Oil, Gas and the Transition to Renewables 2024 Comparisons

Law No 22 of 2021 regarding Oil and Gas (the “Oil and Gas Law”), as last amended by Law No 6 of 2023 regarding the Stipulation of Government Regulation in lieu of Law No 2 of 2022 regarding Job Creation (the “Job Creation Law”), stipulates that oil and gas resources in Indonesia are national assets controlled by the State. The Oil and Gas Law confers the exclusive right to and authority over oil and gas exploration and exploitation in Indonesia upon the Indonesian government.

Any private company wishing to engage in the exploitation and exploration of oil and gas must enter into co-operation contracts with the Indonesian government through the Special Task Force for Upstream Oil and Gas Business Activities (Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi, or “SKK Migas”). These co-operation contracts typically take the form of production sharing contracts (PSCs).

The oil and gas sector in Indonesia is divided into the upstream and downstream sectors. Both sectors are generally governed by the Ministry of Energy and Mineral Resources (MEMR).

Upstream Regulatory Bodies

The upstream sector is governed and supervised by SKK Migas, which was established through Presidential Regulation No 9 of 2013 regarding the Management of Upstream Oil and Gas Activities, as amended by Presidential Regulation No 36 of 2018.

Generally, SKK Migas is responsible for overseeing the management of upstream oil and gas activities, to the extent this management aligns with the relevant PSC. The head of SKK Migas reports directly to the President of Indonesia. In fulfilling its duties, SKK Migas is supervised by a committee comprising the Minister of Energy and Mineral Resources, a deputy Minister of Energy and Mineral Resources, a deputy Minister of Finance, and the head of the Capital Investment Co-ordinating Board.

Downstream Regulatory Bodies

The downstream sector is governed and supervised by the Downstream Oil and Gas Regulatory Agency (Badan Pengatur Hilir Minyak dan Gas Bumi, or “BPH Migas”). BPH Migas was established through Presidential Decree No 86 of 2002 regarding the Establishment of Regulatory Agency for the Supply and Distribution of Oil Fuel and Business Activities for Transporting Natural Gas via Pipelines, as well as Government Regulation No 67 of 2002 regarding Regulatory Agency for the Supply and Distribution of Oil Fuel and Business Activities for Transporting Natural Gas via Pipelines, as amended by Government Regulation No 45 of 2012.

BPH Migas is responsible for the supervision of the implementation of the supply and distribution of oil fuel and the transportation of natural gas through pipes, ensuring the orderly arrangement, availability and distribution of fuel oil throughout Indonesia. It is also responsible for increasing the use of natural gas domestically.

Indonesia’s state-owned enterprise (Badan Usaha Milik Negara, or BUMN) in the oil and gas sector is PT Pertamina (Persero) (“Pertamina”), which was formed through Government Regulation No 31 of 2003 regarding the Conversion of the State Oil and Gas Mining Company (Pertamina).

Historically, Pertamina functioned both as a regulator and a business entity within Indonesia’s oil and gas sector. However, this regulatory role was terminated with the enactment of the Oil and Gas Law, which transferred regulatory authority to the Indonesian government.

The Indonesian government designated Pertamina as the holding company for BUMN in the oil and gas sector, with six sub-holdings, through BUMN Decree No 198/MBU/06/2020 regarding the Dismissal, Change in Job Nomenclature, Transfer of Duties, and Appointment of Members of the Board of Directors of Pertamina and Pertamina Decree No Kpts-18/C00000/2020-S0 regarding the Basic Organisational Structure of Pertamina. Pertamina currently has the following six sub-holdings:

• upstream sub-holding (PT Pertamina Hulu Energi);
• refining and petrochemical sub-holding (PT Kilang Pertamina Internasional);
• commercial and trading sub-holding (PT Pertamina Patra Niaga);
• gas sub-holding (PT Perusahaan Gas Negara Tbk);
• power and new renewable energy (NRE) sub-holding (PT Pertamina Power Indonesia); and
• integrated marine logistics sub-holding (PT Pertamina International Shipping).

The reorganisation took place after the consolidation of state-owned enterprises in the oil and gas sector – namely, PT Perusahaan Gas Negara Tbk (PGN) and PT Pertamina Gas. In April 2018, following the issuance of Government Regulation No 6 of 2018 regarding Increase of the Capital Subscription of the State in the Share Capital of Pertamina, and the designation of Pertamina as the state-owned holding company for oil and gas, the Indonesian government transferred its ownership in PGN to Pertamina. In December 2018, PGN acquired 51% of PT Pertamina Gas shares from Pertamina.

In the upstream sector, PT Pertamina Hulu Energi (PHE) and its subsidiaries act as PSC contractors for SKK Migas. In Indonesia, PHE currently operates 27 working areas and is a non-operator in 13 areas.

In the refinery and petrochemical sector, PT Kilang Pertamina Internasional operates six major refinery units – Refinery Unit (RU) II Dumai, RU III Plaju, RU IV Cilacap, RU V Balikpapan, RU VI Balongan, and RU VII Kasim – with a total installed processing capacity of 1,031 mbopd (or approximately 90% of the existing processing capacity in Indonesia).

In the downstream sector, PGN owns and operates natural gas pipelines in excess of more than 10,000 km in total length, covering 96% of the national natural gas pipeline network.

The primary regulation governing the oil and gas sector in Indonesia is the Oil and Gas Law. The State maintains ownership of mineral rights across Indonesian territory and the Indonesian government possesses the authority to regulate mining activities. The oil and gas sector in Indonesia consists of upstream and downstream (which also captures midstream) activities, both of which are regulated separately.

Upstream Sector

Upstream activities in Indonesia, which include exploration and exploitation, are mainly governed by Government Regulation No 35 of 2004 regarding Upstream Oil and Gas Business Activities (“GR 35/2004”), as last amended by Government Regulation No 55 of 2009. The upstream sector is regulated by SKK Migas. Given Indonesia’s unique archipelagic composition, upstream oil activities can occur both onshore and offshore. The MEMR determines work areas for these operations after consulting with and receiving recommendations from the respective regional governments.

