Indonesia, as one of the largest economies in Southeast Asia and a globally significant oil and gas resource-rich country, has long attracted numerous international energy companies to its market. This is due to its abundant oil and gas reserves, advantageous geographical location, and continuously improving investment policy environment. However, as the oil and gas industry involve core areas of national strategic resources, its regulatory system is highly complex and stringent, with legal norms and administrative management characterized by multiple entities and multi-level supervision. Particularly in oil and gas asset mergers and acquisitions as well as mineral rights transfer transactions, there are multiple legal risks and compliance challenges, including but not limited to uncertainties in regulatory approvals, special restrictions in contract terms, differentiated requirements of local regulations, and derivative issues such as environment and social responsibility.
- Overview of Indonesian Oil and Gas Industry Law and Regulatory Framework
The legal supervision of Indonesia's oil and gas industry mainly relies on the revised Law No. 22 of 2001 on Oil and Gas (hereinafter referred to as the "Oil and Gas Law") and its supporting government regulations and ministerial decrees. The Oil and Gas Law clearly divides the oil and gas industry into upstream and downstream sectors. Upstream operations cover the exploration (eksplorasi) and exploitation (eksploitasi) of oil and gas resources, while downstream operations include the processing, transportation, storage, and sale of crude oil and natural gas.
To ensure the state's absolute control over oil and gas resources, Indonesia's Oil and Gas Law explicitly stipulates that all upstream activities must be implemented through a cooperation contract (Kontrak Kerja Sama, “KKS”) signed with the government. The mainstream model is the Production Sharing Contract (PSC). This system not only safeguards the state's resource revenue rights but also attracts companies to participate in exploration and development through the production sharing mechanism. According to legal requirements, a KKS contract must at least meet the following points: the ownership of natural resources always belongs to the government before transfer, the operational management rights are controlled by the executing body (Badan Pelaksana, the upstream regulatory body authorized by the government), while the funding and risks are entirely borne by the business entity (Badan Usaha) or permanent establishment (Bentuk Usaha Tetap, a company with legal personality established outside Indonesia but conducting business within Indonesia). This means that the government is not allowed to make investments or bear financial risks in the implementation of KKS.
In 2020, Law No. 11 of 2020 on Omnibus Law on Job Creation made substantial revisions to the existing Oil and Gas Law, marking a fundamental shift in the regulatory approach. In the upstream sector, the reform changed the implementation mechanism from a "quasi-concession system" to a "business licensing system," effectively integrating the traditional KKS contract with the Business Identification Number (Nomor Induk Berusaha or “NIB”) framework. This integration was achieved through the OSS system, which digitized the entire licensing process, significantly enhancing the transparency and efficiency of project approvals. According to the 2022 annual report of the Ministry of Energy and Mineral Resources, the average approval cycle for upstream projects was reduced from 127 working days to 58 working days (a decrease of 54.3%) after the implementation of the OSS system.
For downstream activities, including refining, natural gas transmission, and retail distribution, companies must obtain specific business licenses from the Ministry of Energy and Mineral Resources (ESDM). The licensing process requires the submission of complete documents, including company establishment documents, the articles of association with all amendments, taxpayer identification number (NPWP), NIB, spatial utilization permit, detailed funding source explanation, and health, safety, and environment (HSE) compliance statement. These requirements form the basis of Indonesia's downstream regulatory compliance framework. It is worth noting that the reform introduced a risk-based licensing system and consolidated various environmental permits into a unified authorization covering environmental impact assessment, waste management, and emission control. In addition, all new downstream facilities are now subject to mandatory localization rate verification, further strengthening the domestic value chain.
Companies or permanent establishments must allocate 25% of their oil and/or gas production to meet domestic demand. This regulation aims to ensure that the supply of oil and/or gas produced in Indonesian mining areas can meet domestic fuel needs. When a work area produces both oil and gas, companies or permanent establishments are required to submit up to 25% of their oil production and 25% of their gas production, respectively.
For subsequent business activities such as oil field treatment, transportation, storage, and sales of self-produced products conducted by companies or permanent establishments after exploration and exploitation activities, no additional business license is required.
- Regional Specific Regulation: Taking Aceh's Oil and Gas Autonomy as a Typical Case
Although the Indonesian central government maintains unified control over most oil and gas resources, some regions enjoy special autonomy or regulatory status, with Aceh being the most representative example. According to Government Regulation No. 23 of 2015, Aceh has the "joint management" authority over oil and gas resources within its jurisdiction, forming a special regulatory framework that investors must carefully deal with.
This regulation grants Aceh four basic rights in oil and gas development:
- Joint management rights over onshore and offshore oil and gas resources within 0-12 nautical miles from the coastline.
- Establishment of the Aceh Oil and Gas Management Agency (BPMA) as the main regulatory and approval body.
