Govt. Allows for the Construction of Domestic Oil Refineries by Private Companies

The Ministry of Energy and Natural Resources (“Ministry”) recently issued Regulation No. 35 of 2016 on the Implementation of Domestic Oil-Refinery Construction by Private Companies (“Regulation 35/2016”).In essence, Regulation 35/2016 sets out the legal framework for the construction of domestic oil refiners by private companies in order to safeguard fuel supplies in Indonesia, to increase national fuel-production volumes, to reduce dependency upon fuel imports, and to hopefully eventually achieve national energy security. [1] Construction of Oil Refineries by Private CompaniesPursuant to Regulation 35/2016, a private oil refinery refers to any petroleum and/or condensate refinery, along with its various supporting facilities, which is constructed by a private company or companies within Indonesia (“Refinery”). Such private companies include any incorporated business entities (legal entities) which are: (a) Engaging in a constant and permanent business sector; (b) Established in accordance with prevailing Indonesian laws and regulations; (c) Operating and domiciled within Indonesia; and (d) Working with private parties who own all or most of their shares. [2] Before they can construct a Refinery, private companies are required to secure a Processing Business License (Izin UsahaPengolahan) by complying with the various requirements and procedures which are set out under Ministry Regulation No. 7 of 2005 on Requirements and Guidelines for the Implementation of Business Licenses for Downstream Oil-and-Gas Business Activities (“Regulation 7/2005”). [3] Furthermore, Regulation 35/2016 requires that the development of any new Refinery should utilize technologies which maximize environmental protection and management, and should also prioritize the use of domestic products. [4] On the other hand, Regulation 35/2016 enables for the construction of any Refinery which is undertaken by private companies to be supported by various fiscal or non-fiscal facilities in accordance with the prevailing laws and regulations and/or the integration of petrochemical production in order to enhance their economic feasibility. In addition to such support, private companies are also at liberty to obtain local and/or imported raw materials (i.e. petroleum and/or condensates of natural gas) for their Refineries. [5] Fulfillment of Domestic Need and Fuel DistributionRegulation 35/2016 mandates that any fuels which are produced by Refineries must be prioritized for the fulfillment of domestic needs first, and can only be exported to foreign countries after due consideration has been paid to domestic needs, in accordance with the prevailing Indonesian laws and regulations. Nevertheless, Regulation 35/2016 also allows for any fuel which is produced at Refineries to be sold directly to domestic end-users, provided that any private companies which are intending to do so first secure a Wholesale Business License (Izin Usaha Niaga Umum). [6] Similar to the Processing Business License, procedures for the securing of this license are also regulated in detail under Regulation 7/2005.In addition, Regulation 35/2016 also stipulates that any private companies which are currently in the process of constructing their own Refineries may be directly appointed as distributors of certain types of fuel and special types of fuel by the Oil-and-Gas Downstream Regulatory Agency (Badan Pengatur Hilir Minyak dan Gas Bumi– “BPH Migas”). However, any such appointments should only involve private companies which have already secured Wholesale Business Licenses and which are also in possession of proper storage and distribution facilities. [7] Oversight MeasuresRegulation 35/2016 authorizes the Director General of Oil and Gas to guide and oversee the construction, development and operation of Refineries by private companies in accordance with the prevailing laws and regulations. Moreover, BPH Migas has the authority to supervise the procurement and distribution of the certain types of fuel and special types of fuel which are mentioned above. [8] Finally, any private companies which engage in the construction of Refineries are obliged to routinely submit reports to the Director General every three months or whenever they are requested to. [9] Regulation 35/2016 has been in force since 11 November 2016._MS