Under the Oil and Gas Law, the Indonesian government has exclusive rights to oil and gas exploration and exploitation, requiring all private companies that wish to explore and exploit such resources to enter into PSCs with the government through SKK Migas. Currently, there are two types of PSCs used in Indonesian upstream oil and gas activities. Prior to 2017, all PSCs operated on a cost-recovery basis, allowing PSC contractors to recover their operating costs from oil and gas production. However, in January 2017, the Indonesian government introduced Gross Split PSCs, which eliminated cost-recovery arrangements. Under the Gross Split PSC, PSC contractors receive a higher production split compared to the cost-recovery model, but they must cover all their costs independently.

In 2020, the MEMR reintroduced the cost-recovery mechanism through MEMR Regulation No 8 of 2017 regarding Gross Split Production Contracts, as last amended by MEMR Regulation No 12 of 2020 regarding the Third Amendment to MEMR Regulation No 8 of 2017 regarding Gross Split Production Sharing Contracts (“MEMR Reg 12/2020”), permitting new or extended PSCs to utilise this model. The regulation mandates that the MEMR will determine whether a PSC will follow a gross split format, a cost-recovery format, or another type of co-operation agreement.

Downstream Sector

Downstream activities, including processing, transportation, storage, and trading, are regulated by Government Regulation No 36 of 2004 regarding Downstream Oil and Natural Gas Business Activities (“GR 36/2004”), as amended by Government Regulation No 30 of 2009. These operations are overseen by the MEMR and BPH Migas.

The Indonesian government has outlined a national energy policy through Government Regulation No 79 of 2014 regarding the National Energy Policy, to be implemented from 2014 to 2050. This policy emphasises ensuring energy availability for national needs, prioritising energy development, utilising national energy resources, and maintaining national energy reserves. The target for primary energy availability, including natural oil and gas, is approximately 400 million tonnes of oil equivalent (mtoe) by 2025 and around 1,000 mtoe by 2050.

The President of Indonesia also has announced a list of national strategic projects under Presidential Regulation No 3 of 2016 regarding the Acceleration of the Implementation of National Strategic Projects, most recently amended by Presidential Regulation No 109 of 2020. These projects include various downstream oil and gas projects, including the expansion of refineries in Bontang and Tuban, upgrades to existing facilities, and the construction of fuel oil and liquefied petroleum gas tank storage in eastern Indonesia.

Ongoing Updates

The Indonesian House of Representatives is discussing a draft oil and gas law to reform the existing oil and gas regulatory framework. Proposed changes include the creation of an Oil and Gas Special Executive Agency (Badan Usaha Khusus Minyak dan Gas Bumi, or “BUK Migas”) to replace SKK Migas and increase the privileges of Pertamina in the acquisition of oil and gas working areas, as well as changes to contracts and the licensing system in the upstream sector. The Indonesian House of Representatives has been drafting the legislation since 2019, however, due to the COVID-19 pandemic, progress slowed and the bill was subsequently deprioritised in 2021.

Under the Oil and Gas Law and GR 35/2004, upstream oil and gas activities in Indonesia can be conducted by either a business entity or a permanent establishment (PE). A business entity must be a legal entity established, operating and domiciled in Indonesia. This includes state-owned enterprises, regionally owned enterprises, co-operatives, small-scale businesses, and private limited liability companies. A limited liability company may take the form of a wholly Indonesian-owned company (Penanaman Modal Dalam Negeri, or PMDN) or a partially or wholly foreign-owned company (Penanaman Modal Asing, or PMA).

Conversely, a PE is a business entity established outside Indonesia that conducts activities within Indonesia and is subject to its laws and regulations. An offshore subsidiary holding a participating interest in a PSC is considered a PE.

Private entities obtain the authorisation to explore and extract oil and gas resources by entering into a PSC with the Indonesian government (through SKK Migas), thus acting as a contractor to SKK Migas. Each entity is limited to holding one PSC, usually awarded for 30 years (typically consisting of ten years of exploration, followed by 20 years of exploitation).

Offering of Work Areas

Upstream business activities take place in designated regions known as “work areas”. These areas are established following approval from the MEMR in consultation with SKK Migas and relevant local governmental authorities. Work areas can be allocated through either a tender process or a direct offer as regulated under MEMR Regulation No 35 of 2021 regarding the Procedure for Allocating and Offering Oil and Gas Working Areas (“MEMR Reg 35/2021”).

New working areas are mostly awarded through a tender process. To participate in a tender process, the bidder must purchase the bid documents for the work areas to register as a tender participant, acquire government information on the work area, and submit and complete bid documents to the MEMR by the tender closing date.

The direct offer process enables a party to propose a working area for inclusion in a tender process, with or without prior joint study. If a joint study is conducted, the proposing party earns the right to match the highest bidder in the subsequent tender for that specific contract area. Direct offers without a joint study are restricted to areas previously tendered but left without a successful bidder.

Business Licensing

Under Government Regulation No 5 of 2021 regarding the Organisation of Risk-Based Business Licensing (“GR 5/2021”), which is the government regulation governing business licensing in Indonesia, upstream oil and gas activities may be implemented by business entities or PEs through the obtainment of a PSC and a Business Identification Number (Nomor Induk Berusaha, or NIB) through the Online Single Submission (OSS) system.

Cost-Recovery PSC

In the conventional production sharing scheme applied in Indonesia, production output is generally subject to requirements such as first tranche petroleum (FTP), cost recovery, and applicable taxes, and the remaining portion is shared between the PSC contractor and the Indonesian government according to the proportions specified in the Cost-Recovery PSC. The PSC contractor bears all financial risks associated with operations under the PSC. Upon advancing to the exploitation stage, the contractor becomes eligible for cost recovery.

Gross Split PSC

In early 2017, the Indonesian government introduced the gross split production sharing scheme through MEMR Reg 12/2020. This scheme divides production output grossly, without deductions for FTP, cost recovery, or taxes, based on predetermined sharing proportions at the start of field development. These proportions may vary depending on specific variables and progressive factors (“Gross Split PSC”).

