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Compatible Concept of Contract Law with Oil and Gas Production Sharing Contract in Indonesia

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Abstract

The practice of Gross Split and Cost Recovery contracts for oil and gas production sharing results in inconsistency in the concept of oil and gas production sharing contract. This inconsistency will contribute to inability to reach the natural resource management as mandated by the fourth paragraph of the preamble of the 1945 Constitution, related to Article 33, point (3) of the 1945 Constitution, related to Article 1 and 2 of the Agrarian Law, related to Article 4 of oil and gas law, related to Article 25 in point (1) of Government Regulation No 55 of 2009. The regulations for oil and gas production sharing contract which is public and private have not been integrated into one guideline, and thus private, and public laws are often used as the guideline. Based on the comparison of the two types of oil and gas production sharing contracts, Gross Split contract might degrade the principle of ownership by the state in managing oil and gas compared to Cost Recovery contract. This disadvantage is evident from the lack of government role in supervising and monitoring the management of oil and gas, and this lacking government role can reduce the chain effect of the national economy.
IOSR Journal Of Humanities And Social Science (IOSR-JHSS)
Volume 24, Issue 9, Series. 3 (September. 2019) 10-21
e-ISSN: 2279-0837, p-ISSN: 2279-0845.
www.iosrjournals.org
DOI: 10.9790/0837-2409031021 www.iosrjournals.org 10 |Page
Compatible Concept of Contract Law with Oil and Gas
Production Sharing Contract in Indonesia
Zakia Vonna1, Sri Walny Rahayu2, M. Nur3
1Magister of Notary, Syiah Kuala University
2 lecture of Law Faculty, Syiah Kuala Univrsityt
3lecture of Law Faculty, Syiah Kuala University
Corresponding Author: Zakia Vonna
Abstract: The practice of Gross Split and Cost Recovery contracts for oil and gas production sharing results in
inconsistency in the concept of oil and gas production sharing contract. This inconsistency will contribute to
inability to reach the natural resource management as mandated by the fourth paragraph of the preamble of the
1945 Constitution, related to Article 33, point (3) of the 1945 Constitution, related to Article 1 and 2 of the
Agrarian Law, related to Article 4 of oil and gas law, related to Article 25 in point (1) of Government
Regulation No 55 of 2009. The regulations for oil and gas production sharing contract which is public and
private have not been integrated into one guideline, and thus private, and public laws are often used as the
guideline. Based on the comparison of the two types of oil and gas production sharing contracts, Gross Split
contract might degrade the principle of ownership by the state in managing oil and gas compared to Cost
Recovery contract. This disadvantage is evident from the lack of government role in supervising and monitoring
the management of oil and gas, and this lacking government role can reduce the chain effect of the national
economy.
Keywords: contract, oil and gas production sharing contract, Gross Split and Cost Recovery contracts
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Date of Submission: 26-08-2019 Date of Acceptance: 10-09-2019
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I. INTRODUCTION
Indonesia as one of the countries with the largest oil and gas potential in the world has proven and
potential oil reserves of 3,305.7 MMstb (Million Standard Tank Barrel) and proven and potential natural gas
reserves of 3,331.15 TSCF (Trilion Standard Cubic Feet), therefore Oil and Gas has become Indonesia's most
important export commodity since the 1970s, even before 2006, Indonesia had become the world's largest
exporter of LNG (Liquified Natural Gas) for almost three decades(Nugroho,2011: 14). However, in 2012 oil
lifting realization tended to decline with lifting only 898.5 thousand barrels on average per day. This condition
has produced negative sentiment not only on state revenues but also on Indonesia's energy security
program(Rosdiana, 2015: 342).
The increase and decrease in oil and gas production in Indonesia is inseparable from the policies and
regulations implemented by the state through the Government both through legislation in general and contracts
that specifically bind the Government with Oil and Gas investors. In Indonesia, the regulation on Oil and Gas is
regulated in Law Number 22 of 2001 concerning Oil and Gas (Oil and Gas Law).Implementation of Production
Sharing Contracts is a translation of the Production Sharing Contract (PSC), hereinafter using the term
Production Sharing Contracts, is a form of cooperation contract that has been the basic concept of oil and gas
management in Indonesia which focuses on the maximum benefit for the country and the results are used for the
greatest prosperity of the people(Pudyantoro, 2012:139).
