LNG

In a surprise ruling this week, the Indonesian Constitutional Court ruled that the country's upstream oil and gas regulator (BPMIGAS) - which is a party to every concession contract for oil and gas exploration in Indonesia - is incompatible with the Indonesian Constitution.

The decision has resulted in the immediate dissolution of BPMIGAS, whose offices were closed within hours of the ruling.

Law firm Susandarini & Partners, in association with Norton Rose Australia, have the following view on the decision:

"The Court found that BPMIGAS had violated the constitutional principle that control of Indonesian natural resources must be maintained by the State.

"It had done so, the Court found by issuing concession contracts to private enterprises, by handing over day-to-day management of such contracts to such enterprises, and by failing to maximise the profits which accrue to the Indonesian Government under those contracts.

"The decision clarified that the powers formerly exercised by BPMIGAS should in the interim be exercised and transferred to the Ministry of Energy and Mineral Resources (MEMR) - a provision which may provide for some continuity in the short term.

"Nevertheless, BPMIGAS played a key role in all upstream oil and gas activity in Indonesia and how that role will be replicated - and which aspects need to be changed in order to be compliant with the Constitution - is still unclear.

"The Government's initial response has been to issue a Presidential Directive establishing BPMIGAS as part of the MEMR, but what this will mean in practice remains to be seen.

"The decision did not, however, address the question of whether contracts issued by BPMIGAS in the 10 years of its existence continue to be valid.

"The Chairman of the Court, in extra-judicial comments following the publication of the decision, stated that such contracts remain valid for the time being, and the Minister for Energy and Mineral Resources echoed that view, but it is a matter on which the Court's ruling itself is silent.

"This issue will be one that is watched very closely by industry players and investors, as will the impact on production across the industry, both upstream and down," the lawyers said.