmental or administrative authorisations required to operate a distribution network. To what extent are gas distribution utilities subject to public service obligations?

The ownership of natural gas remains with the government up until the point of delivery or sale, but the structure for supplying and trading of natural gas will enter a new era. Direct negotiation of gas sales contracts by sellers and buyers and the trading of natural gas have now been made possible by the enactment of Law 22. Under the law and the form of cooperation contract the seller of the gas produced under a cooperation contract is appointed by BP Migas. To our knowledge, to date the appointed seller has been the operator of the cooperation contract.
19 To what extent are natural gas supply and trading activities subject to governmental oversight?

See questions 5 and 7, which are applicable to distribution as well as transportation pipeline networks.
15 How is access to the natural gas distribution grid organised? Describe any regulation of the prices for distribution services. In which circumstances can a rate or term of service be changed?

As stated in question 9, BPH Migas may control access to the natural gas grid, subject to the master plan and will also determine tariffs for pipeline use and the price of natural gas for households and smallscale consumers. BPH Migas may adjust tariffs if there is a change in the cost of the pipeline, new investments are made or if there is a change in the number of users. The tariff can also be changed if there is an amendment to the gas transportation agreement affecting the amount of the tariff. Sellers of natural gas to households and small-scale consumers must submit natural gas price proposal to BPH Migas, including: a proposal for the price of the natural gas;  an economic analysis relating to the stipulation of this natural gas price;  the numbers of households and small-scale consumers as well as marketing plan; the volume of sales; and a copy of the gas-sale agreement. Any change in this information could be used as the basis for a price adjustment. In addition, the minister has issued a regulation stipulating the selling price of natural gas through pipelines for consumers of PT Perusahaan Gas Negara (Persero) Tbk (PGN) other than households and small-scale consumers.
16 May the regulator require a distributor to expand its system to accommodate new customers? May the regulator require the distributor to limit service to existing customers so that new customers can be served?

To engage in trading, an entity must obtain a trading business licence from the minister, which will cover only a certain trading area and, as stated above, the price of natural gas for households and small-scale customers will be determined by BPH Migas. The trading business licence granted will be either a wholesale business licence or a limited trading licence. A wholesale business licence entitles the licensee to serve large customers. These licensees must have a guaranteed supply of product from domestic or overseas sources and they must maintain minimum operational reserves, as stipulated by BPH Migas. They must also own or control their own storage facilities and infrastructure. Further oversight might evolve given Law 22s purpose of ensuring an adequate domestic supply and its requirement that contractors make up to 25 per cent of their gas production available to the domestic market.
20 How are physical and financial trades of natural gas typically completed?

Most domestic natural gas sales are conducted directly between the operator of a cooperation contract and the end-user pursuant to a gas sale and purchase agreement. If necessary, a pipeline operator will sign a gas transportation agreement with both the seller and the buyer. Alternatively, gas can be sold to a gas distributor or trader who will sell the gas on to the end-user. In these cases, either the trader or the end-user will construct the facilities for the physical delivery of the gas to the end-user.
21 Must wholesale and retail buyers of natural gas purchase a bundled product from a single provider? If not, describe the range of services and products that customers can procure from competing providers.

See question 10.

17 Describe the contractual regime in relation to natural gas distribution.

At present, no. Going forward, this will depend on how BPH Migas regulates distribution and trading activities and whether the government will issue multiple trading and distribution licences for a given area. Bundling of several products is possible since one entity may hold both a distribution and a trading licence.
Regulation of LNG
22 What is the ownership and organisational structure for LNG, including liquefaction and export facilities and receiving and regasification facilities?

See question 12.

This depends on how the LNG business is carried out. If, under the applicable contractual arrangements, the natural gas is to be sold as LNG, then the owner of the LNG will be the government until the

www.gettingthedealthrough.com

97

indonesia

SSEK

Update and trends

Regulations issued over the last five years have substantially changed the regulatory framework for Indonesias oil and gas sectors. Pertaminas dominant role in downstream activities has ended, and private entities are now permitted to carry out downstream gas activities based on licences issued by the Indonesian government under the supervision of BPH Migas. Although downstream natural gas activities have been liberalised, there are a number of issues and uncertainties that will require resolution, either by new policies or implementing regulations. Indonesia recently enacted a regulation on the development of coalbed methane (CBM) as an alternative gas energy resource and, currently, seven cooperation contracts for CBM have been executed. In addition, the terms of new LNG sales contracts and the implementation of existing ones are being affected by the current economic downturn.

