Thursday, September 18, 2008

Oil and Gas Contracts and legal works

During my experience in running my Law Firm which now is called Suleiman Agung & Co, there are many experiences involving legal works relating to Oil & Gas. When I started in June 1, 1998, I started my office from my home at Cipete, South of Jakarta. After around 3 months I got legal works from an Oil Company who has returned its Contract Area /Block to the Indonesian Government.

For such purpose I had been requested to give them legal advices as to what are the procedures required to be completed, and ask my law firm to conduct, research and legal due diligence on their documents including reseraching with the relevant authorities, as to what are the steps that must be taken. Based on such request I made such legal research and legal due diligence, and provide my Client with the legal advices and legal services.

For my legal services rendered, my Law Firm received legal fees, for which I then moved to a certain office building where I had shared space with my friend who was renting office space and offered me a space to be shared. I then obtained another retainer arrangement with an Oil and Gas Company who retained my Law Firm for 1 year.

It was really interesting. My Client is actually the holding company, which I was requested among others to review and look at their Production Sharing Agreements (PSC) and Technical Assistance Agreement (TAC) and assisting and accompanying them in meetings and negotiations in their efforts to reschedule their financing/ loan agreement. Well, related to the Production Sharing Contracts, it is really interesting because there are several types of Oil and Gas Contracts between the Government of Indonesia and the Oil and Gas Contracts, among others PSC, TAC, Enhance Oil Recovery(EOR), PSC-JOB ( Joint Operating Body).

One of the interesting part in drafting and reviewing such Oil and Gas Contracts, is the history surrounding such oil and gas activities, where according to the geologies, such oil and gas products was actually originated from fossils and plankton of animals, plants which was buried deep down in the earth, through process of over more than 350 Years, where the pressure is very high and the temperature is very high, which changed them to become oil and gas and are being trapped or deposited in a reservoir deep below the earth.

Amazing and really interesting isn't it? The risk in the oil a gas industry is very high, because you may find that after spending huge amount of monies, you may end up in finding a dry hole. And there are also risks exposure such as blow-out which is a kick of high pressure to the well head which could not be controlled, and shall then cause a blow out which could collapse the Drilling Rig, and even cause a crater, after such blow-out occurred. Of course there is the Blow Out Preventer ( BOP), but, this Blow Out, which is beyond the capacity of the BOP can occur. Thus the liabilities and financial exposure is really huge.

Since the risk is very high, the Government Of Indonesia’s policy is to shift the risk to Oil and Gas Contractors. After commercial production is declared by the Government, which right now is BP Migas, together with the Oil and Gas Contractors, then if such field or portion of the Contract Area is decided to be developed for production, then all the prior expenses which was incurred by the Contractor will be recovered by the Government in this case represented by BP Migas.

Thus the philosophy adopted by the GOI, is that such cost recovery is made by the Government of Indonesia ("GOI) "not" with cash and fresh monies, but through the oil and gas products produced from such Contract Area, field or portion of the Contract Area which had been declared commercially production. If no commercial oil or gas is made, then the risk of spending the monies or sinking fund is solely borne by the Oil and Gas Contractor, and not by the GOI, accordingly the GOI will not make any cost recovery upon the costs and expenses incurred by the Oil and Gas Contractor.

We should also note that, under the concept under the Indonesian Constitution Law, the Oil and Gas deposits are owned by the whole people of the Republic of Indonesia, and is totally different with the concept of a country which allows individual to own such oil and gas deposits which lays below their individual land property. Since the oil and gas reservoir and deposits which are under the ground is owned by the whole people of the Republic of Indonesia, the Government then has the full responsibility and obligation to ensure that the social welfare of the whole people of the Republic of Indonesia is guaranteed from such oil and gas reservoir and assets.

Formerly Pertamina, was being established, by Law No.8 Year 1971, as the proxy of the oil and gas authority mining rights, granted by the people, but now this concept had been changed where Pertamina is changed and become a PT Pertamina (Persero), which has the same status as Oil and Gas Contractors like other Oil and Gas Contractors, but this PT Pertamina (Persero) is 100 % owned by the State.

As we then realized, the GOI, who has the obligation and responsibilities to manage the social welfare of the whole people of Indonesia, based on the Indonesian Basic Constitutions Article 33 paragraph 3 Basic Law 1945 and its amendments, really needs the sources of revenue, which until know, the main resource is still depending on the oil and gas assets. Such resources from the oil and gas from the whole Area of the Republic of Indonesia, is then considered as the resources to fill in be the Governments Yearly Income and Budgets Program, which usually is made based on a 5 Year Plan, but every year the Government has to make report to the Indonesian Peoples Parlement (MPR and DPR).

Thus to make sure that GOI is guaranteed to get the portion of the Oil and Gas produced from the whole Contract Area located within the Whole Oil and Gas Territory of the Republic of Indonesia, then for each Contract Area under the PSC, TAC, PSC JOB, EOR, there is always a First Tranche Petroleum ( FTP) mechanism, built in such contracts, which means that on the Current Year before cost recovery is made to the costs and expenses incurred by such Oil and Gas Contractors, after commercial production has been declared by the Government of Indonesia represented by BP Migas ( a State Regulatory Body in Oil and Gas), and production is to take place, 20% of the Total Oil and Gas produced from such Contract Area has to be allocated aside to fill in the Yearly Government Income and Budget Program.

This FTP is split between the GOI and the Contractor in proportion to their split equity portion as been mutually agreed in their PSC. Besides this FTP there is also a Domestic Market Obligation (DMO) imposed to the Oil and Gas Contractors, where a certain formula is established under the PSC, TAC, EOR, PSC -JOB, where in essence based on the latest Oil and Gas Law including the Decision from the Constitutional Court, such DMO is 25% of the Oil and Gas Contractors portion of the Crude Oil produced in the current Year.

Well the above are some of the legal aspects which my Law Firm and I am involved in giving legal advises to our Oil and Gas Contracts. If some of you readers needs some legal advises and assistance from my Law Firm of Suleiman Agung & Co, please do not hesitate to contact me as the Senior Partner of this firm through my Mobile phone 0816830647 or my email agungsacolaw@telkom.net or agungsuleiman@gmail If you wish to put your advertisement of your products or services we will be happy to offer you as space for your ads in our website of http://www.agungssuleiman.blogspot.com

Agung Supomo Suleiman September 20, 2008

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