Under MEMR Reg 12/2020, existing PSCs remain valid until their expiry and can potentially transition to Gross Split PSCs. Upon expiration, the MEMR decides whether to convert expiring PSCs to Gross Split PSCs, Cost-Recovery PSCs, or another type of co-operation contract, regardless of any extension. The decision for new PSCs is also determined by factors such as risk levels, investment climate, and maximising benefits for the State.

Taxes applicable to PSCs in Indonesia encompass income tax, VAT, import duties, regional taxes, and other levies. Each PSC specifies whether it adheres to tax laws and regulations in effect at its execution or follows subsequent changes.

Additionally, PSC contractors pay non-tax state revenues such as exploration and exploitation fees, signing bonuses, and production bonuses, varying by PSC terms. Tax frameworks for Cost-Recovery PSCs are governed by Government Regulation No 79 of 2010 regarding Recoverable Operational Costs and Income Tax Treatment in the Upstream Oil and Gas Sector (“GR 79/2010”), as last amended by Government Regulation No 93 of 2021 regarding Income Tax Treatment for the Transfer of Participating Interests in Offshore Oil and Gas Business Activities (“GR 93/2021”). Gross Split PSCs are regulated under Government Regulation No 53 of 2017 regarding Tax Treatment in the Upstream Oil and Gas Sector for Gross Split PSCs (“GR 53/2017”), as last amended by Government Regulation No 93 of 2021, as partially revoked by Government Regulation No 93 of 2021, with detailed tax facilities specified in Ministry of Finance Regulation No 67/PMK.03/2020 regarding the Granting of VAT or VAT and Luxury Goods Sales Tax, as well as Land and Building Tax Facilities for Upstream Oil and Gas Business Activities through Gross Split PSCs (“MOF Reg 67/2020”).

Both GR 79/2010 and GR 53/2017 regulate income and non-income tax for PSC contractors, offering similar incentives and facilities. These include exemptions from import duties during exploration and exploitation, VAT or Luxury Goods Sales Tax exemptions for specified goods and services, and 100% reductions in Land and Buildings Tax (Pajak Bumi dan Bangunan, or PBB) during the exploration and exploitation stages. The Ministry of Finance determines tax facilities during the exploitation stage based on project economics. GR 79/2010 also provides tax incentives such as a domestic market obligation holiday and state asset use for upstream activities. MOF Reg 67/2020 outlines procedures for VAT, Luxury Goods Sales Tax, and PBB exemptions under Gross Split PSCs.

Under GR 35/2004, Pertamina has a right of first refusal if a contractor intends to transfer its interest in a PSC to a third party. Additionally, under MEMR Regulation No 23 of 2021 regarding the Management of Oil and Gas Working Areas for which the PSC will Expire (“MEMR Reg 23/2021”), Pertamina may choose to take over the operations of a work area upon the expiration of its PSC, regardless of whether the original contractor applied for an extension. If both Pertamina and the original contractor indicate interest in operating the work area, the MEMR has the discretion to determine whether Pertamina, the original contractor, or both will resume operations.

Further, upon approval of the first Plan of Development (POD), a PSC contractor must offer a 10% participating interest in its PSC to a regionally owned enterprise (Badan Usaha Milik Daerah, or BUMD). This BUMD must be a regional entity either wholly owned by the regional government or at least 99% owned by the regional government (with the remainder owned by a regional government-affiliated entity). It must be established according to regional government regulations and solely engaged in managing the offered participating interest without other business activities. The BUMD has the discretion to accept or decline the offer based on its financial capacity. If declined, the offer must then be tendered to a state-owned enterprise (Badan Usaha Milik Negara, or BUMN).

The Oil and Gas Law requires businesses engaged in oil and natural gas activities to prioritise local manpower, domestic goods, services, and engineering and design capabilities in a transparent and competitive manner. Under MEMR Regulation No 15/2013 regarding the Use of Domestic Products for the Upstream Oil and Natural Gas Business (“MEMR Reg 15/2013”), procurement activities must comply with the Domestic Product Appreciation Book (the “APDN Book”) published by the MEMR. This book categorises goods and services as mandatory, maximised, or empowered for domestic use.

The method for calculating Local Content (Tingkat Komponen Dalam Negeri, or TKDN) is as follows.

• For goods, TKDN is calculated based on the ratio of domestic component costs to the total cost of the finished goods.
• For services, TKDN is calculated based on the ratio of domestic service costs to the total service cost.
• For a combination of goods and services, TKDN is the ratio of the total domestic component costs to the combined cost of goods and services.

The provider’s status also affects the TKDN value. The MEMR divides providers into three categories:

• domestic company (at least 50% owned by Indonesian entities);
• national company (50% or more owned by foreign entities); and
• foreign company.

Additionally, SKK Migas outlines TKDN requirements for the procurement of goods and services by PSC contractors under SKK Migas Working Guidelines (Pedoman Tata Kerja) No PTK 007/SKKIA0000/2023/S9 regarding Procurement Guidelines for Goods and Services (5th Revision) (“PTK 007/2023”).

In the context of both Cost-Recovery PSCs and Gross Split PSCs, upon commercial discovery, the PSC contractor is required to prepare a POD for the respective field. The initial POD requires approval by the MEMR, following evaluations by SKK Migas, marking the commencement of the exploitation phase. SKK Migas grants approval for any subsequent PODs.

Upon approval of the relevant POD, the PSC contractor must commence operations within five years following the conclusion of the exploration period. Failure to do so will result in the termination of the PSC and the relinquishment of the work area.

The POD approval process is stipulated in SKK Migas Working Guidelines No PTK-037/SKKMA0000/2021/S1 regarding POD (3rd Revision).

The terms of each PSC vary based on factors such as the generation of the PSC and the contractor’s capacity to negotiate deviations from standard PSC terms.

