Tuesday, October 21, 2008

Domestic Market Obligation (DMO) issue in OiI/Gas in Indonesia

In the Oil and Gas activities in Indonesia, one of the interesting parts to be observed is the Domestic Market Obligation ( DMO) issue.

Why is it interesting ? This is really interesting because, this DMO is imposed towards the Producing Oil/Gas Companies in Indonesia by the Government of Indonesia (GOI) together with the Peoples House of Representative in Indonesia (DPR) to make sure that the Indonesian Domestic Consumption on Oil and Gas per the running Calendar Year, are being fulfilled.

Accordingly this is within the framework of implementing National Interest of a Nation for the continuity of the development and progress of such Country.

With respect to this issue, it appears that every Nation and Country in this world shall have its task in imposing its National Interests.

As far as the Industries, State Owned Companies, cars and public transportation, Airplanes, Vessels, Army Vehicles, which are the base fundamental needs of such Nation, are still by enlarge are being energized by the oil fuel/ gas, then the institution of such country which is the Government and the House of the Peoples Representatives (DPR) , shall do its up most to ensure that such source of energy to supply their Industry as the back bone of their country are flowing.

The above circumstances, may probably be the reason why DMO is imposed under the Production Sharing Contracts (PSC)/Technical Assistance Agreement(TAC) / Enhance Oil Recovery (EOR) by the Government of Indonesia ( GOI) now being represented by BP Migas.

Relating to this issue, the significant elements among others shall then be as to what kind of formula and to what extent of volume of DMO, shall be shared by each Producing Oil/Gas Contractor in Indonesia.

There has to be a certain Total Number of Domestic Consumption of Fuel/Gas per Calendar Year that has to be established by the GOI together with the DPR based on their studies.

Furthermore what are and from where are the sources for such Domestic Consumption of Oil /Gas, meaning as to how much is it driven from Outside of Indonesia and how much is taken from Inside of Indonesia.

Relating to the "Sources from Inside Of Indonesia", it appears that such DMO shall be shared or based on a certain Quota among "All of the Oil/Gas Companies who are already in the production Stages In Indonesia".

This Quota, is then equally shared prorate among "All of the Oil/Gas Companies who are already in the production Stages In Indonesia".

Based on the above perception, a certain formula was then applied in each and every PSC, TAC, EOR, which based on the Existing Law No. 22 Year 2001, including the Decision of the Constitution Court In Indonesia, such DMO is 25 % of the Oil /Gas Equity entitlement or oil /gas portion of each respective Oil/Gas Contractor in the Calendar Year.

However, as I understand, Law No.22 Year 2001 is now being reviewed, for which, relating to this DMO issue, I understand from a source, that DPR at this present moment is suggesting the DMO figure to be 75%, which appears to be a rather high figure. The representative from the Oil/Gas Community or the Indonesian Petroleum Association shall have their saying in the hearing with the DPR relating to this revision of the Law No. 22 Year 2001 including to the DMO issue .

Agung Supomo Suleiman Senior Partner of the Law Firm of Suleiman Agung & Co

Blog: http://www.sacolaw.blogspot.com

Email : agungsacolaw@telkom.net

Mobile phone : 0816830647

Thursday, October 16, 2008

Knock To Knock Arrangements in Oil/Gas Operastional Contracts

When you are negotiating and drafting legal contracts between parties in the oil and gas operations, you frequently are faced with a situation where the other party is asking for a knock to knock arrangements.

Interesting isn't it. Well what does it mean.

Let me share my experience on some interesting experience relating to this knock to knock arrangement.

These may occur when the other party is having the same strong position when they negotiate the terms related to shifting the risks relating to the liability and indemnifications issues.

For instance, you happen to be a lawyer representing one of the Oil and Gas Companies in establishing and incorporating such liability clauses, you are asking the Contractor to indemnify, release and hold harmless the Oil/Gas Company from and against any claims in whatsoever form and kind being filed by any person or party, who are employed or engaged by such Contractor, regardless of the cause.

In these case the Contractor which is represented by their lawyer, may ask for a knock to knock to knock arrangements relating to this liability issue.

In response to their request you as the lawyer of the Oil and Gas Company, shall then request such Contractor’s Lawyer to provide you with their revisions and versions.

After receiving such revisions, you then as the lawyer of the Oil and Gas Company will come again with your comments and inputs, for instance that you may agree, to also indemnify, hold harmless the Contractor from and against claims coming from any person under the Oil/Gas Company employment relation, however, to the extent such losses or damages are solely caused by the deliberate and major fault of the Company.

As you may see, the risks of liability, and the burden of proof elements, may be moved from one party to the other party, depending on the strength position of such respective parties who are negotiating such terms.

In practice, this may happen since under the Indonesian Law, we adopt the freedom of contract, Article 1338 of the Indonesia Civil Code, whereby the parties are free to enter and negotiate any kind of agreements in our case commercial agreement, which they want, provided however that such agreement does not violate the applicable compulsory law, public law or the public order.

Thus, in my experience and practices as a commercial lawyer, I have the perception that, whether an agreement is in more favor to a party compared to the other party, really depends on the situation and position of the parties during the negotiation, drafting and completion or signing the agreement.

