Brief Legal Notes on Preparing Drilling Contracts

When you enter and try to draft Drilling Contract,  you must be aware that the relation between the owner of the Drilling Unit, or Contractor and the Company  who requires such Drilling Operation  is governed by The Drilling Contract.  It is really  interesting as a Business Lawyer to be requested by  the end-user  to draft such Drilling Contract Agreement.

Within the petroleum industry, the drilling of wells is significantly important, since without a well - a simple yet complex ) hole in the ground -there is no way to get the oil and gas.  Basically the people directly involved in drilling are employed by operating companies, drilling contractors and various services and supply companies. The Operating Companies are the financiers of the industry and the principal users of the services provided by Drilling Contractors and Services Companies.

An operating company often called an Operator, is a person or company who actually has the right to drill and produce the petroleum that may exist at particular Site.  In Indonesia this Operator has to enter into a certain contract called  i.e.  Production Sharing Contracts (PSC) with  BP Migas pursuant to the terms and conditions under the PSC.  This Operator based on the PSC  who shall be the Oil and  Gas Company shall than enter into a Drilling Contract with a Drilling Company. The Oil/Gas Company itself under the PSC  has the right to explore, exploit, produces such Oil and gas in a certain Block Area as described under the PSC.   
 
At one time when I was experienced working as In House Legal Counsel for 5 Years in one of the Oil and Gas Companies in Indonesia called Huffco Indonesia (Vico), where such Oil and Gas Company were engaging 8 Drilling Rigs  to conduct the Drilling activities in the Contract Area of its PSC.

We must understand that in this kind of Drilling operations, there are high risks involved since the well which are being drilled are really deep wells  containing High Pressure  for instance 1,000 feet.  The oil, gas with such high pressure will flow and push  the casing and tries to found out a way to seek  places with lesser pressure to relieve its high pressure from  the hole below the Rotary Table. On land rigs Blow Out Preventers  (BOPs) are attached to the top of the well beneath the rig floor for preventions. The preventions are nothing more than large, high pressure valves  capable of being remotely controlled. When closed, they form a pressure tight seal at the top of the well and prevent the escape of the fluids. Without such BOP, if blow out occurs, gas, oil; and salt water spew on the air with a tremendous roar.

If there are gas, the whole thing will probably be on fire, and the Rig will lie as melted, twisted mess of junk.Human lives are threatened, pollution may occur,  precious Oil and Gas are wasted, and a Rig worth of  thousands or even million dollars maybe at a total Loss. Thus, obviously, it is desirable not to allow a blow out occur, and in fact not many occur. However, since a blow is spectacular, blow events becomes a media event. In reality according to the oil and gas expertise, Rig Crews will do their best and up most with great efforts that the well they are drilling remains under control. A hole with full of mud that weights the right amount or has the proper density, will not blow out.But sometimes the unexpected occurs.          

Having taking into the above consideration, as Business Lawyer / In-House Legal Counsel we have to ensure that a proper Drilling Contract is drafted and prepared to cover any and all such above risks, which may involved the loss of personal, equipments and event the Wells, for which we have to make sure that the rules concerning the liabilities, indemnities and risks relating to such  losses and damages which imposed legal exposures have to be covered and taken care under the Drilling Contracts. 

In the preamble of the Drilling Contract it shows how the contracting parties may describe the nature of the Drilling Task to be conducted by the Drilling Contractor. 

The Oil / Gas Company desires to have wells drilled in the Contract Area of the Company in Certain part of  Kalimantan as described under the Oil and Company Production Sharing Contract with the Government formerly Pertamina and now BP Migas. We as the Business Lawyer must emphasized in such Drilling Contract  that the Drilling Contractor has the expertise and experiences in the business of drilling, testing, completing. work over, and deepening wells. Such Drilling Contractor represents that it has adequate resources and equipment in good working order and has fully trained personnel capable of efficiently operating such Drilling Rig.

We have to make sure that the Drilling Contractor is ready, willing and able to drill said wells and carry out the said auxiliary operations and services for the interest and satisfactory of the Company. We also  have to stressed out that the Drilling Contractor agrees and is obligated to furnish the Drilling Unit with the Drilling and other equipment and personnel as described in detailed in the Appendix attached to such Drilling Contract.