• A PSC is granted for 30 years, with up to ten years for exploration and 20 years of exploitation. The term of a PSC may be extended for up to 20 years.
• PSC contractors must commence activities within six months of the PSC’s effective date and fulfil the work programme in the first six years of the exploration period. They assume full financial responsibility and risk if exploration is not successful. The PSC contains annual exploration expenditure for the initial six years and any extensions, subject to approval by SKK Migas through annual work programmes and budgets (for PSCs with a cost-recovery mechanism).
• Most new-generation PSCs now contain provisions requiring the execution of abandonment and site restoration (ASR) programmes and funding. The Oil and Gas Law emphasises post-operation responsibilities to ensure environmental management and protection, while GR 35/2004 requires contractors to allocate funds for these activities. According to MEMR Reg 23/2021, nearing-expiry PSCs must fulfil outstanding post-operation obligations assigned by the MEMR, potentially involving entities such as Pertamina or another contractor. MEMR Regulation No 15 of 2018 regarding Post-Operation Activities in Upstream Oil and Gas Business Activities (“MEMR Reg 15/2018”) specifically directs PSC contractors to conduct post-operation activities using designated funds.
• PSC contractors must develop a post-operation activity plan submitted via a work programme and budget during exploration stages or as part of a field development plan during exploitation stages, subject to approval by the MEMR before implementation.
• Under the Oil and Gas Law and GR 35/2004, PSC contractors must gradually relinquish part or the entirety of their working areas to the MEMR via SKK Migas. Before such relinquishment, the PSC contractors must fulfil all exploration-stage firm commitment obligations in the PSC.

Government Regulation No 36 of 2023 regarding Foreign Exchange Export Proceeds from the Business, Management and/or Processing of Natural Resources (“GR 36/2023”) and Bank Indonesia Regulation No 7 of 2023 regarding Foreign Exchange Export Proceeds and Foreign Exchange Import Payments (“BI Reg 7/2023”) require Indonesian exporters of natural resources, including LNG, to deposit their export foreign exchange proceeds in the Indonesian financial system. Indonesian exporters must:

• deposit all their export proceeds into Indonesian bank accounts within a designated timeframe; and
• retain at least 30% of those proceeds in these accounts or approved equivalents for a minimum of three months.

For further details on the licensing requirements for export of oil and gas products in Indonesia, please refer to 3.13 Laws and Regulations: Imports and Exports.

The approval requirements for transferring participating interests in PSCs vary based on the generation of the PSC. In some PSCs, no approval is necessary for transfers to an affiliated company. However, transfers to non-affiliated companies generally require approval from either the MEMR or SKK Migas.

To standardise the process, the MEMR has issued MEMR Regulation No 48 of 2017 regarding Business Supervision within the Energy and Mineral Resources Sector (“MEMR Reg 48/2017”), as partially revoked by MEMR Regulation No 7 of 2020 regarding Procedures for the Granting of Areas, Licensing, and Reporting in relation to Mineral and Coal-Mining Business Activities, as amended by MEMR Regulation No 16 of 2021 and partially revoked by MEMR Regulation No 10 of 2023 regarding Procedures for the Drafting, Submission, and Approval of Work Plans and Funding Budgets, and Procedures for the Reporting of the Implementation of Mineral and Coal-Mining Business Activities. To implement this regulation, SKK Migas issued SKK Migas Guidelines Procedure No PTK-057/SKKMA0000/2018/S0 regarding Administration of Co-operation Contract (1st Revision). The regulation mandates that any transfer of participating interests to affiliated or non-affiliated companies requires the prior approval of the MEMR through SKK Migas. In practice, the Indonesian government currently refers to this rule instead of any rules stipulated in individual PSCs.

GR 35/2004 and MEMR Reg 48/2017 prohibit PSC contractors from transferring majority participating interests to a non-affiliated party or changing operatorship during the initial three years of the exploration phase.

There are two types of change of control of a PSC contractor: direct and indirect. Under MEMR Reg 48/2017, “direct control” refers to a parent company one level above directly owning a majority of shares with voting rights. “Indirect control” involves the transfer of shares by a parent company more than one level above, which holds a majority of the voting shares in a PSC contractor. MEMR Reg 48/2017 stipulates that a direct change of control requires prior approval from the MEMR via SKK Migas, whereas indirect changes of control require notification to the MEMR through SKK Migas – typically after the transaction is finalised.

Additionally, both direct and indirect transfers of participating interests – as well as changes in control – are subject to taxation under GR 79/2010. These tax obligations are further detailed in Minister of Finance Regulation No 257/PMK.011/2011 regarding Procedure for Withholding and Payment of Income Tax on Other Income of Contractors In the form of Uplift or Other Similar Rewards and/or Contractor’s Income from the Transfer of Participating Interest.

Indonesia does not impose any regulatory restrictions on production rates. Indonesia joined the Organization of the Petroleum Exporting Countries (OPEC) in 1962 but left the organisation voluntarily in 2008, owing to dwindling oil production and becoming a net importer of crude oil, which is against OPEC’s statute for membership. Indonesia rejoined OPEC briefly in 2016 but suspended its membership again within a year, owing to disagreements over a mandated 5% production cut.

For 2024, Indonesia has set a target of oil lifting at 660,000 bopd for oil and 6,160 million standard cubic feet per day (mmscfd) for gas.

The Oil and Gas Law liberalised the downstream market and effectively ended Pertamina’s monopoly on the sector. Private entities can now enter the downstream sector by establishing a limited liability company in Indonesia and procuring the relevant downstream business licence, subject to any applicable foreign shareholding restrictions stipulated in Presidential Regulation No 10 of 2021 regarding the Investment List, as last amended by Presidential Regulation No 49 of 2021 (the “Investment List”). In short, the Investment List contains the list of business lines that are open or closed for foreign investment.

There are no monopolies in the downstream sector and thus there are no rights and terms of access granted to any monopoly or near monopoly.

The issuance of downstream business licences is administered by the MEMR. In addition to obtaining the standard corporate licensing, business actors intending to conduct processing, transportation, storage or trading activities must apply for a business licence for such activity from the MEMR via the OSS system. The procedure is regulated under MEMR Regulation No 29 of 2017 regarding Licensing in Oil and Gas Business Activities (“MEMR Reg 29/2017”), as last amended by MEMR Regulation No 52 of 2018. Generally, applicants must satisfy administrative requirements (ie, corporate deeds and taxpayer number) and technical requirements (ie, feasibility study), which depend on their scope of business activity.