- Authorization of BPMA to sign upstream KKS contracts, which is significantly different from the standard procedures in other regions approved by SKK Migas or the Ministry of Energy and Mineral Resources (ESDM).
- Supervisory rights over maritime blocks in the 12-200 nautical miles zone, although the central government retains the primary jurisdiction, Aceh must be involved in monitoring and data review.
For companies considering oil and gas asset mergers and acquisitions in Aceh, this framework brings additional compliance requirements:
- A dual approval process that needs to be coordinated with BPMA and central institutions.
- Localization content requirements exceeding national standards.
- Enhanced community participation regulations reflecting Aceh's unique socio-cultural background.
- Labor policies incorporating Islamic law principles in certain operational aspects.
It is worth noting that Aceh remains the only province in Indonesia with such extensive autonomy in oil and gas management, forming a special regulatory environment that requires dedicated due diligence. Other resource-rich regions, such as Riau or East Kalimantan, currently still follow the standard central government regulation, making Aceh's joint management system particularly unique in Indonesia's energy governance system.
- Comprehensive Due Diligence Guide for Indonesian Oil and Gas Asset Mergers and Acquisitions
The success or failure of oil and gas asset mergers and acquisitions largely depends on the depth and professionalism of due diligence. In response to Indonesia's complex regulatory environment, investors need to conduct a systematic review covering the following key dimensions. Firstly, a comprehensive examination of the KKS contract is required, focusing on the contract term and extension conditions (such as renewal trigger mechanisms and early termination clauses); minimum work obligations (MWO), verifying the progress of fulfillment and outstanding items; revenue distribution and production sharing, analyzing the tiered sharing mechanism and domestic market obligation (DMO) clauses; restrictions on the transfer of rights and obligations, paying attention to the approval requirements for equity changes and government licensing procedures; and decommissioning obligations, clarifying site restoration responsibilities and financial guarantee arrangements.
Secondly, conduct a permit and compliance check, including the validity of the NIB and its integration status with the KKS; whether land use permits comply with the spatial planning requirements of Government Regulation No. 5 of 2021 and Ministerial Regulation No. 13 of 2021.
Financial and tax audits are also key steps, requiring verification of national revenue payment records, such as historical payments (royalties, taxes) and arrears; identification of tax disputes, including unresolved audits or litigation risks; analysis of transaction tax liabilities, such as potential capital gains tax responsibilities from mergers and acquisitions; and review of financing structures to ensure compliance with foreign exchange controls and anti-money laundering regulations.
In terms of environment and social responsibility (ESG), it is necessary to assess the validity of environmental assessment documents, such as AMDAL (Environmental Impact Assessment), RKL (Environmental Management Plan), and RPL (Environmental Monitoring Plan); verify the status of ecological restoration, including the completion of waste disposal and site recovery; and examine community development commitments, such as localization content and the fulfillment of corporate social responsibility.
Regarding labor and human resources, attention should be paid to the cultivation of local employees; compliance with foreign employment, ensuring adherence to the Labor Law and related regulations; and verification of skill certification and social security.
Investors also need to pay special attention to high-risk areas, such as historical compliance gaps, unrectified violations that may lead to inherited liabilities; community relations, unresolved land disputes or social conflicts that may affect operations; and regulatory changes, such as the latest revisions to localization rate requirements and environmental protection standards.
Finally, the following practical suggestions are proposed: conduct on-site inspections to confirm the condition of assets and community relations; fully estimate contingent liabilities in the financial model, especially environmental remediation costs; and set up special indemnity clauses in transaction documents for identified risks.
Through this systematic framework, investors can eliminate transaction barriers in advance, accurately assess asset values, and design transaction structures with risk prevention capabilities.
- Compliance Pathways and Suggestions in Actual Operations
After completing due diligence and asset closing, companies enter the operational phase, during which strict compliance policies must be implemented. The Indonesian government requires operators to regularly submit reports on production, safety, environment, employment, etc., to the Minister of Energy and Mineral Resources and local governments. These data directly relate to the regulatory authorities' judgment on whether the company is in compliance.
Companies also need to pay attention to Indonesia's policy inclination towards "local content", such as prioritizing the procurement of local products and services and hiring Indonesian citizens. Although these policies are not always mandatory, failure to reasonably explain deviations can easily trigger political and social risks and even affect the approval of project extensions or expansion permits.
- Conclusion
Indonesia, as a resource-rich country with huge market potential, has a stable yet dynamically evolving legal system for its oil and gas industry. As the government promotes legal reforms, strengthens regional regulation, and improves investment transparency, oil and gas asset mergers and acquisitions face not only legal challenges but also opportunities for structural optimization and resource integration. If companies can conduct thorough legal research, due diligence, and compliance preparations before entering the market, especially in special regions like Aceh, properly handling the relationship between the central and local governments will greatly increase the success rate of mergers and acquisitions and the long-term stability of operations. In the future, Indonesia will remain an important market that global oil and gas investors cannot ignore.