Agung Supomo Suleiman

Senior Partner Law Firm Suleiman Agung & Co

Blog : http://www.agungssuleiman.blogspot.com

Email : agungsacolaw@telkom.net

HP : 0816830647

Wednesday, October 15, 2008

Construction Contract Exposures in the Oil /Gas Operations

When you are building a certain Gas and Oil Production Facilities Project, in a certain Contract Area, In Indonesia, you might then have to prepare and enter into an Engineering, Procurement, Construction and Commission Work Contract Agreement.

In the Oil and Gas operations, we usually call this the EPIC Contract Agreement. Under this EPIC Contract Agreement the skeleton or table contents of this Agreement which may be drafted, in practice covers among other the following issues :

the Definitions, the Work, the Responsibilities of the Oil/Gas Company ( Company), the Responsibilities of the Contractor, the Project Schedule, Time Completion, the Contract Price, the terms of Payment, Changes in Work, Guarantees and Warranties, Acceptance of Work, Default, Termination and Suspension, Liquidated Damages, Labor Relations, Relation with other Contractors, Insurance and General Indemnification, Patent Indemnification, Treatment of Proprietary Informations, Invention and Licenses, Liens and claims, Assignments and Subcontracts, Force Majeur, Accounting Records, Arbitration and Governing Laws, Taxes, Duties, Contractor's Representatives, Company's Representatives, Notices and Communications, Miscellaneous, Obligations and Liability.

In the preamble of the EPIC Contract Agreement, we usually describe, the reference relating to the background of the Oil/Gas Company, as to what basis is this Company conducting its oil and Gas Operations in Indonesia.

In my practice as Lawyer, we usually refer to the Production Sharing Contract or TAC or EOR, depending on the cooperation arrangements between the Oil and Gas Company with the GOI which is now BP Migas.

Furthermore, if the Oil/Gas Contractor is conducting its operations in cooperation with other investors, then we shall refer to the Operating Agreement which is specifically entered by such oil/gas Companies with the other Oil/Gas Investors.

As we all are aware, since the funds required to conduct the oil and gas facilities are significant, then such Oil/Gas Contractors, may enter into a Joint Operation Agreement (JOA) with other oil/gas companies, share the funds, costs and expenses. In this JOA arrangements, one of the Oil/Gas Contractors shall be elected as the Operator, who usually shall be responsible to enter into the agreements with 3rd Parties, to conduct the oil and gas operations, in which in our case is the EPIC Contract Agreement.

As an oil and gas Lawyer, having the opportunity and experience in being involved in preparing the EPIC Contract Agreement is really very interesting.

The interesting part is that the Construction Contractor, which we are asking to perform the Construction work, shall not only be responsible for the Construction work of the Oil and Gas Production Facilities, but shall also be responsible for coordinating and managing the Engineering, the Procurement, Installation and the Commissioning of such Production Facilities.

Thus as the Lawyer who shall be responsible for preparing and reviewing the legal aspects of these arrangements, we have to make sure that our Client who is the Oil and Gas Company are really being given the full legal right to request such Contractor to perform the Work in a professional manner by utilizing sound engineering principles, Project Management Procedures and supervisory procedures in accordance with the accepted practices in the petroleum processing industry.

We also have to make sure that the Contractor has inspected the Site and surrounding locations and is familiar with the conditions related to the performance of the Work. This is important since there may be cases where, the Contractors is not aware of the Site conditions, which shall result delay in the performance of the Work.

If the Contractor has to fabricate outside of Indonesia any pressure vessel to be used in connection with the Project, such Contractor has to advise the Oil/Gas Company at the earliest practical date, that it has to fabricate and will obtain all the necessary permits from the Directorate General of Oil and Gas (MIGAS) (through the Oil/Gas and BP Migas) prior to the beginning of the fabrication.

This EPIC Contract Agreements usually comprised of several Sections and Volumes, where we have to set up the order of priority in the event there is a discrepancy or consistency between the Sections or Volumes of such legal documents.

The significant part in preparing such EPIC Contract Agreement, is also on the Scheduling of the Work, in which the Contractor has to schedule its Work to comply with any design, construction and commissioning schedule constituting part of the EPIC Agreement and with any sequence or priority described in the Scope of Work.

The Contractor is required to submit to the Oil and Gas Company within a certain period of time for instance 2 weeks a time schedule ( Project Schedule).

This Project Schedule in practice among others includes the activities such as Identification of the Critical path with all the restrains and interrelations clearly indicated, start of the survey for pipelines, start and completion dates of detail design and schedule issue dates for “ Issued for Approval” Drawings, Start and Completion Dates and scheduled issue dates for Approved for Construction Drawings, Preparation and issuance of bills materials, start and end of mobilizations and demobilizations. All normal construction activities including Site Clearing, excavation work, foundation and equipment installations etc.

The Contract Price for the full payment of the EPIC Work to be completed by the Contractor to the satisfaction and accepted by the Oil/Gas Companies Work shall be a Lump Sum Price. There will also be the terms of payment where schedule of payment shall be established under the EPIC contract agreement.

Well, those above are some of the items that the oil and gas lawyers has to be involved in helping the end users and the management of the Oil and Gas Companies from the legal aspect to support and protect the legal rights of the Oil and Gas Companies in conducting its operations in Indonesia.

Agung Supomo Suleiman

Senior Partner of Law Firm Suleiman Agung & Co

http://www.sacolaw.blogspot.com

email : agungsacolaw@telkom.net

Mobile Phone : 0816830647

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