The definition of Production Sharing Contracts is regulated by Article 1 Number 12 Government
Regulation Number 27 of 2017 concerning Amendment to Government Regulation Number 79 of 2010
concerning Refundable Operating Costs and Treatment of Income Taxes in the Upstream Oil and Gas Business
Field (PP concerning Cost Recovery) that is, "Production Sharing Contract is a form of Cooperation Contract in
Upstream Business Activities based on the principle of sharing production."
Initially the technical concept of Production Sharing Contracts was regulated in the PP on Cost
Recovery, this provision was one of the implementing regulations of the Oil and Gas Law. Then on August 29,
2017 the Government of Indonesia promulgated Regulation of the Minister of Energy and Mineral Resources
Number 52 of 2017 concerning Amendment to the Regulation of the Minister of Energy and Mineral Resources
Compatible Concept of Contract Law with Oil and Gas Production Sharing Contract in Indonesia
DOI: 10.9790/0837-2409031021 www.iosrjournals.org 11 |Page
Number 08 of 2017 concerning Gross Split Production Sharing Contracts (ESDM Ministerial Regulation on
Gross Split). With the enactment of the ESDM Ministerial Regulation on Gross Split, the current concept of Oil
and Gas Production Sharing Contracts in Indonesia can be implemented in 2 (two) forms, namely the concept of
Cost Recovery or Gross Split.
Cost Recovery Revenue Sharing Contracts are demonstrated by the return of costs that are the
responsibility of the Government based on the Work Plan and Budget which must be approved in advance by
the Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) in accordance with the
details stipulated in the Minister of Energy Regulation and Mineral Resources No. 22/2008 concerning Types of
Costs for Upstream Oil and Gas Business Activities (ESDM Ministerial Regulation on Cost Recovery).
Another characteristic possessed by the concept of Cost Recovery is the existence of First Tranch
Petroleum (FTP) or taking the first oil and gas production as a security of state revenue. So that this FTP directly
has a function as a government control tool in relation to the amount of state revenue from the oil and gas sector
and cost recovery issued(Umaruddin, 2010: 9).In contrast to Cost Recovery, Gross Split Production Sharing
Contracts are based on the principle of distributing gross production without a mechanism of returning operating
costs. The main characteristic that distinguishes between Cost Recovery Production Sharing Contracts with
Gross Split is clearly seen in the presence or absence of state returns on operational costs that were first incurred
by the Cooperation Contract Contractor (KKKS) and abolished the FTP system which should be a source of
state revenue in the Oil and Gas sector if at any time KKKS no longer invests in Indonesia.
With the implementation of the Gross Split Production Sharing Contract in the implementation of the
Oil Sharing Production Contract, there is an inconsistency of the Government in making regulations in the Oil
and Gas sector for the purpose of managing Oil and Gas itself, this can be seen from the reduction in the
percentage of production sharing, which is the basic split (base split) for state revenue in the oil sector reduced
from 85% (eighty five) percent to 57% (fifty seven) percent and the KKKS share increased from 15% (fifteen)
percent to 43% (forty three) percent, for Gas income the state has decreased from 70% (seventy) percent to 52%
(fifty two) percent and the share of KKKS has increased from 30% (thirty) percent to 48% (forty eight). The
reduction in the percentage of profit sharing explicitly shows a decrease in state revenue in the oil and gas
sector. Based on the ESDM Ministerial Regulation on Gross Split, in addition to reducing the basic percentage
of oil and gas revenue sharing received by the state, the share of oil and gas revenue sharing can also be adjusted
based on variable components and progressive components. This further shows that the Production Sharing
Contract with the concept of Gross Split has legal inconsistencies as the purpose of establishing a contract
between the Government of Indonesia and KKKS.
II. PROBLEMS IDENTIFICATION
Based on the introduction above, problem identification is limited to several things, which are as follows: (1)
How is the mechanism for the preparation of Oil and Gas Production Sharing Contracts?, and (2) How the Oil
and Gas Production Sharing Contract Dispute Resolution Mechanism?
III. OBJECTIVE OF THERESEARCH
The objective of this research was to describe the mechanism for the preparation of Oil and Gas Production
Sharing Contracts and the concept of contract law in Indonesia implemented in oil and gas production sharing
contract
IV. RESEARCH METHODS
This research was a normative law research study with legal approach, comparison, and philosophy, with
prescriptive analysis. The technique adopted for the current research was library research of primary, secondary,
and tertiary documents.