 

The Contractor shall without prejudice comply with all instructions made by the Company consistent with the provisions under the Drilling Contract, which may from time to time be given by the Company. However, in performing the Drilling Work such Contractor shall be an independent Contractor with the authority to control and direct the performance of the detailed work, subject to Company's right to give instructions and of inspections and supervision by the Company's representatives at the Site Location where the Drilling operations is conducted and shall not relieve Contractor from Contractor's obligation and responsibilities. 

We have to be aware that many service companies such as Cementing Services, Mud, Well Testing, are also at the Location of the Rig Site, for which,  we have to make sure that the liabilities, indemnification,  and insurance clauses covering their respective properties and personal are properly covered with respect to loss and damages that might occur during the Drilling Operations. If there are tools stuck deep in the hole, usually the Insurance Company does not want to cover such down hole equipment loss. If there are losses to the structure of the well causing damages to the well or oil and gas reservoir, the Drilling Company, may request  that the Company absorb such well reservoir loss.           

Well, those are some brief provisions which the In-House Legal Counsel of an Oil and Gas Company must take into consideration in preparing and drafting a Drilling Contract to support the Drilling Operations conducted in the oil and gas operations in Indonesia. 

Probability Foreigners Allowed to own Property in Indonesia

New Hopes within the Entrepreneur relating to the probability of Foreigners to own property in Indonesia. This news emerged as good hopes for the Property Business players in Indonesia. During the Year of 2008 - 2009 according to Rhenald Kasli in Kompas Newspaper of  8 February 2010 there are property owners who are still hit by Crisis. However, if it is open according to the Minister of Peoples Housing there will be Foreign Investment coming in to Indonesia in the amount of USD 3 billion - 6 Billion per Year. 

The question which arises is as to whether is it true that Property are attractive for Foreigners and whether this plan is attractive to the business players in Indonesia says Rhenaldi Kasali in his Economic Analysis in Kompas News Paper of 8 February 2010. According to him, The Foreign Buyers of property in Indonesia in fact is not a new issue. In Karawang and Bekasi, West of Jawa there are plenty of Indian and Korean who are staying in said area. They said that they are the owner of such property. However,  from the answer  upon question to the developer,  it shows that such foreigners  which had already stayed for 10 Years is purchasing such property on behalf of the Company according to Rhenald Kasali.

In  Bali there are also many of Properties being build by Italian, French, Australian and Brasil. However, according to Rhenaldi the lands and buildings are on the name of certain person. These are also found in Batam and Bintan, where the owners are from Singapore and HongKong     In the island of Mentawai where the waves are good for surfing,  according to Rhenaldi,  many tourists are staying in the Boats. This is not because it is more comfort but since it is not easy to build or own property whch is suitable for  foreign tourists  who are regularly traveling there. 

If the above are ignored, the state for sure will loose the opportunity to get tax income since there are so much opportunities which are thrown away and loose from attention.

Regulations 

That Foreigners are not prohibited to own  property is actually known. However, according to Rhenaldi, we are used to make rulings which are blocking rather then opening. In the old rulings it is said that

Foreigners who  are allowed to buy property are those " who is domiciled in Indonesia". The words " domiciled in Indonesia" if we further check is more saying "No" then "Yes". Why is in not just shortened to become " Person who are allowed to purchase property. Point ?.

Furthermore according to Rhenaldi, the Right to use is limited only for 25 Years. For buyers which viewed the property as instrument for Investment, this ruling for sure is less attractive if compared with the rulings  applied in other countries within the similar Area. 

In Malaysia and Singapore, they can be provided with 99 Years, there are even being granted the rights for 900 Years. 

Furthermore countries which are desiring for the incmoing of foreign investment, the Property Policy are in line with other Policies, such as imigration, Buisiness Licenses/Permits, citizen status etc. In Indonesia such vision is not yet in line.

" Debottlenecking Mindset"

Rhenaldi says that there are lots of reasons why foreigners are attracted to purchase property in a country. Besides the need of having a place to stay, is for the schooling of their children, health care or medicare, working placement, or trading and also for investing.

