T

he government will overhaul the management of the oil and gas sector in the country by giving more authority to state-owned company Pertamina and establishing another state enterprise with special duties.

The overhaul in the oil and gas business will be part of a proposal to be included in the draft revision to the Oil and Gas Law No. 22/2001.

Energy and Mineral Resources Minister Sudirman Said disclosed the idea for the first time during a hearing with the House of Representatives Commission VII on Wednesday.

'€œUpstream oil and gas activities will be conducted fully based on licenses given by the government to a specially assigned state enterprise and to Pertamina,'€ Sudirman said.

The specially assigned state-owned enterprise (SOE), which will be set up to replace the existing upstream oil and gas regulator, the Upstream Oil and Gas Regulatory Task Force (SKKMigas), will have the authority to sign contracts with energy companies working in this country.

Meanwhile, Pertamina will also have the authority to manage oil and gas blocks in the country on its own under a direct appointment by the government. Thus, Pertamina needs no contract with the specially assigned SOE.

In addition, Pertamina, through its subsidiaries, could possibly have participating interests in any exploration and production activities being conducted by other oil and gas companies that have contracts with the specially assigned SOE.

For Pertamina'€™s handling of oil and gas blocks, the Energy and Mineral Resources Ministry also proposes significant changes. Under the planned revision, Pertamina will operate the oil and gas blocks under a royalty and tax mechanism, a significant shift from the current production sharing contract (PSC) scheme.

Currently, Indonesia implements a PSC system for the oil and gas sector. Under the system, oil and gas companies are contractors hired by the government to manage oil and gas blocks.

As contractors, the oil and gas companies bear all the investment burdens for the oil and gas blocks. Only if the oil and gas blocks produce, will the government reimburse contractors for their expenses. The reimbursement in the PSC system is known as a cost recovery.

The PSC system has been said to be the most suitable for the oil and gas sector because the government bears no risks over failures of expensive oil and gas exploration activities, which are conducted by contractors.

The head of the Energy and Mineral Resources Ministry'€™s legal division, Susyanto, said the changes '€” Pertamina'€™s new authority in oil and gas operations and the establishment of a specially assigned SOE to replace SKKMigas '€” were based on a ruling of the Constitutional Court.

'€œWe are translating the Constitutional Court'€™s ruling stating that the government should give concessions to one or more state-owned enterprises,'€ he said.

In 2012, the Constitutional Court made an unanticipated decision by declaring that numerous articles in the 2001 oil and gas law violated the 1945 Constitution. The Court also ruled that the existence of the upstream oil and gas regulator BP Migas was unconstitutional because it handed over the management of oil and gas blocks to companies under a contract, which limited the state'€™s ability to maximize the benefits of natural resources for the people'€™s welfare.

The court'€™s decision became the basis of a plan to revise the 2001 oil and gas law, as well as to establish a better mechanism for SKKMigas '€” which was formed as a temporary body to takeover BP Migas'€™ role following the court'€™s ruling.

The revision of the oil and gas law has become one of main issues in the House of Representative'€™s legislation program. Both the government and the House of Representative'€™s Commission VII are planning to propose their own draft revisions and discuss them in a special panel of the commission.

Minister Sudirman said the ministry'€™s current proposal was an early concept that was open for further discussion.

Apart from the management of the upstream oil and gas sector, the Energy and Mineral Resources also proposed several points for the management of the downstream oil and gas sector, including the role of SOEs as buffer agencies for oil and fuel, as well as for gas management.