V. CONCEPTUAL FRAMEWORK
In normative legal research, the preparation of conceptual frameworks is absolutely necessary as a
framework used to formulate the problems that form the basis of research(AmiruddindanAsikin, 2004: 119).
Therefore, as a basis for the conceptual framework in this study are as follows:
5.1 Contract Legal Arrangements in Indonesia
Indonesia is a follower of the continental European legal system inherited from the Netherlands.
Written law is typical of continental Europe, where an action can be punished if there is a law or written law in
advance. In contrast to the Anglo-Saxon legal system that uses the rule of law derived from judges in court,
therefore the continental European system is very thick with an element of legal certainty(SuwardiSagama,
2016; 28).The legal certainty to be achieved by the parties conducting legal relations is a consequence of the
Compatible Concept of Contract Law with Oil and Gas Production Sharing Contract in Indonesia
DOI: 10.9790/0837-2409031021 www.iosrjournals.org 12 |Page
emergence of the contract. This is regulated in Article 1338 of the Civil Code, i.e. “all agreements made in
accordance with the law apply as the law for those who make them. The agreement cannot be withdrawn other
than by agreement of the two parties, or for reasons determined by law."
The definition of contract in the Indonesian legal system is regulated in Article 1313 of the Civil Code, which is:
"an act by which one or more persons commit themselves to one or more other people" (MuljadiandWidjaja,
2010: 59). Furthermore, in Article 1233, the contract is the source of the engagement, in which each engagement
can be born from agreements or agreements or laws. In general, the Civil Code through Article 1320 regulates
the legal conditions of a contract, namely: (1) There is agreement between the two parties; (2) The ability to
carry out legal actions; (3) The existence of objects; and (4) The existence of lawful causes.
The classification of types of contracts in Indonesia in addition to the contracts stipulated in the Civil Code
nominaat (named contract) are also known to be a variety of contracts that cannot be found in the Civil Code.
Forms of contracts that are not found in the Civil Code are categorized into innominaat contracts (anonymous
contracts), ie contracts that arise, grow, and develop in the community after the Civil Code(Muljadi andWidjaja,
2010: 83). Examples of forms of innominaate contracts are Franchise Contracts, Leasing, and Oil and Gas
Production Sharing Contracts.
5.2 The concept of Oil and Gas Production Sharing Contracts in Indonesia
The Production Sharing Contract Agreement between the Government of Indonesia and the KKKS is a
civil contract that contains a public element (Government to Business) but is still implemented with a Business
to Business mechanism, because the Government of Indonesia in this case requires a business entity that is a
representation or an arm of the state in entering into business contracts with KKKS(MaulanaArba, 2016: 7).The
business contract between the Government and the KKKS does not necessarily become a means for KKKS to
transfer oil and gas ownership from the Government to the KKKS, because the Oil and Gas Production Sharing
Contract that is implemented is only a legal relationship that confirms the position of the KKKS as the
Government's partner in helping manage Oil and Gas. In addition, the presence of KKKS, especially in the form
of Foreign Investment (PMA), is expected to increase the competitiveness of the Indonesian economy as a
developing country(SaruArifin,2017: 11).
The definition of Oil and Gas Production Sharing Contracts is regulated by Article 1 Number 12
Government Regulation Number 27 of 2017 concerning Amendment to Government Regulation Number 79 of
2010 concerning Refundable Operating Costs and Treatment of Income Tax in the Upstream Oil and Gas
Business Sector (PP concerning Cost Recovery), i.e. "Production Sharing Contract is a form of Cooperation
Contract in Upstream Business Activities based on the principle of production sharing."
This definition is further elaborated by SoedjonoDirdjosisworo in Salim HS (2008:38)as
follows:"Production Sharing Contracts are cooperation with the profit sharing system between a State Company
and a contracted foreign company. If the contract has expired, the machines brought by foreign parties will
remain in Indonesia. Cooperation in this form is a foreign credit in which the payment is made by sharing the
production of the company. "
Oil and Gas Production Sharing Contracts currently being implemented in Indonesia can be
implemented in two concepts, namely the Gross Spilt concept and the Cost Recovery concept. The
understanding of the two concepts is described as follows:The Gross Split Production Sharing Contract is a
production sharing contract in the upstream Oil and Gas business activities based on the principle of gross
production distribution without a mechanism of returning operating costs. While the definition of Cost Recovery
Revenue Sharing Contracts are contracts that are oriented towards returning costs paid by the Government to
contractors as reimbursement of production and investment costs during the exploration, exploitation and
development of oil and gas blocks that are being carried out within the territory of a country.