There are lots of foreign traders who frequently entry and exit carrying products made in Indonesia to abroad electing to have a house in Indonesia by doing illegal manner rather then staying in the Hotel.

However, on the other side, the property in Indonesia is in fact attractive for Investors in the Asean Region. The pricing of property in Indonesia    in the main roads with the average quality is still ranging 20% of the similar property in Singapore.

Rhenaldi syas that as a comparison the pricing of 5 star Property in Singapore had reached Rp.150 million per square meter. In Indonesia with the same Class maximum  price is only Rp 30 million per square meter. Besides that the increasing price of property is interesting. Thus the potential is there according to Rhenaldi above writing.

For Japanese who had retired, felt that  the expensive living cost in their Country had driven such retired  person to seek for a staying place location in other country. Indonesia is included as the country who they are interested., however they frequently failed to get, resulting they choose Philipine and Thailand.  

The existing experienced shows that there are still " plenty of Bottle necking Mindset" which has to be solved to guide the new Governments Regulation, to enable the incoming of new investments within the property sector says Rhenaldi.

These Bottle necking Mindset is founded in several sectors in the Government, Parliament (DPR and DPRD/The House People Representative), The Chamber of Commerce and Industry ( Kadin), the entrepreneurs, and public.

• Firstly,  the new rules and regulations must be attractive enough by the Investors. The Use Right does not need to added other words which gives the perception that it is just making up something which in unnecessary, for instance it is said " can be extended 2 times each 20 Years after certain Years.

• Secondly, Bottlkenecking mindset in the elevant department, such as immigration, manpower, financing and banking

• Thirdly,  Bottlkenecking mindsetblock. This bottlenecking block according  to Rhenaldi are fears or  exesive nationalism, which resulted more of Restriction rather than Boosting -Pushing such as that ideas of limiting foreigners not to allow purchasing property above Rp1.5 milliard, and may only purchase new houses.  

• The latest mindset is that the worrisome that the need of people to own houses is still high which is 800,000 Unit.  However from the data form Panagian Simanungkalit and Associates shows that new houses which are being built had  reached  only 257.365 Unit in the Year 2010.

• Rhenaldi syas that we have to understand that the property market in not only determined by " the Need" or the desire to purchase, but also the preparation to buy and the power to purchase.

• Rhenaldi says that rather than raising about matters which has already  a market mechanisme, why are we not limiting on startegic matters such as prohibition to purchase property in the strtaegic area, border or area which can damage the natural resources. 

The above are my reading on Rhenaldi Economic Analysis relating to Probability Foreigners Allowed to own Property in Indonesia, as found in the Kompas Newspaper of 8 February 2010.


             

Running A Business Law Firm

Well, I have been running this shop of mine which is a Business Law Office for more than 11 1/ 2 Years since 1st June, 1998. The Law Firm specialty depends on the Partner who is running such Firm. Since I was formerly working as In - House Legal Counsel 5 Years in the Oil and Gas Company (formerly owned by Roy M.Huffington) called Vico Indonesia (Huffco Indonesia) who produces LNG as the end product after being refined in Bontang,  and 5 Years as In House Legal Counsel in a Cooper Mining Company (one of the biggest copper mining company in the world) called PT Freeport Indonesia who is operating in Irian or now called Papua, my links and network of friends are within the oil and gas as well as Mining Companies in Indonesia. 

I was also working for 5 Years as Legal Consultant and Advocate at the Law Office of Adnan Buyung Nasution and 2 Years as Partner at the Law Office of Delma Juzar  & Wiriadinata (Wiriadinata & Widyawan), where  I   experienced providing legal services relating to  corporate business, financing transactions, restructuring loan, insurances,  construction contracts, capital market, shipping, labour matters.

The significant experiences which I felt was  that I had experienced for more than 11 1/2 Years running my own Law Firm which is now called Suleiman Agung & Co.   since 1 st June 1998,  when Indonesia was hit by the Asian Economic Crisis. 

