Upstream Oil And Gas Business Activities
Government Regulation 35/2004 specifically regulates upstream oil and gas operations. According to Article 40 paragraph 1 of the Government Regulation in Lieu of the Job Creation Law, amended by Article 1 paragraph 7 of Law 22/2001, upstream business activities are those related to exploration and exploitation. The provisions related to exploration and exploitation are as follows:
- Exploration is an activity aimed at gathering information about geological conditions to discover and estimate oil and natural gas reserves in a specific work area. There are three main steps in this process: surveying, drilling exploration, and assessing the economic value of hydrocarbon reserves.
- Exploitation involves the extraction of oil and natural gas from specific work areas, including drilling and well completion, the construction of transportation, storage, and processing facilities for the separation and purification of oil and natural gas in the field, as well as other related activities.
This upstream business activity is carried out by business entities or permanent business forms based on cooperation contracts. These cooperation contracts can take the form of contracts for results or other types of cooperation agreements intended to explore and exploit resources that are more beneficial to the country, with the results being used to enhance the prosperity of the people.
A contractor is a business entity or a permanent business form designated to carry out exploration and exploitation in a work area according to a cooperation contract. The cooperation contract is signed by the contractor with the Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) in accordance with Article 1 paragraph 10 of the Minister of Energy and Mineral Resources Regulation 2/2022. SKK Migas is a special task force that manages upstream oil and gas business activities under the guidance, coordination, and supervision of the Minister of Energy and Mineral Resources. Contractors operating in upstream business must provide funds for post-operation activities. This obligation has been carried out since the beginning of the exploration phase and is achieved through work plans and budgets.
Downstream Oil And Gas Business Activities
Downstream business activities include oil and gas operations as well as exploration and exploitation. Government Regulation 36/2004 specifically regulates these downstream activities. According to Article 40 paragraph 1 of the Government Regulation in Lieu of the Job Creation Law, amended by Article 1 paragraph 10 of Law 22/2001, downstream business activities are activities that focus on processing, transportation, storage, or sales.
This downstream business activity is carried out by enterprises that have a business license issued by the minister and is conducted through fair competition mechanisms. A business license is a permit granted to enterprises to conduct operations such as processing, transportation, storage, and/or transactions with the aim of generating profit.
The downstream business essentially consists of:
- Processing is the process of refining, obtaining components, improving quality, and increasing the added value of crude oil and natural gas, but does not include field processing;
- Transportation is the process of transporting crude oil, natural gas, and/or their processed products from production sites or storage and processing locations, including natural gas through transmission and distribution pipelines;
- Storage means taking, collecting, storing, and releasing crude oil and/or natural gas;
- Trading includes buying, selling, exporting, and/or importing crude oil and/or its processed products, including natural gas transactions through pipelines.
Conducting Upstream And Downstream Oil And Gas Business Activities Simultaneously
The provisions of Article 10 of Law 22/2001 state:
(1) Business entities or permanent establishments engaged in upstream business activities are prohibited from conducting downstream business activities.
(2) Business entities engaged in downstream business activities cannot conduct upstream business activities.
According to the explanation of Article 10 paragraph (1) of Law 22/2001, upstream activities refer to the extraction of non-renewable natural resources, which are the wealth of the state, and therefore the state must obtain maximum benefits from these activities for the prosperity of the people. In addition, as stated in Article 31 paragraph (6) of Law 22/2001, the distribution of revenue between the central government and local governments must be clear, as downstream business activities are generally business ventures, where production costs and losses cannot be charged (consolidated) to the costs of upstream business activities.
Business entities must establish a separate legal entity if they engage in both upstream and downstream activities simultaneously, such as through a holding company.
LEGAL BASIS:
- The 1945 Constitution of the Republic of Indonesia;
- Law Number 22 of 2001 on Oil and Natural Gas;
- Government Regulation in Lieu of Law Number 2 of 2022 on Job Creation;
- Law Number 6 of 2023 on the Establishment of Government Regulation in Lieu of Law Number 2 of 2022 on Job Creation into Law;
- Government Regulation Number 35 of 2004 on Upstream Oil and Gas Business Activities;
- Government Regulation Number 36 of 2004 on Downstream Oil and Gas Business Activities;
- Government Regulation Number 34 of 2005 on Amendments to Government Regulation Number 35 of 2004 on Upstream Oil and Gas Business Activities;
- Government Regulation Number 30 of 2009 on Amendments to Government Regulation Number 36 of 2004 on Downstream Oil and Gas Business Activities;
- Government Regulation Number 55 of 2009 on Second Amendments to Government Regulation Number 35 of 2004 on Upstream Oil and Gas Business Activities;
- Minister of Energy and Mineral Resources Regulation Number 2 of 2022 on the Organization and Work Procedures of the Special Task Force for Upstream Oil and Gas Business Activities.
REFERENCE:
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