Indonesia: BPMIGAS Fixed? - reconstitution in near-identical form

Introduction

Last week's dissolution of Indonesia's upstream oil and gas agency, BPMIGAS, by the Constitutional Court has been followed by its reconstitution in near-identical form. The only apparent changes are that it has a new name (SKSPMIGAS), and is now under the authority of the Ministry of Energy and Mineral Resources (MEMR). This display of continuity is both marked and deliberate, but what does it mean for the upstream oil and gas business in Indonesia going forward?

SKSPMIGAS

With surprising swiftness, the Government of Indonesia responded to the Constitutional Court ruling by issuing a Presidential Directive and Ministerial Regulations establishing SKSPMIGAS as the successor upstream oil and gas regulator.

SKSPMIGAS – whose full name translates as Interim Working Unit for Upstream Oil and Gas Business Activities – operates out of the BPMIGAS offices, with the same personnel (bar the removal of Raden Priyono as its director) undertaking the same tasks they did last week. In constituting SKSPMIGAS, the President and MEMR have assigned to it all of its predecessor's powers and responsibilities, and have stated that extant Production Sharing Contracts (PSCs) will remain in force until their natural expiry.

With the new branding has come a directive from the Minister urging greater humility. In a telling insight, SKSPMIGAS executives have been instructed to trade in their flashy cars for a less conspicuous Toyota Kijang.

Analysis

Beyond the public image, however, significant questions remain. One concerns the status of the regulations issued by BPMIGAS. These regulations are the backbone of the operation of the PSC regime, and the Court's finding that BPMIGAS was at all times acting unconstitutionally throws their validity into doubt. While MEMR Minister Jero Wacik has written to PSC holders affirming the validity of such regulations, the legal effect of that letter is open to challenge.

More importantly, the Court's decision that BPMIGAS was unconstitutional was based only in small measure on the agency's independent nature, in that it was operating outside any Ministry and reporting directly to the President. Regardless of the agency's place in the State organisational structure, it was BPMIGAS's actions that were found to be the major reason for its dissolution. Specifically, the court found fault in the agency's ceding of day-to-day administration of oil exploration and exploitation work, in its issuing of PSCs to companies that were not state-owned, and in the detail of the terms of the PSCs themselves. In this context, the rebranding and repositioning of the regulator does not address many of the fundamental failings impugned by the Court.

Indeed, voices within the camp that brought the original complaint before the Constitutional Court have expressed dismay at the apparent sidestepping of its ruling by the Government and have threatened a further legal challenge to this interim arrangement. Nevertheless, the Court's chairman has expressed satisfaction with the Government's initial response and the establishment of SKSPMIGAS, and so the likelihood of such challenge being upheld must be diminished.

Implications

With the establishment of SKSPMIGAS, a temporary solution has been found in a classically Indonesian fashion – a solution that is likely to endure for years despite the 'interim' label affixed to the new agency's name. With presidential elections due in 2014, it seems unlikely that a permanent regime and a new oil and gas law will be adopted in the coming months.

While we cannot expect certainty on the fundamental constitutional issues any time soon, a few measures should be taken in the coming weeks to alleviate investors' concerns and remove ambiguities where legal realities have not kept pace with political will. One would be the wholesale adoption or ratification of BPMIGAS policies, regulations and procedures through appropriate regulation rather than circular letter. Another would be resumption in the issuance of new PSCs, authorisations for expenditures, and other day-to-day aspects of the regulator's work which have in the past week been delayed. In addition, the approach taken by SKSPMIGAS towards PSC renewals will be an important barometer of good will.

But above all, the degree to which the Government is prepared to guarantee to PSC holders that administrative actions of SKSPMIGAS will not be overturned, or that the PSC holders will not suffer losses as a result of any challenge, will be the key to rebuilding confidence in Indonesia's oil and gas sector.

While it now seems clear that past commitments of BPMIGAS will be honoured indefinitely, the same cannot yet be said of SKSPMIGAS. The Government has taken care to signal that it is business as usual, and the foundations are in place to make that so, but more needs to be seen and done before investors will respond in kind.

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