18/07/2012
Challenge to Indonesia’s Oil and Gas Law raises concerns for investors
By Phil Taylor
One of Indonesia’s most important energy-related laws is again being challenged in the country’s constitutional court. The Oil and Gas Law has become the subject of a judicial review filing by two labour unions who claim it is leading to misuse of the country’s resources.
The United Pertamina Workers’ Union and the Confederation of Indonesian Oil and Gas Labor Unions claim six articles of the law (mainly dealing with the categorisation of oil and gas activities and the parties entitled to regulate, supervise and invest in them) go against Article 33 of Indonesia’s amended Constitution which provides, in part, that natural resources should be ‘controlled by the state to be exploited to the greatest benefit of the people’.
Before the Oil and Gas Law came into effect in 2001, state-owned fuel extractor and refiner Pertamina had wide-ranging powers and a virtual monopoly in the sector. The Law, and regulations which took effect three years later, effectively stripped the corporation of its regulatory role, putting it in the position of any other state-owned enterprise. This allowed foreign-invested oil and gas companies greater market access; some also felt it left the state-owned refiner in a much weaker position than its counterparts in neighbouring countries such as Malaysia.
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‘If they pulled the [Oil and Gas] Law away, it would certainly be unsettling for those who’ve spent time working under the system...'
Brian Scott
Partner, Herbert Smith
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Indonesia specialist Brian Scott, a Herbert Smith partner, says the latest legal challenge appears to be part of a trend emerging over the past two years, and follows some significant championing of Pertamina in certain political quarters. In late 2011, for example, the government publicly backed the company’s bid to take over the operations of Indonesia’s largest gas production site, the Mahakam block in East Kalimantan.
‘Whereas at one point Pertamina was heading for privatisation, to become just another commercial player, in the last year or two there has been a step back from that in some constituencies of the government,’ Scott told IBA Global Insight.
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Oil and gas is Indonesia's most successful sector in terms of foreign investment |
Challenges in the constitutional court are relatively common in Indonesia. According to Norman Bissett, a foreign legal consultant with Hadiputranto Hadinoto & Partners, the court is quite amenable to cases involving the natural resources industry. Similar challenges have resulted in the removal of clauses from the Oil and Gas Law and the Mining Law, while a 2002 case resulted in the wholesale striking down of the Electricity Law on the grounds that it was unconstitutional in not treating the nation as a geographic whole.
The latest filing raises particular concerns, as it could potentially lead to the restructuring of, and increased restrictions in, the country’s most successful sector in terms of foreign investment. ‘[The Oil and Gas Law] is one of the things that works relatively well in Indonesia,’ added Scott. ‘If they pulled the law away, it would certainly be unsettling for those who’ve spent time working under the system, and with the new regulations that came in in 2004.’
At the time of writing, the constitutional court was still considering the case and had not yet issued an official summary of the issues at stake. However, Bissett remained optimistic about the outcome. ‘While it is always dangerous to prognosticate for Indonesia, on balance I am hopeful the court will not strike out these provisions,’ he said.
Phil Taylor is a UK-based freelance writer and editor. He can be contacted at phil@phiine.com