Oil and Gas Production Sharing Contracts in Indonesia, both in the concept of Gross Split and Cost
Recovery, are implemented by SKK Migas with Business Entities or Permanent Establishments as regulated by
Article 6 paragraph (1) juncto Article 11 paragraph (1) of the Oil and Gas Law in conjunction with Article 24
paragraph (1) PP Migas which at least contains the following requirements:(1) Ownership of natural resources
remains in the hands of the government until the point of delivery; (2) Operations management control is at
SKK Migas; (3) All capital and risks are borne by the Business Entity or Permanent Establishment; (4) The
Minister of Energy and Mineral Resources establishes the forms and main provisions of the contract; (5) KKKS
through SKK Migas can propose to the Minister of Energy and Mineral Resources a change in contract terms
and conditions; and (6) Other Technical and General Provisions as general clauses in an agreement.
The main provisions or clauses that must be regulated in an Oil and Gas Production Sharing Contract
based on Article 26 of the Oil and Gas PP are: (1) state revenue; (2) Work Areas and returns; (3) obligation to
release funds, (4) transfer of ownership of production results from Oil and Gas; (5) the period and conditions of
contract extension; (6) dispute resolution; (7) oil and gas supply obligations for domestic needs; (8) contract
termination; (9) post-mining mining obligations; (10) occupational safety and health; (11) environmental
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management; (12) the transfer of rights and obligations; (13) required reporting; (14) field development plans;
(15) prioritizing the use of domestic goods and services; (16) the development of the surrounding community
and the guarantee of the rights of indigenous peoples; and (17) prioritizing the use of Indonesian workers.
For the period of Oil and Gas Production Sharing Contract, it can be given for a maximum period of 30
(thirty) years and can be extended with an extension period of no longer than 20 (twenty) years for each
extension, but the provisions do not specify how many times the extension is extended can be done(Pudyantoro,
2012:202). Based on the Oil and Gas Law, after the effective signing of the Oil and Gas Production Sharing
Contract, within a period of 180 (one hundred and eighty) days, the KKKS must start their activities.Oil and Gas
Production Sharing Contracts, both those involving Indonesian legal entities and those involving foreign parties
are usually included aspects of dispute resolution, this is one of the objectives of the preparation of a contract
between the parties, namely to guarantee actions that might arise in the future such as disputes(Simatupang,
1996:41) .
Settlement of disputes over Oil and Gas Production Sharing Contracts, both in the Oil and Gas Law
and PP Migas, is not found in the article governing dispute resolution in the event of a dispute between SKK
Migas with a business entity and / or permanent establishment. In practice the dispute resolution clause is set
forth in the Production Sharing Contract based on the agreement of the parties. In the event of a dispute between
SKK Migas and the KKKS in the form of an Indonesian legal entity, the law used is Indonesian law because
both parties are legal entities established under Indonesian law and they are subject to Indonesian law.
Disputes that if later occur between KKKS in the form of permanent businesses and SKK Migas, use
the rules in the International Chamber of Commerce (ICC) because the permanent establishment is a foreign
company operating in Indonesia. From this, the dispute resolution used by the parties in the Production Sharing
Contract for Oil and Gas business activities refers to Law Number 30 of 1999 concerning Arbitration and
Alternative Dispute Resolution(Muryati, 2013: 51).
VI. THEORETICAL FRAMEWORK
The theoretical framework referred to in this paper is the theoretical thinking used in analyzing the
problem being studied. The existence of a theoretical framework is absolute in research activities as a basis for
argumentation and theoretical basic support in the framework of problem solving approaches that are faced or
which are the object of research.In order to examine the problems in this study, the writer needs to analyze the
problem using several theories as follows:
6.1 Commercial Contract Theory
The legal certainty to be achieved by the parties conducting legal relations is a consequence of the
emergence of the contract. This is regulated in Article 1338 of the Civil Code, i.e. "all agreements made in
accordance with the law apply as the law for those who make them (pacta sunt servanda). The agreement cannot
be withdrawn other than by agreement of the two parties, or for reasons determined by law."In law, there are
various theories known, each of which tries to explain aspects of the contract. From various theories that explain
aspects of the contract, there are theories relating to commercial contracts where the State has control of natural
resources, namely: (1) underlying presuppositions, (2) legal liability, and (3) liberal theory.