A single company can possess multiple downstream business licences. The applicable business licences in this sector are the Oil and Gas Processing Licence, the Oil and Gas Storage Licence, the Oil and Gas Transportation Licence, and the Oil and Gas Trading (Retail or Wholesale) Licence.

The downstream sector does not have specific fiscal terms or production sharing schemes.

As stipulated in BPH Migas Regulation No 1 of 2023 regarding Procedures for Calculating and Determining the Tariff for Transportation of Natural Gas Through Pipelines (“BPH Reg 1/2023”), BPH Migas regulates the tariffs imposed for gas transportation. The operator must submit the proposed tariffs to BPH Migas and BPH Migas will verify and evaluate the proposed tariffs.

Pursuant to Government Regulation No 48 of 2019 regarding the Amount and Use of Business Entity Fees in the Business Activities of Supplying and Distributing Fuel Oil and Transportation of Natural Gas Through Pipelines (“GR 48/2019”), companies holding wholesale trading business licences, limited trading business licences, processing business licences for the distribution of oil as an expansion of the processing business, or specific licences for the transmission of natural gas are required to pay a royalty fee to BPH Migas (see 3.5 Income or Profits Tax Regime: Midstream/Downstream).

The downstream sector does not have a specific tax regime. Generally, the following taxation rules apply.

• Tax holiday for pioneer investors – MOF Regulation No 130/PMK.10/2020 regarding Provision of Corporate Income Tax Reduction Facility provides tax holiday incentives for the oil and gas refinery industry in Indonesia. Companies may enjoy a corporate income tax reduction from 50% to 100% for five to 20 fiscal years depending on the value of their investment. An additional 25% or 50% reduction may apply for the next two fiscal years. The minimum investment value to be eligible for this incentive is IDR100 billion.
• Tax allowances – certain industries (eg, lubricant manufacturing, organic-based chemical production from oil, natural gas and coal, and natural and artificial gas supply) qualify for tax allowance facilities under Government Regulation No 78 of 2019 regarding Tax Allowances Facilities for Investments within Certain Business Sectors and/or within Certain Regions. These allowances include deductions of net income by 30% of the total investment value in the form of:
1. tangible fixed assets used for the primary business activity, charged for six years deductible by 5% each year;
2. accelerated depreciation;
3. lower withholding tax on dividends for foreign taxpayers; and
4. conditional loss carry-forward compensation for up to ten years.
• Withholding tax – the sale of fuel, gas and lubricants is subject to withholding tax in accordance with MOF Regulation No 34/PMK.010/2017 of 2017 regarding Collection of Article 22 Income Tax in Connection with Payment for Delivery of Goods and Activities in the Field of Import or Business Activities in Other Fields, as last amended by MOF Regulation No 48 of 2023. The standard withholding tax rate is 0.3% excluding VAT. However, for fuel purchased from Pertamina or its subsidiaries, the withholding tax rate is reduced to 0.25%, excluding VAT.
• VAT – the current VAT rate is 11% but will increase to 12% by 2025. However, Government Regulation No 49 of 2022 regarding VAT Exempted and VAT or VAT and Sales Tax on Luxury Goods Not Collected on Import and/or Delivery of Certain Taxable Goods and/or Delivery of Certain Taxable Services and/or Utilization of Certain Taxable Services from Outside the Customs Area exempts crude oil and natural gas from VAT upon delivery.
• Import duty – import duties vary depending on the product and its Harmonised System (HS) code.
• Royalty – companies must pay royalties to BPH Migas if engaged in fuel oil supply and distribution or natural gas transmission through pipelines. The royalty rates, specified in Government Regulation No 48 of 2019 regarding Amount and Use of Business Entity Fees in the Business Activities of Supplying and Distributing Fuel Oil and Transportation of Natural Gas Through Pipelines (“GR 48/2019”), vary based on sales volume.

There are no special rights given to national oil and gas companies with regard to downstream licences.

There are no separate laws or regulations in Indonesia for local content requirements for midstream/downstream operations. However, there are some sectors that are restricted for foreign investment, as regulated under the Investment List – including LNG transportation by shipping, which is restricted to 49% foreign ownership.

Generally, under GR 36/2004, downstream business actors must prioritise the use of domestically sourced goods, equipment, services, technology, and engineering capabilities in a transparent and competitive manner. The same also applies for the fulfilment of workforce requirements.

Downstream business activities must operate through a limited liability company that has obtained the relevant business licence, which may be applied for through the MEMR via the OSS system. A separate downstream business licence will be issued for processing, storage, transportation, and trading (which consists of retail and wholesale) activities.

A single company may hold multiple business licences. For all types of downstream activities, business licences are first issued in the form of a temporary business licence that is valid for up to five years, followed by a permanent licence once the company is ready for operations. What follows is an overview of downstream business licensing under MEMR Reg 29/2017.

• Processing – this licence requires submitting periodical reports to the MEMR and BPH Migas. Valid for up to 30 years, extendable for an additional 20 years.
• Storage – this licence requires the submission of periodical reports to the MEMR and BPH Migas. This licence is valid for up to 20 years, extendable for another ten years.
• Transportation – this licence requires the submission of periodical reports to the MEMR and BPH Migas. For natural gas transportation, a gas transportation agreement and access arrangement approved by BPH Migas is required. This licence is valid for up to 20 years, extendable for another ten years.
• Trading – this comprises retail and wholesale trading. If trading is carried out by a PSC contractor, a separate business trading is not required, as the trading activities are considered as ancillary to the upstream activities. This licence is valid for up to 20 years, extendable for another 20 years.

A private company in the downstream sector does not have condemnation or eminent domain rights. Land rights are typically acquired through negotiations with owners and occupants, following existing laws, either through land purchase or land lease for facility usage. Business entities in the downstream sector may hold land titles under their own name.