point of delivery or sale, and therefore facilities would be developed within the framework of the cooperation contract. If the natural gas to be liquefied has been purchased by a private party, then the LNG and related processing and other facilities would be owned by the purchaser. Currently, Indonesia has two main LNG export facilities, the Arun and Bontang facilities. The structure for each of these projects is generally as follows (although BP Migas may have assumed several of the roles of Pertamina described below):  Pertamina has entered into sales agreements with non-Indonesian buyers and, to support these agreements, it has entered into supply agreements with contractors to ensure that it holds committed gas reserves sufficient to meet its obligations under the sales agreements.  Pertamina, on behalf of the government, owns the LNG to the point of export and all facilities for the LNG plant. Pertamina contracts with the shipping companies to transport the LNG to the end buyers, and with a management company to manage and operate the LNG plant. All costs for processing dry gas into LNG, including the costs of the management company, are reimbursed at cost. The sales revenue recognised by the contractor is recognised on a net-back basis. The sales proceeds are used first to repay any loans and then to pay all costs of processing and transporting the LNG to the buyers. The contractor is entitled to the remaining proceeds after these costs have been paid in accordance with its PSC. Two new LNG projects are under development: the Tangguh LNG project in Papua, which is scheduled to begin exporting LNG in 2009, and an LNG facility in Sulawesi to be supplied by the Donggi and Senoro fields.
23 Describe the regulatory framework and any material governmental or administrative authorisations required to build and operate LNG facilities.

of the project, its financing could also be subject to government approval. See question 5 on the authority of BP Migas.
24 Describe any regulation of the prices and terms of service in the LNG sector.

There are no regulations concerning the determination of the prices and terms of service in the LNG sector. The price of LNG will vary depending on the contractual arrangements between the sellers and buyers. If the LNG is sold within the framework of a cooperation contract, its sale and pricing will be subject to the provisions of the cooperation contract and the regulations of the government and BP Migas applicable to the sale of natural gas.
Mergers and competition
25 Which government body may prevent or punish anti-competitive or manipulative practices in the natural gas sector?

While BPH Migas can impose penalties on business entities engaged in the natural gas sector, the Commission for the Supervision of Business Competition (Komisi Pengawas Persaingan Usaha, KPPU) is responsible for implementing Indonesias Antimonopoly Law. The KPPU may issue a decision that certain agreements or conduct in the relevant market (including the natural gas market) are anti-competitive and therefore in violation of the Antimonopoly Law. The decisions of the KPPU can be appealed at the district courts and then to the Supreme Court.
26 What substantive standards does that government body apply to determine whether conduct is anti-competitive or manipulative?

If conducted within the framework of a cooperation contract, the chief approval required will be the approval of the development plan by either the minister or BP Migas. If conducted outside the framework of a cooperation contract, the processing entity will need one or more downstream business licences depending on the scope of its operation. Technically speaking, presidential approval is required to establish and operate private LNG facilities, as is the approval of Indonesias Capital Investment Coordinating Board (BKPM) if the project is to be undertaken by a processing company with foreign ownership. In addition to these approvals, other technical, safety and environmental licences must be obtained from the Department of Energy and Mineral Resources, the other departments having jurisdiction over major construction projects, as well as from the relevant regional and provincial governments. Depending on the structure

The general prohibitions set forth in the Antimonopoly Law will be applied. These prohibitions can be categorised as follows: prohibited agreements, prohibited conduct, and abuse of a dominant position in a given market sector.
27 What authority does the government body have to preclude or remedy anti-competitive or manipulative practices?

Should the KPPU determine that a violation of the Antimonopoly Law has occurred, it may, inter alia, order the termination of the prohibited agreement or cessation of the prohibited conduct or abuse of dominant position. Though administrative sanctions are within the KPPUs authority, if the case is appealed in a district court, the court may, among other penalties, impose criminal sanctions, revoke a companys business licence, or require the termination of actions that cause damage to other parties.

98

Getting the Deal Through Gas Regulation 2009

SSEK
28 Does any government body have authority to approve or disapprove mergers or other changes in control over businesses in the sector or acquisition of production, transportation or distribution assets?

indonesia
merger or an acquisition must be notified to KPPU as well as the standard form for making the notification.
29 In the purchase of a regulated gas utility, are there any restrictions on the inclusion of the purchase cost in the price of services?

