MENU
Comprehensive Legal Brief: The Local Content Requirement in the Oil and Gas Upstream Industry

I. Introduction

Oil and gas industry has a long history in Indonesia for more than 130 years, since the first oil discovery in North Sumatra in 1885. Indonesia also join Organization of the Petroleum Exporting Countries (“OPEC”). Before we discuss the local content requirement on the oil and gas upstream industry, it is important to understand the business overview and the regulatory framework brief in Indonesia prior to invest in this promising sector.

In accordance with PWC’s investment and taxation publication on oil and gas in Indonesia in 2023, Indonesia held proven oil reserves of nearly 2.5 billion barrels at the end of 2020. Furthermore, in 2020, it is also worth noting that the investment in the oil and gas industry was around USD 10.6 billion, a drop of 13% compared to investment in 2019 off USD 12.5 billion.

 

II. Business Activities Overview and Regulatory Framework

In a nutshell, the following law and regulations became the regulatory framework in Indonesia, specifically Law No. 22 of 2021 on Oil and Gas (the "Law No. 22/2001”). On 30 December 2022, the President of the Republic of Indonesia signed Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation (the “Perppu No. 2/2022”). Furthermore, on 31 March 2023, Indonesia’s House of Representatives approved into law the Perppu No. 2/2022 as Law No. 6/2023 (the "Law No. 6/2023"). In addition to the above, when we are discussing about the local content requirement, we will analyze the Ministry of Energy and Mineral Resources Regulation Number 15 of 2013 concerning The Use of Domestic Product in Upstream Oil and Gas Activities (the “MEMR Regulation No. 15/2013”).

 

As initial matter, it is important to understand what the objective of Law No. 22/2001 is. In accordance with Article 3 of Law No. 22/2001, there are several objectives that can be determined, as follows:

  1. Guarantee the effective implementation and control over exploration and exploitation business activities in a useful, beneficial, as well as highly competitive and sustainable manner for state-owned Oil-and gas, which are strategic and non-renewable, through open and transparent mechanisms;
  2. Guarantee the effective implementation and control over Processing, Transporting, Storing and Commercial businesses in an accountable manner, which are organized through reasonable, fair and transparent business competition mechanisms;
  3. Guarantee the efficient and effective supply of Crude Oil and Natural Gas, both as source of energy and as raw material, for domestic need;
  4. Support and promote the national capacity to be more capable of competing nationally, regionally and internationally;
  5. Increase state income to provide the greatest contribution possible to the national economy and to develop as well as strengthen the position of Indonesian industry and trade; and
  6. Create job opportunities, improve the people’s welfare and prosperity in a just and equitable manner, as well as continuously maintain environmental sustainability.

Under Law No. 22/2001, there is a differentiation between upstream business activities (between exploration and exploitation) and downstream business activities (processing, transport, storage, and commerce). Please note that upstream business activities are controlled through Joint Cooperation Contract ("JCCs"), mostly with Production Sharing Contract ("PSC"), between business entity and the executing agency, which known as Special Taskforce for Upstream Oil and Gas Business Activities - Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu MInyak dan Gas Bumi (“SKK Migas”). Meanwhile, downstream business activities are controlled by business licenses issued by Badan Pengatur Hilir Minyak dan Gas Bumi (the “BPH Migas”). Therefore, SKK Migas and BPH Migas supervise upstream and downstream activities, respectively, to ensure:

  1. The conservation of resources and reserves;
  2. The management of oil and gas data;
  3. The application of good technical norms;
  4. The quality of processed products;
  5. Workplace safety and security;
  6. Appropriate environmental management, such as preventing environmental damage;
  7. The prioritization of local manpower, goods and services, and domestic engineering capacities;
  8. The development of local communities; and
  9. The development and application of oil and gas technology.

In relation to the upstream and downstream business activities above, they may be carried out by State-Owned Enterprises (“SOEs”), regional administration-owned companies, cooperatives, small-scale businesses, or private-business activities. In addition, the upstream business activities may include branches of foreign incorporated enterprises as a Permanent Establishment, or Badan Usaha Tetap (“BUT”).

In view of the differentiation for the business model in the oil and gas industry, it is important to note that upstream entities are prohibited from engaging in downstream activities and vice versa in accordance with Article 10 of Law No. 22/2001.

 

III. Local Content Requirement

Law No. 22/2001 mandates that business entities, or BUTs, carrying out oil and gas business activities must prioritize using local manpower, domestic goods, and services, as well as engineering and design capabilities, in a transparent and competitive manner. In view this, Ministry of Energy and Mineral Resources—Kementerian Energi dan Sumber Daya Mineral (“MEMR”) issued an implementing regulation, specifically MEMR Regulation No. 15/2013. In a nutshell, there are three categories for local content requirements, such as 

  1. Goods (Article 11 of ESDM Regulation No. 15/2013);
  2. Services (Article 11 of ESDM Regulation No. 15/2013): and
  3. Combination of goods and services (Article 15 of ESDM Regulation No. 15/2013).

The method of calculation of the local content requirement is as follows:

  1. Goods will be calculated based on the ratio of domestic components in the goods and the entire cost of finished goods.
  2. Services will be calculated based on the ratio between the service cost of domestic components in the services and the total costs of services; and
  3. Combination of Goods and Services will be the ratio of entire domestic components costs in the combined goods and services against the entire combined costs of goods and services.

For your reference, we herein provide the local content requirement target set by ESDM in relation to the oil and gas industry in accordance with Appendix I of ESDM Regulation No. 15/2013 as below:

Target for Local Content Requirement of Goods/Services in Upstream Oil and Gas Business Activities

No

Commodities

Local Content Requirement Target (%)

2021-2025

Goods

1

Drilling Pipe (OCTG)

  1. High Grade
  2. Low Grade

 

55
40

2

Pipeline

  1. Spiral/SAW
  2. ERW
  3. Seamless Pipe

 

80
80
50

3

Drilling Mud, cement, chemicals

70

4

Electrical Submersible Pump

35

5

Pumping Unit

70

6

Machinery & Equipment

40

7

Wellhead and X-mas tree

  1. On-shore
  2. Off-shore

 

70
40

8

Fuels

95

9

Oil

70

10

Other Goods

40

Services

11

Surveying, Seismic, and Geological Study Services

  1. On-shore
  2. Off-shore

 

90
35

12

Drilling Service

  1. On-shore
  2. Off-shore

 

90
55

13

Front End Engineering Design Service

  1. On-shore
  2. Off-shore

 

80
60

14

Engineering Procurement Construction Installation Contracting Services

  1. On-shore
  2. Off-shore

 

90
55

15

Shipping Service

85

16

Airplane Service

95

17

Other Services

75

 

IV. Conclusion

It is true that the oil and gas industry is one of the most high-caliber and promising industries in Indonesia. To conclude, there are several laws and regulations as guidelines for the investors, such as Law No. 22/2001 and Law No. 6/2023. In relation to the local requirement for upstream business activities in the oil and gas industry, it is important to understand ESDM Regulation No. 15/2013. Lastly, the above-mentioned local content requirement was important to consider by the investors while they were engaging in their business operations.

Author
Mahmuddin
Associate
Corporate Law, Business and Investment Law, Intellectual Property Law, Foreign Direct Investment
Related News