The BP Migas Tsunami

Some bad news and good news for the Indonesian oil and gas industry. After the unexpected ruling from the Constitutional Court (Mahkamah Konstitusi – MK) to dissolve BP Migas – the state’s regulating body for upstream oil and gas and contracts – many were left in limbo with questions regarding the status of the existing contracts and of the future of the industry as a whole. The good news is, perhaps this is could be an opportunity for governance reform in the industry. Oh and, perhaps good news for lawyers as well as their billable hours may increase.

The crux of the matter lies in Article 33 of the 1945 Constitution, in which the Court believes that with the structure of BP Migas after the 2001 oil and gas law, the state is unable to utilize its natural resouces to maximize its benefits for the welfare of the people. The Court argues that BP Migas is unconstitutional because BP Migas prevented the State from exercising directly its full authority over its oil and gas resources and with the signing of the Production Sharing Contract (PSC) the State lost its freedom to make regulations or policies contrary to the contents of the PSC.

In a way I believe the Court had a point, because BP Migas wasn’t the only regulator as contractors would still need to liaise with the Upstream Oil and Gas Directorate under the Ministry of Energy and Mineral Resources (“MEMR”). It’s cumbersome for contractors at times because you had to go to both BP Migas and MEMR anyways. Calling BP Migas as a regulating body would not be entirely correct, in my opinion. They are the executing legal entity to enter into PSCs with oil and gas contractors (and they negotiate on behalf of the government to agree on the contract’s terms).

Now, with the “tsunami” ruling that swept everybody off their feet, the government needed to act quickly to ensure that in the aftermath of the tsunami, there’s a continuity in the oil and gas industry. They issued Presidential Regulation No. 95/2012, stating that the responsibilities of BP Migas is now transferred to a temporary working unit (Upstream Oil and Gas Business Activities Implementation Unit – UPKUHM) under the direct supervision of the Minister of EMR, and all contracts will remain in effect until they expire or until such other dates may be agreed.

Thus, as Prof. Hikmahanto argued in his Kompas op-ed (do note that he was also consulted by the government during the court process), with the MK ruling, the government is actually exposed to the liabilities of the contract. He cautioned, with this arrangement in effect, the government is in hostage of potential legal problems and this beats the purpose of the “maximizing benefits for the welfare of the people” argument.

The 2001 oil and gas law is currently being revised, but with this ruling, the ideological battle is locked and the law must be revised accordingly. If I can draw on Prof. Hikmahanto’s op-ed correctly, there would be at least two options to move forward: A) nominate a state-owned enterprise to act on behalf of the government so that it can exercise its petroleum resources – i.e. Pertamina like the pre-Reformasi era; or B) a total overhaul of the oil and gas law and apply the mining licenses regime into the oil and gas industry.

Costs and benefits are a bit murky at this point of time, but we know the precedent in option A and how difficult it is in implementing option B. Pertamina isn’t exactly “clean” from corruption and that is what prompted the oil and gas law in 2001 (separation between the regulator and the operator). Meanwhile, knowing the track record of how Laws in Indonesia are legislated together with DPR, the longer the oil and gas law revision will take, the longer that the government will be exposed of the liabilities of the contracts. Not to mention whether it is truly practical to implement a licensing regime in the oil and gas industry.

Funny thing is, the group of proponents of MK’s ruling are the same proponents who proposed the 2001 oil and gas law in the first place – Islamic groups such as Muhammadiyah and Islamic political parties PAN, PKB, PPP, PK, PBB – who were dominant during Reformasi and made Abdurrahman Wahid the President (read Lin Che Wei’s analysis here).

One should be curious to understand why they would repeal what they proposed earlier – if not for dubious political motives and not for “the welfare of the people”.

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1 thought on “The BP Migas Tsunami”

  1. As much as I understand how tedious it might be for oil and gas contractors to coordinate and negotiate both with MEMR and BPMIGAS, I feel compelled to explain and clarify that there is actually a difference between the roles and responsibilities of these regulatory bodies. Although I don’t understand semantics much – as you pointed out that calling BPMIGAS a regulatory body might not be entirely correct.

    The MEMR is responsible to create and implement Indonesia’s energy policy, ensuring that business activities are in accordance with the relevant laws and regulations, and awarding contracts. The MEMR, where in this case is under the Directorate General of Oil and Gas (Dirjen MIGAS), is responsible for:
    1. the lifting calculation formula and its division between the local and central government;
    2. the policy on the gradual reduction of the fuel subsidy;
    3. the offering of new exploration and production blocks, etc.

    BPMIGAS, which is a product of Oil and Gas Law no.22/2001, is a non-profit state owned legal entity which controls upstream activities and manages oil and gas contractors on behalf of the government through PSCs. The head of BPMIGAS reports directly to the President and coordinates with the MEMR. Some of the roles and responsibilities are as following:
    1. providing advice to the MEMR with regard to the preparation and offering of work areas and PSCs;
    2. acting as a party to PSCs and reporting to the MEMR on the implementation of PSCs;
    3. assessing “field development plans” and submitting that evaluation to the MEMR for its approval;
    4. approving work plans and budgets;
    5. appointing sellers of the State portion of petroleum and/or natural gas to the Government’s best advantage, etc.

    Regarding the debacle of BPMIGAS’ dissolution, I’m also curious and puzzled by the Constitutional Court’s decision. Why only now have they unanimously agreed that BPMIGAS is against the Constitution? After 10 years of existence, BPMIGAS has done its utmost best to deliver for the nation as pointed out by this article: http://www.republika.co.id/berita/nasional/umum/12/11/14/mdh7p0-buku-putih-bp-migas-sanggahan-untuk-publik. But of course, I’m biased here.

    Irrespective of how BPMIGAS (or in this case, UPKUH MIGAS) is going to turn out in the future, all I can say right now is that we need a visionary law that would ensure investor confidence, but at the same time ensure energy sovereignty and self-reliance for the utmost benefit of the people of Indonesia, rather than just dealing with administrative works due to the aftermath of the dissolution.

    Anyways, it’s a very well written article. Salam kenal.

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