The transfer of shares in any company with foreign ownership requires the approval of the BKPM. This approval is usually granted routinely, but for the natural gas sector, the BKPM may require a recommendation from the Directorate General of Oil and Gas, BP Migas or BPH Migas. Once any required recommendation letter is obtained, the BKPMs approval should be issued within two weeks. For the transfer of assets, generally speaking no approval would be required, although the purchasing company would have to obtain all requisite licences before engaging in business and the selling company may have to obtain approval to transfer assets it had imported with tax or custom facilities. Under GR35, any direct transfer of a contractors participating interest in a PSC must be approved by the minister based on the recommendation of BP Migas. GR35 is inconsistent concerning PSCs that already existed when the Law was enacted, and cooperation contracts entered into since, because, under such contracts, transfers to affiliates only require notice to BP Migas whereas transfers to nonaffiliates require both BP Migas and government approval. However, beginning in 2007, versions of PSCs have stipulated that transfers to affiliates, and share transfers resulting in a change of control in a party to a PSC, require the prior written consent of BP Migas and the minister. GR35 also imposes a new requirement that if all or a portion of the rights of the contractor are transferred to a non-affiliate, or to another company that is not a partner in the same working area, the minister can request that the contractor offer the interest to a national company. There is no corresponding provision in any PSC or cooperation contract of which we are aware and, given that the Law provides that rights under existing PSCs are not to be affected by the Law, it is uncertain whether the new transfer requirements of GR35 can be applied to a transfer of interests in an existing PSC. For mergers, acquisitions and consolidations, while the Antimonopoly Law does not give the KPPU the authority to pre-approve such transactions, all mergers, acquisitions, and consolidations with assets and sales value exceeding certain thresholds must be reported to the KPPU at the latest 30 days after closing. Although no regulation has been adopted to implement this notification requirement and because the Antimonopoly Law is silent on the issue, KPPU has drafted a guideline addressing the notification requirements. The draft guideline contains, among other things, threshold by which a

As this issue relates to the tariff for the distribution of natural gas, it is an issue to be determined by BPH Migas.
30 Are there any restrictions on the acquisition of shares in gas utilities? Do any corporate governance regulations or rules regarding the transfer of assets apply to gas utilities?

With the enactment of Law 22, other than the general rules applicable to the acquisition of shares in private and state-owned entities or their assets, and subject to question 31, there are no restrictions on the acquisition of shares in, or the assets of, gas utilities. As to the transfer of assets, see question 28.
International
31 Are there any special requirements or limitations on foreign companies acquiring interests in the natural gas sector?

Foreign companies may not directly engage in downstream activities, although they may establish subsidiaries to engage in these activities, the establishment of which requires the approval of the BKPM and the obtaining of the requisite downstream business licence. If the acquisition is made by acquiring an interest in an existing Indonesian company, then it would require the approval of the BKPM. The conditions for obtaining the BKPMs approval of either the establishment or acquisition of an Indonesian company will depend on the regulations and policies then in effect. BKPMs current internal guidelines seem to indicate that it will permit maximum foreign ownership of 100 per cent in a company engaged in downstream gas business activities in the natural gas sector. Furthermore, there are no special requirements or limitations imposed on foreign companies. Law 22, however, restricts any company from engaging in both upstream and downstream activities at the same time and provides that a company (whether foreign or domestic) may hold an interest in only one cooperation contract. See also question 28.

Michael D Twomey Fitriana Mahiddin 14th Floor Mayapada Tower Jl. Jend. Sudirman Kav.28 Jakarta 12920 Indonesia

michaeltwomey@ssek.com fitrianamahiddin@ssek.com Tel: +62 21 521 2038 / +62 21 521 2130 Fax: +62 21 521 2039 www.ssek.com

www.gettingthedealthrough.com

99

indonesia
32 To what extent is regulatory policy affected by treaties or other multinational agreements?

SSEK
Transactions between affiliates
34 What restrictions exist on transactions between a natural gas utility and its affiliates?

The most recognised treaties that would affect the regulatory policy are those tax treaties to which Indonesia is a party. Multinational agreements may also affect the regulatory policy where these agreements have been ratified by the Indonesian government.
33 What rules apply to cross-border sales or deliveries of natural gas?

Law 22 does not restrict transactions between affiliates of a natural gas utility. General restrictions under the Antimonopoly Law and Indonesian tax laws (in respect of transfer pricing) would apply.
35 Who enforces the affiliate restrictions and what are the sanctions for non-compliance?

There are no specific laws concerning cross-border sales of natural gas or LNG.

The KPPU and the Indonesian tax authorities enforce these restrictions. Sanctions imposed under the Antimonopoly Law are discussed in question 26. The tax authorities have the right to adjust to market values those prices it deems non-market in any transaction between affiliates.

100

Getting the Deal Through Gas Regulation 2009

Annual volumes published on:

Air Transport Anti-Corruption Regulation Arbitration Banking Regulation Cartel Regulation Construction Copyright Corporate Governance Dispute Resolution Dominance e-Commerce Electricity Regulation Environment Franchise Gas Regulation Insurance & Reinsurance Intellectual Property & Antitrust Labour & Employment Licensing Merger Control Mergers & Acquisitions Mining Oil Regulation Patents Pharmaceutical Antitrust Private Antitrust Litigation Private Equity Product Liability Project Finance Public Procurement Real Estate Restructuring & Insolvency Securities Finance Shipping Tax on Inbound Investment Telecoms and Media Trademarks Vertical Agreements

For more information or to purchase books, please visit: www.GettingTheDealThrough.com

Strategic research partners of the ABA International section

The Official Research Partner of the International Bar Association

Gas Regulation 2009 ISSN 1740-7826