The transportation of oil and gas products would fall under the purview of the MEMR, the Ministry of Transportation (MOTR), the Ministry of Environment and Forestry (MOEF), and/or BPH Migas, depending on the type of product and the mode of transportation.

Generally, the MOTR, the MEMR and BPH Migas are responsible for the transportation of oil and gas products, whether by land, sea, or water. BPH Migas is also responsible for the supervision of oil fuel distribution through pipelines. Additionally, the transportation of certain oil and gas products may have to comply with terms set out by the MOEF if the products are categorised as hazardous or toxic waste.

GR 36/2004 obliges downstream storage and transportation companies to provide access to third parties for facility use. However, this obligation is not commonly implemented in practice. In response, MEMR Regulation No 4 of 2018 regarding the Operation of Natural Gas in Downstream Oil and Gas Activities, as amended by MEMR Regulation No 19 of 2021, empowers BPH Migas to conduct tenders for gas transmission lines. This regulation also outlines the licensing criteria for engaging in natural gas transmission, either through pipelines or other designated facilities within specified transmission zones or distribution networks.

The Indonesian government periodically imposes price caps on natural gas sales to meet its Domestic Market Obligation (DMO). Business actors should consider Presidential Regulation No 40 of 2016 regarding the Determination of Natural Gas Sales, as amended by Presidential Regulation No 121 of 2020, and MEMR Regulation No 15 of 2022 regarding Procedures for the Determination of Certain Natural Gas Users and Certain Natural Gas Prices in the Industrial Sector, which cap gas prices at USD6 per MMBTu for the sale of gas at the plant gate to the domestic fertiliser, petrochemical, oleochemical, steel, ceramics, glass, and rubber glove industries. This cap also extends to the sale of gas for the electricity industry (including for sale to potential buyers such as PLN), as regulated by MEMR Regulation No 45 of 2017 regarding Natural Gas Utilisation for Power Plants, as amended by MEMR Regulation No 10 of 2020.

Nevertheless, if the quoted gas price exceeds USD6 per MMBTu, the MEMR will adjust the price paid to PSC contractors by reducing the government’s own revenue in the PSC to compensate for the difference.

Import/Export of Natural Gas (including LNG)

Cross-border sales of natural gas are allowed under specific conditions – namely, if domestic demand for natural gas has been met (in cases of inadequate infrastructure) or if domestic purchasing power is insufficient. MEMR Regulation No 6 of 2016 regarding Provisions and Procedures for Stipulating the Allocation and Utilisation as well as Pricing of Natural Gas (“MEMR Reg 6/2016”), as partially revoked by MEMR Regulation No 30 of 2021 regarding Procedures for Stipulating the Allocation and Utilisation as well as Pricing for Flare Gas in the Upstream Oil and Gas Industry, prioritises natural gas production for government programmes, national production enhancement, and industrial needs.

Imports and export approvals are issued by the Ministry of Trade (MOT), with a recommendation from the Directorate General of Oil and Gas (DGOG). For imports in general, an NIB also acts as an import licence.

Import/Export of Oil

Cross-border sales of oil must adhere to the DMO requirements (for upstream entities). MEMR Regulation No 18 of 2021 regarding the Priority to Use Crude Oil for Meeting Domestic Needs stipulates that Pertamina and crude oil processing licence holders are to prioritise domestic crude oil from PSC contractors before considering imports. PSC contractors or their affiliates must offer their crude oil to Pertamina through negotiation. The process, however, lacks clear implementation details. Imports and exports of oil require MOT approval based on DGOG recommendations, with an NIB for imports.

Downstream business licences are not transferable. The transfer of assets forming a distribution network would require the revocation of the special rights over the distribution network and the issuance of new special rights to the acquirer. In some cases, the acquirer must notify the relevant government body (ie, BPH Migas for the sale or transfer of a gas distribution pipeline) of the transfer of asset ownership. Further, for share transfers within downstream companies, MEMR Reg 48/2017 requires a post-transfer notification to the MEMR.

Generally, Law No 25 of 2007 regarding Capital Investment, as amended by the Job Creation Law, ensures equal treatment for both domestic and foreign investors and protects them against expropriation or nationalisation. Expropriatory acts should be compensated accordingly.

Separately, the Indonesian government stipulates restrictions on foreign ownership for different business sectors in Indonesia under the Investment List. Under the current Investment List, upstream oil and gas activities in Indonesia are open to 100% foreign ownership. However, certain downstream activities (ie, LNG transportation via sea, lake/rivers, or air cargo) are limited to 49% foreign ownership.

There are no sanctions or restrictions when investing in oil and gas ventures abroad.

Both upstream and downstream operations are subject to environmental oversight by the central government through the Ministry of Environment and Forestry (MOEF) and regional governments (eg, governors, mayors, and regents). Environmental licences, depending on the type, may be issued by either the MOEF or regional agencies as per regulations. The issuing authority will also handle administrative sanctions for violations. By way of example, the MOEF handles sanctions for its approvals, whereas governors handle sanctions for theirs. However, the MOEF may intervene and assume control from regional governments in cases of severe violations by businesses.

The primary environmental regulations in Indonesia are:

• Law No 32 of 2009 regarding Environmental Protection and Management (the “Environmental Law”), as amended by the Job Creation Law, which is the main law regarding environmental management in Indonesia and covers a wide range of environmental protection, environmental damage, sanctions, and enforcement for environmental crimes;

• Government Regulation No 22 of 2021 regarding Implementation of Environmental Protection and Management (“GR 22/2021”), which regulates the environmental licensing regime for business entities operating in Indonesia and was issued after the enactment of the new licensing regime under the Job Creation Law; and
• MOEF Regulation No 4 of 2021 regarding Types of Business and/or Activities Which Are Mandated to Have Environmental Impact Analysis, Environmental Management Effort and Environmental Supervision Effort or Letter of Capability of Environmental Management and Supervision (“MOEF Reg 4/2021”), which stipulates a list of business activities that require an Environmental Impact Assessment (Analisis Mengenai Dampak Lingkungan, or AMDAL) or Environmental Management and Monitoring Measures (Upaya Pengelolaan Lingkungan dan Upaya Pemantauan Lingkungan, or UKL-UPL).