I managed to survive in running this Law Firm for more than 11 1/2 Years. Like selling other services, in the Legal Services field, the Services that you are offering to sell to your Customers or Clients are among others your legal expertise in  giving legal advices on the legal aspects of your Clients business. These includes giving legal advises on the rules and regulations that have to be taken into considerations by your Clients in conducting their business activities in Indonesia.

For instance if your Client happens to be a foreign investors who is interested in conducting Coal Trade Activities from Indonesia to be exported to outside the country for instance China, since their Industries are growing fast where for running their industry they  might need Coal for fueling their Power Plant to engine their Industry or manufacture to produce their products, than for sure they are in the high need of Coal. Our Customers or Clients are also questioning whether a foreign company is allowed to establish a Mining Company in Indonesia who desires to conduct the Coal Mining activities in Indonesia.  

Some of the Customers were asking whether a foreign Investor or  foreign Company maybe involved in the Trading of this Coal in Indonesia or  establishing a Coal Mining Company in Indonesia, several questions  may pop up such as : What are the rulings and what are the requirements that must be fulfilled. In order to answer their questions, we as Business Lawyer, have to check on the Rulings of Trading of Coal in the Department of Trade and The Directorate of Coal. We also need to seek on the New  Mineral  & Coal Law No. 4 Year 2009 concerning Coal Trading and Coal Mining activities. 

We have to check the Size of the Coal Mining Area, the  Location of the Coal  where they want to trade or mine and the Relevant Competent  Authority either Central Level and The Local Regional  level who is authorized to Issue/Grant the Izin Usaha Pertambangan ) Coal Mining Authority/ Business Mining License.  

As implementation of the Autonomy Law - there is a segregation - Delegation of Authority between the Central Government and the Local Regional Government, where the Ruling may be incorporated in the New Mineral and Coal law No. 4 Year 2009 as well as in the implementation ruling either made by the Central or Local Government.

We may  need to check whether the Location of the Coal is within 1  Regency, Province or  crossing more than 1 Regency or Province.  We may also need to check the size of  such Coal Mining or Coal Stock Pile. Since foreign investors are involved we also have to check the rulings on Foreign Investors who wants to invest in Indonesia in the Coal Mining Sector.  

For checking such purpose we have to Check -  the Rules and Law No.4 Year 2009 including checking with The Directorate of Coal and Department of Mine and Energy.  We also need to check with the Local Government Ruling ( Perda) as well as the Rulings from Local Government ( Bupati/Governor) where the Location of the Coal Mining is located. In order to avoid any overlapping  with other activities such as Forestry Conservation or any other activities we have to check with the Bupati and Local Government /Local Forestry Department. 

If our Client wants to take over or acquire any existing KP we have to check the existing documents possessed or held by the KP holder to know the legality, the size, the Duration period and who had issued such KP. We also need to check the rulings relating to converting KP into IUP either it is already expired  or still on. We  may also need to conduct research upon  the time period for processing the new IUP for  the size of the  coal concesion and whether it is more proper in acquiring  an existing KP or  applying for a new IUP

We may also notice from several information that there are many uncertain brokers of Coal Trader and Coal Mining Concession, where we really have to check whether the sources of the Coal Product or Coal Mining Stock or Coal Mining Permit are genuine and backed-up by real legal documentation. for which we as Business Lawyer can conduct the necessary checking on the Legal Documents and licenses, as well as the rulings and policies. 

Since Foreign Investors are involved, if the requirements under the New Mining law requires that a Limited Liability is required to be the legal entity to conduct the Mining Coal Business than a Joint Venture agreement might be drafted where we as Business Lawyer have to draft such Joint Venture Agreements. Initially before a Joint Venture is negotiated, in the initial stage  we may be requested to draft a Memorandum of Understanding  (MOU) or Letter of Intent to jot down the desires and intention of our Client and the Local Partner.

One interesting experience tasks which I was involved in assisting legal services related to Coal Business activities, is that our law firm was involved representing a Coal Trader who are also injections some funds to a certain  Mining Company for constructing its Coal Plant Facilities  where the repayment of the loans/funds is through the delivery of the Coal products by the Seller /Debtor to the Buyer or Financier.       

