Downstream Regulations

(Articles 23-30 Law No. 22/2001; Implementing Regulations GR 36/2004).

Law No. 22/2001 (“Law No. 22”) formally liberalised the downstream market by opening the sector (processing, transportation, storage and trading) to direct foreign investment and ending the former monopoly of state-owned oil and gas company PT Pertamina (Persero) (“Pertamina”). Whilst the distribution of downstream products and blending of lubricants had previously been conducted by multinationals in Indonesia, since Law No. 22 was enacted many prominent multinationals have established themselves in the more capital intensive areas of the downstream sector. These areas include:

a. tank farms/storage facilities for bulk liquids and LPG;

b. the distribution of gas by way of pipelines (Citigas and long distance pipelines);

c. proposed refineries and downstream LNG; d. proposed LNG regasification terminals; and

e. the retailing of fuel (both subsidised1 _{and non-subsidised).}

A summary of the key section of the downstream regulations as provided for in Law No. 22 and its implementing regulations Government Regulation (“GR”) 3 6/2004. Please see Appendix A for an English translation of GR 3 6/2004.

A.1. Operation and Supervision of Downstream Business

Downstream businesses are required to operate through an Indonesian incorporated entity (hereafter referred to as a “PT Company”) and to have obtained a business licence (issued by the MoEMR/the Government, with input from BPH Migas). As indicated in Section II (“Regulatory Framework”), BPH Migas is responsible for regulating, developing and supervising the operation of the downstream industry.

A.2. Business Licences

A separate business licence is required for each of the following downstream activities (except where the activity is the continuation of an upstream activity in which case a licence is not required):

a. processing (excluding field processing); b. transportation;

c. storage; and

d. trading (two types of business licences are required – a wholesale trading business licence; and a trading business licence).

It is permissible for one PT Company to hold multiple business licences.

Each business licence, managed by MoEMR with input from BPH Migas, stipulates obligations and technical requirements that the licensee must abide by.

To obtain a business licence, a PT Company must submit an application to the MoEMR by enclosing administrative and technical requirements which contain, at a minimum, the:

a. name of operator; b. line of business proposed;

c. undertaking to comply with operational procedure; and

d. detailed plan and technical requirements relating to the business. The business licenses are issued in two stages:

a. a temporary licence for a maximum period of five years whilst the PT Company prepares the facilities and infrastructure of the business; and b. a permanent operating licence once the PT Company is ready for

operation.

A.3. Processing

A PT Company holding a processing business licence must submit to the MoEMR and BPH Migas operational reports, an annual plan, monthly realisations, and other reports.

The processing of oil, gas and/or processing output to produce lubricants and petrochemicals are to be stipulated and operated jointly by the MoEMR and the Ministry of Industry and Trade (“MoIT”).

Non-integrated gas supply chain

Processing of gas into Liquefied Natural Gas (“LNG”), Liquefied Petroleum Gas (“LPG”), and Gas To Liquids (“GTL”) is classified as a downstream business activity as long as it is intended to realise a profit and is not secondary to an upstream development.

This technically allows for a non-integrated LNG/LPG supply chain concept by virtue of:

a. enabling PSC Contractors to be the appointed seller of gas (including Government share) to be further processed by a separate entity; b. shorter LNG supply arrangements; and

c. the possible use of an onshore project company sponsored by a

shareholder agreement which receives initial funds for the development and operation of a LNG processing plant.

In practice, downstream LNG and mini LNG refineries have (at the time of writing) been slow to win approval – largely because of concerns over the adequacy of domestic gas supply.

A.4. Transportation

Transportation of gas by pipelines via a transmission segment or a distribution network area is permitted only with the approval of BPH Migas with licences being granted only for specific pipelines/commercial regions.

A PT Company with a transportation business licence is required to:

a. submit monthly operational reports to the MoEMR and BPH Migas; b. prioritise use of transportation facilities owned by cooperatives,

small enterprises and national private enterprises when using land transportation;

c. provide an opportunity to other parties to share utilisation of its pipelines and other facilities used for the transportation of gas; and

d. comply with the Master Plan for a National Gas Transmission and Distribution Network.

BPH Migas has the authority to:

a. regulate, designate, and supervise tariffs after considering the economic considerations of the PT Company, users and consumers; and

b. grant permits for the transportation of gas by pipelines to a PT

Company based on the Master Plan for a National Gas Transmission and Distribution Network.

A PT Company may increase the capacity of its facilities and means of transportation after obtaining special permission.

A.5. Storage

A PT Company is required to:

a. submit its operational reports to the MoEMR each quarter or as and when requested by BPH Migas;

b. provide an opportunity to another party to share in its storage facilities; c. share storage facilities in remote areas; and

d. have a licence to store LNG.

A PT Company can increase the capacity of its storage and related facilities after obtaining permission from BPH Migas.

Transportation or storage activities that are intended to make a profit, or be used jointly with another party by collecting fees or lease rentals, are construed as downstream business activities and require the appropriate downstream business licence and permits.

A.6. Trading

A PT Company must guarantee the following when operating a trading business: a. the constant availability of fuels and processing output in its trade

distribution network;

b. the constant availability of gas through pipelines in its trade distribution network;

c. the selling prices of fuels and processing output at a fair rate; d. the availability of adequate trade facilities;

e. the standard and quality of fuels and processing output as determined by the MoEMR;

f. the accuracy of the measurement system used; and g. the use of qualified technology.