As a general rule, business activities are subject to different types and degrees of environmental assessment depending on their risk level. Under the Environmental Law and its implementing regulations, business activities with a significant impact require an AMDAL, business activities without a significant impact require a UKL-UPL, and low-risk business activities only need a self-declaration (Surat Pernyataan Pengelolaan Lingkungan, or SPPL). This classification is set forth in MOEF Reg 4/2021. These documents are not business licences, but they are prerequisite steps for the obtainment of an environmental approval.

During the exploration phase, PSC contractors must complete a UKL-UPL report. In the subsequent phase of exploitation, PSC contractors must conduct an AMDAL. PSC contractors must regularly report compliance with their UKL-UPL or AMDAL to the appropriate government authorities. Furthermore, PSC contractors are required to obtain environmental approvals from the Indonesian government for their activities.

Health, safety and environment (HSE) requirements in the oil and gas sector apply generally, without distinction between offshore and onshore operations. The DGOG at the MEMR oversees the implementation of HSE regulations in the oil and gas sector and enforces sanctions for non-compliance. It deploys designated teams to ensure safety standards are met. If the facilities and systems comply with the DGOG’s standards, the DGOG will issue certifications for installations and equipment. If a company fails to meet the applicable HSE rules, it will be subject to various administrative sanctions up to the revocation of its licence.

In the upstream sector, as discussed in 2.8 Other Key Terms: Upstream, most new-generation PSCs now contain provisions requiring the execution of ASR programmes and funding. The Oil and Gas Law outlines the importance of post-operation obligations for environmental management and protection, and GR 35/2004 mandates PSC contractors to set aside funds for these activities. MEMR Reg 23/2021 stipulates that the remaining post-operation obligations of an expiring PSC are to be handled by the entity appointed by the MEMR, which could be Pertamina and/or another contractor.

Post-operation activities – as provided under MEMR Reg 15/2018 – include well-plugging, site restoration and disposal of equipment, using allocated funds before or upon the expiration of the PSC. These activities must be reported to SKK Migas either:

• through the submission of a work plan and budget if the PSC is in the exploration stage; or
• as part of the POD if the PSC is in the exploitation stage.

PSC contractors are also required to obtain approval for their post-operation activity plan from the DGOG prior to implementing post-operation activities. PSCs that do not contain provisions regarding post-operation obligations are subject to the rules set forth in MEMR Reg 15/2018. The procedures to reserve and deposit ASR funds are set forth in SKK Migas Working Guideline No PTK-040/SKKMA0000/2023/S9 regarding ASR (2nd Revision).

Further decommissioning obligations are detailed in various regulations, such as MEMR Regulation No 02P/1992, requiring land reclamation, and Government Regulation No 17 of 1974, requiring dismantlement of unused facilities. An SKK Migas working guideline in 2015 also includes well-plugging as part of drilling work completion. Please note that there are no decommissioning obligations in the downstream sector.

Indonesia ratified the Paris Agreement through Law No 16 of 2016. As part of its commitment to achieve net zero emissions by 2060, Indonesia has recently issued the following regulations related to Carbon Capture and Storage (CCS):

• MEMR Regulation No 2 of 2023 regarding the Implementation of Carbon Capture and Storage and Carbon Capture, Utilisation and Storage for Upstream Oil and Gas Business Activities (“MEMR Reg 2/2023”);
• SKK Migas Work Guideline No PTK-070/SKKIA0000/2024/S9 (“PTK 070/2024”); and
• Presidential Regulation No 14 of 2024 regarding the Implementation of Carbon Capture and Storage Activities (“PR 14/2024”).

PR 14/2024 outlines the licensing and rights allocation process for CCS work areas from exploration to decommissioning. It permits cross-border CO₂ transport and storage, capping foreign CO₂ at 30% of storage capacity. PTK 070/2023 also provides technical guidelines detailing CCS/Carbon Capture, Utilisation and Storage (CCUS) procedures and requirements for upstream oil and gas contractors, which complement MEMR Reg 2/2023.

Generally, oil and gas operations in Indonesia are overseen by SKK Migas. However, the province of Aceh has been granted special authority to administer its own natural gas and oil resources. To facilitate this, Aceh established a dedicated body known as the Aceh Oil and Gas Management Agency (Badan Pengelola Migas Aceh, or BPMA) to supervise and manage the province’s upstream oil and gas operations.

National Energy Plan

The Indonesian government expects geothermal, hydropower and bioenergy to be among the primary energy sources in Indonesia from 2015 until 2050, as outlined in Presidential Regulation No 22 of 2017 regarding the National Energy General Plan (“PR 22/2017”). PR 22/2017 also aims to increase the share of renewable energy in the energy supply mix from 5% in 2015 to 23% by 2025 and 31% by 2050. It also plans to reduce oil in the energy mix from 45% in 2015 to 25% by 2025 and 20% by 2050. The share of gas in the energy supply mix is targeted to shift from 23% in 2015 to 22% by 2025 and 24% by 2050. The authors anticipate a reduction in Indonesia’s reliance on oil while maintaining a dependence on gas proportionate to the country’s reserves.

Carbon Economic Value

The Indonesian government has outlined carbon markets in Indonesia under Presidential Regulation No 98 of 2021 regarding the Implementation of Carbon Economic Value and the Achievement of the Nationally Determined Contribution Target and Control of Greenhouse Gas Emissions in the Context of National Development (“PR 98/2021”), which aims to achieve national greenhouse gas reduction targets. This regulation introduces emissions trading with government-set caps (“cap and trade”) and greenhouse gas emissions offsetting for businesses not subject to caps (or in voluntary markets).

Carbon Tax

Law No 7 of 2021 regarding Harmonisation of Taxation (the “Taxation Harmonisation Law”) allows entities engaging in carbon emission balancing or trading to potentially qualify for reduced carbon tax. The Taxation Harmonisation Law also increases VAT, potentially affecting future carbon credit transactions from CCS/CCUS activities.