Well those are among others the functions of the Business Lawyer in assisting Clients to conduct business in Indonesia

   

Sudden Inspection by The Minister of Envorimental to Coal Mining Location

On Saturday according to Kompas newspaper of 8th February,2010, the Minister of Environmental had conducted a sudden inspection to several Coal Mining Location in South Kalimantan. Indication of violation against Law No.32 Year 2009 concerning the Protection and Management of Environmental consisting of non-reclamation on the ex Mining and non re-planting of such ex Mining area.  The Environmental Audit and correction and environmental restoration must be performed by such Mining Company says the Minister as quoted by Kompas newspaper. 

The Environmental Officers says that it does no longer talk about permit or administration but about pollution and damaging environmental. The Environmental Ministerial will sent letter to enforcement of the law to the control at the Regional and Central Government.  

The Investigation team have earlier verify the coal mining management environmental in South Kalimantan, 9 Coal Mining Companies at Kabupaten Kotabaru and 7 at Kabupaten Banjar. The Mining Area had been abandoned without reclamation, erosion control, drainage to the pool sediment, and the water at the mining area is below the quality standard which caused the pollution to the river according to Kompas Newspaper of 8th February 2010.

Note :

From the above news by Kompas, it shows that attention by the Mining Companies are needed to not ignore the reclamation obligation as required by the New Mineral and Coal Mining laws as well as the Laws concerning Protection and Management of Environmental to avoid being imposed of violating the Laws which might fall under Criminal as well as Civil Legal Exposures. 

The Minister of Environmental had indicated that the Government Regulation as implementation of the New Mineral and Coal Law shall be issued by the Government.

Construction Termination Issues

• Constructions legal issues are really very interesting for Business Lawyers who are interested in the operations.We had an exiting experience relating to this Construction issues where there was a litigation case which occurred, due to the mishandling by the operations people who had one sided terminated a construction contract, without properly observing the manner in terminating a contract as ruled under the termination clauses under the Contruction Agreement .

• This case erupted into a case where the Owner of the project was being sued 4 times in the Court; The Plaintiff succeeded in seizing the Bank Account of the Project Owner, where there were a significant amount of money in such Bank Account. The suit case involved claims for losses of material, moral, loss of business opportunities, reputation claimed being suffered by the Contractor.

• The Contractor claimed, that they were not in default, since they were not given the proper manner and time to remedy the work which according to the Owner of the Project was not being properly performed by the Contractor. The lessons that we can take from such case is that, when, you want to terminate a Construction Agreement, due to a default by the Contractor, we have to make sure that the proper reminder had been submitted in writing by the Owner of the project in accordance with the rulings, and time frame, under the terms and conditions of the Construction Contract.

• The Contractor has to be given the chance to remedy its wrong performance, pursuant to the terms and conditions under the Construction Contract. Even though there was a default due to non-performance by the Contractor, there is a mechanism under the Construction Contracts as to how,  we  can  legally terminate such Contract, to avoid more further losses of time and monies which could be suffered by the Project Owner.

• Accordingly, we cannot just terminate such Contract without following the terms and conditions and the procedures which are ruled under such Construction Contract. The Contracts are the ruling provisions which had been mutually agreed by both the Contractor and the Owner of the Project, including agreeing as to how shall they handle the situation where the Contractor has conducted a default in performing its tasks under such Construction Agreement.

Agung Supomo Suleiman  

The Need of Sinchronizing the Rulings and Laws To overcome Delay in Realization of Investment in Mining Sectors

According to Kompas Newspaper of 27 January 2010,  the  Indonesian Mining Association predicts that the realization of the Mining may be delayed at this current moment reaching USD 10 Billion. This is because the Investment Climate in Indonesia is not Conducive, particularly due to the Uncertainty of the Law.   The Head of the Indonesian Mining Association ( IMA) Arief S.Siregar had highlighted the above in front of the Hearing of the House People Representative Komisi VII ( Commission VII) in Jakarta on Tuesday 26/1 2010.