A PT Company is required to:

a. submit monthly operational reports to the MoEMR or at any time as required by BPH Migas;

b. maintain facilities and means of storage and security of supply from domestic and foreign sources;

c. distribute fuels through a distributor, to small-scale users under the Company’s authorised trademark;

d. prioritise cooperatives, small enterprises and national private enterprises when appointing a distributor; and

e. submit operational reports to the MoEMR and BPH Migas regarding appointment of distributors.

A PT Company holding a wholesale trading licence can operate a trading business to serve certain consumers (e.g. large consumers). The MoEMR, along with BPH Migas, may determine the minimum capacity limit of a storage facility or facilities of a PT Company. The PT Company may start its trading business after fulfilling the required minimum capacity.

A direct user who has a seaport or receiving terminal may import fuel oil, gas, other fuels, and process the output directly for its own use, but not for re-sale, after obtaining specific approval from the MoEMR.

A PT Company operating an LPG trading business is required to: a. control facilities and means of storage and bottling of LPG; b. have a registered trademark; and

c. be responsible for maintaining a high standard and quality of LPG, LPG bottling, and LPG facilities.

PT Companies operating in the business of gas trading may include those having a gas distribution network facility and those who do not. The former should operate after obtaining a licence to trade gas and special permission for a Distribution Network Area. The latter may only be implemented through a distribution network facility of a PT Company that has obtained access to a Distribution Network Area and after obtaining a licence to trade gas.

The MoEMR has the authority to determine and set technical standards of gas, and also minimum technical standards for distribution and facilities.

A.7. Strategic Oil Reserve

A strategic oil reserve deposit determined by the Government can be built up either through domestic production or imports. The Government may assign a PT Company to contribute in building the strategic oil reserve. The MoEMR will determine the quantity, type, and location in relation to storage and exploitation of the strategic oil reserve. The quantity of strategic oil reserve will be oil need driven.

A.8. National Fuel Oil Reserve

The MoEMR is responsible for stipulating policy on the quantity and type of national fuel oil reserve and may appoint a PT Company to contribute to building this reserve. The national fuel oil reserve is determined and supervised by BPH Migas. The reserve can only be used when there is a scarcity of fuel oil, and once the scarcity is resolved, the reserve must be returned to its original position.

A.9. Standard and Quality

The MoEMR sets the type, standard and quality of fuel oil, gas, other fuels, and certain processed products that are marketed domestically. In determining the quality standards, the MoEMR reviews the technology to be applied, the capacity of the producer, the consumer’s financial position, safety, health, and environmental standards.

A PT Company operating as a processing business must have an accredited laboratory to perform tests on the quality of the processing output. Likewise, a PT Company operating a storage business, which does blending to produce fuel oil, must provide a testing facility on the quality of the blending output. If the PT Company is unable to provide a self-owned laboratory, it is allowed to use an accredited laboratory facility owned by another party.

Fuel oil, gas, and processing output in the form of finished products, which are imported or directly marketed domestically, must comply with the quality standards determined by the MoEMR. For fuels and processing output that are exported, a producer may determine the standard and quality based on the buyer’s request. Fuels and processing output specially requested must report their determined standard and quality to the MoEMR.

A.10. Availability and Distribution of Certain Types of Fuel Oil

To guarantee the availability and distribution of certain types of fuel oil, a trading business at the moment is unable to operate in a fully fair and transparent market. The MoEMR has the authority to designate areas of trading certain types of fuel oil domestically. This may include trading fuel oil where:

a. the market mechanism has been effective; b. the market mechanism has been ineffective; or c. the market is located in a remote area.

BPH Migas has the authority to:

a. designate a trade distribution area for certain types of fuel oil for corporate bodies holding a trading business licence; and

b. determine joint usage of transportation and storage facilities, particularly in areas where the market mechanism is not yet fully effective or remote areas.

If necessary, the Government, with input from BPH Migas, may determine the retail price for certain types of fuel oil by calculating its economic value. A PT Company holding a wholesale trading business licence that trades certain types of fuel oil to transportation users or trades kerosene for household and small enterprises, must provide the distributor it has appointed with opportunities. The distributor includes cooperatives, small enterprises, and/or national private enterprises contracted with the PT Company. The distributor may only distribute the trademark fuel oil of the corporate body. The PT Company must report to BPH Migas and the MoEMR the name of its distributor.

A.11. Occupational Health and Safety, Environmental Management, and Development of the Local Community

PT Companies operating with a downstream business licence must comply with provisions relating to occupational health and safety, the environment, and the development of local communities. This responsibility includes developing and utilizing the local community through, amongst other things, local employment. Such development must be implemented in coordination with the regional government and priority given around the area of operation.

A.12. Utilisation of Local Goods, Services, Engineering and Design Capacity and Workforce

PT Companies operating with a downstream business licence must prioritise the utilisation of local goods, tools, services, technology, and engineering and design capacity.

In fulfilling labour requirements, a downstream PT Company must prioritise the employment of Indonesian workers according to required competency standards. Where Indonesian workers do not meet the required standards of competence and occupational qualifications, the PT Company must arrange for training and development programs to improve those workers’ capacity.

A.13. Sanctions

BPH Migas has the power to determine and impose sanctions relating to a PT Company’s breach of its business licence. Sanctions increase whilst the breach remains unremedied and include a written reminder, suspension of the business, freezing of the business, and finally, annulment of the business licence. All damages arising out of any sanction must be borne by the respective Corporate bodies.

Any person or company who operates a business without a licence will be

penalised. Duplication or falsification of fuels or processing output; or any misuse of transportation or trading of subsidised fuel carries with it a maximum penalty of six years imprisonment and Rp 60 Billion fine.