CCS/CCUS Regulations

The Indonesian government has introduced MEMR Reg 2/2023, PTK 070/2024, and PR 14/2024 to regulate CCS and CCUS in Indonesia. CCS aims to reduce greenhouse gas emissions by injecting and storing carbon in work areas, whereas CCUS aims to reduce emissions and boost oil and gas production by using and storing carbon in these areas. PSC contractors may do this by capturing emissions from upstream oil and gas operations or deriving the carbon from other industrial activities. Implementation of these activities will require approval from the MEMR and SKK Migas.

The new regulatory regime for CCS/CCUS allows PSC contractors to inject, store and utilise carbon emissions generated from their upstream oil and gas operations in designated work areas, including oil and gas reservoirs, saline aquifers, and coalbed methane gas seams. PSC contractors may carry out these activities with approval from the MEMR and SKK Migas. PSC contractors must also regularly report their activities to the DGOG. Specifically, PTK 070/2024 provides comprehensive technical guidelines for CCS/CCUS activities in the upstream oil and gas sector.

PSC contractors can classify the expenses related to their CCS/CCUS activities as “operational costs” as defined in their PSC, provided that the carbon emissions originate from upstream oil and gas activities within their designated work area. If these emissions come from other industries and are used for CCUS purposes, the associated costs can also be categorised as “operational costs”, but only for activities downstream from where the emissions are received from those industries. The recoverability of such costs depends on whether the PSC follows a traditional cost-recovery model or a gross split contract.

PSC contractors may generate revenue from injection and storage services, potentially maximising the utilisation of current infrastructure and storage facilities. PSC contractors engaging in CCS/CCUS activities also qualify for tax incentives applicable to upstream oil and gas operations, including exemptions from import duties and deductions on land and building taxes, enhancing the economic attractiveness of these initiatives.

Additionally, the recently issued PR 14/2024, which focuses on CCS activities, emphasises Indonesia’s role as a CCS hub. It introduces two CCS schemes:

• first, integrating CCS into existing oil and gas operations with amendments to the PSCs; and
• second, granting permits for exploration and storage in designated non-working areas.

In Indonesia, gasoline and petrochemicals are vital to the energy and industrial sectors. The country is dependent on fossil fuels, with petroleum making up a significant portion of its energy consumption. The petrochemical industry is crucial to the economy, driven by a large population and high demand for these products. The Indonesian government aims to reduce imports and bolster the domestic petrochemical industry to meet this growing demand.

Gasoline is mainly used as fuel for transportation, whereas petrochemicals are essential for various industrial and consumer products. The Indonesian government’s goal is to be self-sufficient in petrochemicals by 2027, highlighting a strong focus on developing this sector.

One of the most significant initiatives in Indonesia’s oil and gas sector is the development of CCS/CCUS. As reported by the Institute for Essential Services Reform, to date, Indonesia has 15 CCS/CCUS projects – most (almost 80%) of which are spearheaded by Pertamina.

These projects are expected to commence within the next two to eight years. The largest upcoming project on the list is the CCS Tangguh, operated by BP Berau Ltd, which is scheduled to be operational by 2026. The project aims to store 25–33 million tonnes of CO₂ over ten to 15 years, with an estimated investment cost of nearly USD3 billion.

Unconventional oil and gas exploration and production are regulated under the Oil and Gas Law and further addressed by MEMR Regulation No 35 of 2021, which outlines procedures for designating and offering these areas either through direct offers or standard tenders.

LNG facilities may be operated by entities in the upstream sector as an ancillary activity to their upstream operations under the PSC or by entities in the downstream sector to engage in processing/trading activities.

As discussed in 3.13 Laws and Regulations: Imports and Exports, exporters of LNG products must obtain an export approval from the MOT, with a recommendation from the MEMR.

Indonesia’s oil and gas history spans more than 130 years, starting with the first significant oil discovery in Asia in Telaga Said, North Sumatra in 1885. Significant milestones include the discovery of the Talang Akar Field in South Sumatra in 1912, the largest field until the Second World War. In 1966, Indonesia became the first country to use the PSC, which has since been adopted globally. The PSC system enables states to retain sovereignty over their petroleum resources, allowing international oil companies to act as contractors. The first Indonesian PSC was signed on 18 August 1966, for the Offshore Northwest Java Block, involving Pertamina and US company Independent Indonesian American Petroleum Company.

Since then, the PSC model in Indonesia has undergone several changes, with the most prominent occurring in 2017. Until 2017, the Indonesian government had only used a traditional cost-recovery PSC model, whereby contractors could recover exploration and development costs from a share of production if successful commercial development occurred. However, in a landmark change in early 2017, the MEMR introduced the Gross Split PSC, replacing the Cost-Recovery PSC. Under this new model, contractors are entitled to a gross split percentage of production before taxes, marking the most pivotal shift in Indonesia’s upstream sector regulation since the enactment of the Oil and Gas Law in 2001.

This shift was caused by fiscal pressures resulting from high expenditures due to inefficiencies within the traditional cost-recovery system. For instance, in 2016, cost-recovery expenditures amounted to USD11.4 billion, while the Indonesian government’s revenue from the oil and gas sector was only USD9.29 billion. The gross split PSC system was formed as a response to these perceived inefficiencies (Brad Roach and Alistair Dunstan, The Indonesian PSC: the End of an Era in Journal of World Energy Law and Business, 2018.)

In the oil and gas sector, the most significant update is the set of CCS/CCUS regulations – namely, PR 14/2024, PTK 070/2024 and MEMR Reg 2/2023. SKK Migas also introduced the latest guidelines for the procurement of goods and services by a PSC contractor, PTK 007/2023 and its implementing guidelines (Guidelines No EDR-0143/SKKIH0000/2023/S0 dated 13 April 2023 regarding the Implementation of Goods/Services Procurement).

In March 2019, the Indonesian House of Representatives began drafting legislation to amend the Oil and Gas Law. This amendment was anticipated to overhaul the regulatory framework for the sector. However, owing to the COVID-19 pandemic, the bill was removed from the House of Representatives’ priority list in 2021 and there has been limited progress on the bill since.