According to the Head of the Komisi VII ( Commission VII) Teuku Riefky Harsya the Government has to speed up the synchronization of the rulings which are issued. Several of the Laws that had to be synchronize are the Oil and Gas Law, Mineral and Coal New Law No. 4 Year 2009, The Environmental Law, the Forestry Law, The Spacial Law, and the Tax Law. This is needed to boost the Mining Investment in order to increase the energy endurance, state revenue and multiply effect to the Economy. The Mining Industry Sectors gives significant benefit through the management of the environment, the development of the area, the development of infrastructure and the absorb of the manpower. Te Mining Sector is dependent upon big capital with the return of capital relatively more longer than other Business Sectors. 

There are several Mining Investors who desires to bring their capital to Indonesia, however, since there is Un-Certainty in the Law in Indonesia, they had delayed their intention. In fact there is USD 10 Billion amount of capital that is planed to be realized in the Year 2009, but until this present moment is being delayed says Arif as quoted by Kompas Newspaper of 27th January 2010 page 18. Some of the Mining Investment Plan which had been delayed among others include Zinc Mining (seng) and Black Tin Diari Primas USD 500 Million and Nickel Rio Tinto USD 4 Billion. Nickel Weda Bay-Eramet in the  amount of USD 2Billion, Htdromet PT Aneka Tambang USD 1 Billion Dollar. Gold Mine Mearest Soputan USD500 million, FeNi4 Antam USD 320 million. and Coal Mining BHP Biliton.

The Regulation system in fact should brought in New Investment of USD 25 Billion in the period of 25 Years from now. But at this current moment there exist Overlapping land /area and Laws and Rulings says Arief as quoted by Kompas newspaper. Article 169 b of Law No.4 /2009 concerning Mineral and Coal regulated that the Holder of the Contract must adjust the Law at the latest 1 Year. But Article 169 a stipulates that the Contract is honored until the end of the Contract Period. This really creates confuseness. 

Under Law No. 32 Year 2009 concerning Environmental, the Department of Environmental has the absolute power to grant permit on top of other permits. We really hope for a clear implementation ruling which can gives Law Certainty. 

Brief Note : 

As we observe from the above circumstances,  we noticed that overlapping  rulings as well as desires and goals between the Forestry, Environmental and Mining activities, Departments,  and its Laws  and Rulings are frequently occurring  in Indonesia which caused the delay in the Realization of Mining Investments in Indonesia.   

This problem is added with the Autonomy Rulings where The Local Government frequently has its own agenda to increase its Regional Income and Budget  for developing its Region. I remember when  working for 5 Years(1993-1998) as in - House Legal Counsel in PT Freeport Indonesia Company  a  Copper Mining  Company,  the Mining Investor wanted the Bupati  to be given more power  to make decision upon the   contribution for  the  Community  Development which was imposed  upon  PT Freeport as a  Copper Mining Company pursuant to its COW,  to enable the Local Government to have  more grip upon its  Local Regional Budget for developing its Region.        

Based on the above circumstances, I believe that the New Mineral and Coal Mining Law No. 4 Year 2009, had accommodated the Concern of the Regional Government where the Mining Operation is Located.  We can see that   Article 129  of this New Mineral and Coal Law No. 4 Year stipulates that the Holder Of IUP operation production for mineral metal and coal is obligated to pay the amount of 4% to the Government and 6% to the Regional Government from its net profit  as of  such Mining Company is  producing.  The Regional Government Part as meant in sub article 1 is regulated as follows: The Provincial Government gets 1 %, The Regency Government/Producer Municipality get 2.5% and the Regency Government /other cities in the same province get 2.5%.

From the recent news we saw in the Kompas during these  recent days, it appears that the Regional Government  in Kalimantan are very aggressive in trying to boost its  Regional Revenue, which frequently is in collusion with the Rulings of the Ministry of Forestry where at a Certain Location such as in Kalimantan,  even though the land is rich with Coal Resources, but if  the Coal Resources is located in the Forestry Conversation Area, than  close coordination between the Department of Forestry in the Regional and Central Level and the Governor and the Directorate of Mineral  and Coal has to be conducted so that the Mining Companies are protected from uncertainty progress of overlapping policies and rulings.