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W&P Newsletter – New Obligations On Post-Operation (Asr) Activities And Reserve Fund Allocation

The Ministry of Energy and Mineral Resources (“MEMR”) recently issued Regulation No. 15 of 2018 regarding the Post-Operation Activities in the Upstream Oil and Gas Industry (“MEMR Regulation No. 15/2018”), imposing new obligations with respect to Abandonment and Site Restoration (ASR) or post-operation activities on contractors. The regulation came into force on 23 February 2018 and it repeals MEMR Regulation No. 01 of 2011 (“Repealed Regulation”). MEMR Regulation No. 15/2018 sends a strong signal of the Indonesian Government’s serious attention to post-operation obligations.

Unlike the Repealed Regulation, which covered only offshore installations, MEMR Regulation No. 15/2018 covers certain post-operation obligations for all upstream oil and gas activities. It requires contactors to prepare a post-operation activity plan and allocate reserve funds for the post-operation activity. The new regulation defines the term “post-operation” as activities of dismantling equipment, installations, and/or supporting facilities including permanent closure of wells (well plugging), site restoration and equipment disposal or removal management (“Post-Operation Activity”) prior to or at the end of a Production Sharing Contract (“PSC”) period. Here are some highlights of MEMR Regulation No. 15/2018:

Procedure for the Post-Operation Activity

  • The contractor must draw up a Post-Operation Activity plan and ensure that it is reflected in its working & budget plan during the exploration stage and in its development plan during the exploitation stage. The Post-Operation Activity plan, which is subject to the approval of the SKK Migas, must include at least (i) identification of the equipment, installations and/or facilities to be dismantled, including the wells to be permanently closed, and (ii) calculation of the cost estimate for the Post-Operation Activity.
  • Prior to the commencement of its Post-Operation Activity, a Contractor must obtain approval from the Directorate General of Oil and Gas (“DGOG”) by submitting a proposal to the DGOG (accompanied by the Post-Operation Activity plan approved by the SKK Migas) through the Chairman of the SKK Migas.
  • When carrying out the Post Operation Activity, the Contractor is required to use the applicable Indonesian national standards (Standar Nasional Indonesia) and/or the international standards in accordance with the approved Post-Operation Activity plan.
  • The Contractor must file a report with the MEMR within 30 days after the completion of the Post-Operation Activity.

Reserve Funds

  • The Contractor must reserve a certain amount (“Reserve Fund”) for the Post Operation Activity by regular placement of funds in an account with an Indonesian state-owned bank under a joint account with SKK Migas starting from the year of its commercial production
  • If the Post-Operation Activity plan is amended or adjusted to the extent that affects a change in the estimated cost for the Post-Operation Activity, the Contractor must adjust the amount of the Reserved Fund.
  • For the PSC under the cost-recovery scheme, the Reserve Fund will be calculated as a refundable operation cost, while for the PSC under the gross-split scheme, the Reserve Fund will be borne by the contractor and calculated as a deductible item in the calculation of its income tax. After the completion of the Post-Operation Activity, for the PSC under the cost-recovery scheme, any excess of the Reserve Fund must be returned to the Indonesian Government, while for the PSC under the gross-split scheme, any excess of the Reserve Fund may be retained by the contractor.
  • MEMR Regulation No. 15/2018 does not expressly provide for the amount and procedure for the Reserve Fund allocation; it only provides that the amount and procedure for the allocation will be further determined by the Head of the SKK Migas and reported to the DGOG.
  •   If, on the expiry of the PSC, the MEMR appoints a new contractor, the new contractor must continue to carry out the obligation to allocate for the Reserve Fund and to perform the Post-Operation Activity, and the new contractor may use the existing Reserve Fund allocated by the previous contractor (if any).
  • Any reserve funds allocated for the Post-Operation Activity which remain unused up to the issuance of MEMR Regulation No. 15/2018 will be treated in accordance with the provisions of MEMR Regulation No. 15/2018.

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