The three contract theories above when implemented in a contract so that the contract is legally binding
and legally enforceable requires certain conditions, namely the so-called contractual capacity or ability to agree,
the intention is that the parties making an agreement in a contract must have legal ability ( legal capacity) to
commit themselves to contracts and be able to enforce any promises made to them. Legal ability here is defined
as the ability to understand the nature and impact of one's actions(Fuady, 2001: 5).
An immature person is deemed not to have the ability to understand the consequences of a legal action
and therefore the law is declared incapable of taking legal action or does not have legal capacity. Whereas for
legal capacity, a legal entity for a limited liability company will be fulfilled if the establishment deed has been
registered with the Minister of Law and Human Rights and published in the state gazette and additional state
gazette. In addition to the requirements regarding the subject matter, contract law also regulates the
requirements concerning objects. The object of the contract is a "thing" that can be traded freely and is not
prohibited by the provisions and / or decency. "Things" here is intended more to matter matter. In its
development, the object of the contract is not only about objects, but also services that are regulated in legal
provisions outside the Civil Code (Article 1601 of the Civil Code). The second objective condition is that the
promised "thing" is not prohibited by law, is not contrary to decency, and does not violate public order, known
as a halal cause (Article 1337 of the Civil Code).
The classification of types of contracts in Indonesia in addition to the contracts stipulated in the Civil
Code nominaat (named contract) are also known to be a variety of contracts that cannot be found in the Civil
Code(MuljadiandWidjaja, 2010:83). Forms of contracts that are not found in the Civil Code are categorized into
Compatible Concept of Contract Law with Oil and Gas Production Sharing Contract in Indonesia
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innominaat contracts (anonymous contracts), ie contracts that arise, grow, and develop in the community after
the Civil Code(Salim, 2008:18). Examples of forms of innominaate contracts are Franchise Contracts, Leasing,
and Oil and Gas Production Sharing Contracts.
In the business or commercial world, contracts have an important role in business transactions that are
not limited only to cross regions but also transnational as well as Oil and Gas Production Sharing Contracts.
Such transactions are usually contained in contract documents(Adolf, 2008:3). The contracts that arise from
these business transactions are growing in shape because they were born and developed from various kinds of
agreements between the parties.
Oil and Gas Production Sharing Contracts regulated by the Oil and Gas Law are written contracts with
terms and conditions contained in Indonesia. As has been stated in Article 1319 of the Civil Code which states
that all contracts, whether they have a special name or are not known by a certain name, are subject to general
regulations(Tri Utomo, 2016), therefore, in addition to being subject to statutory provisions in the oil and gas
sector Oil and Gas Production Sharing Contracts are also subject to general regulations such as the Civil Code.
Sornarajah in Huala Adolf(2008:3) categorizes Oil and Gas Production Sharing Contracts into
economic development contracts or state contracts because the form of the contract contains the characteristics:
(1) a long period of time, 25 (twenty five) to 70 (seventy) year; (2) the contract value is quite large; (3) the
object of the contract is not solely for profit, but has a purpose for social purposes; (4) the object of the contract
is subject to government monopoly; (5) applicable and selected law is the national law of the host country; (6)
the existence of administrative requirements that are public; and (7) the object concerns the interests of the
people. Mariam Darus Badrulzaman(2001: 69) categorizes contracts between the Government and business
entities or permanent establishments such as Oil and Gas Production Sharing Contracts as public contracts
because some of these contracts are controlled by public law such as legal subjects, one of which is the
Government.Government involvement in a contractual relationship such as Oil and Gas Production Sharing
Contract is different from commercial contracts in general, this is because the legal relationship that is
established is not only limited to the form of private legal relations, but also the public. Government
involvement in Oil and Gas Production Sharing Contracts shows that the government's actions are classified in
governmental actions that are civil in nature.
With regard to civil legal action in the administration of government affairs, Philipus M.
Hadjon(2002:167) stated that:"Even though civil legal action for government affairs by state administrative
bodies or officials is possible, it is not impossible that various public law provisions (state administrative law)
will infiltrate and influence civil law regulations. For example, several statutory provisions that specifically
regulate certain procedures or procedures that must be taken in connection with civil law enforcement efforts
carried out by state administrative bodies or officials. "
Bloomberger in Sanusi Bintang (2016: 852), states that the enactment of public law and private law on
contracts occur simultaneously, which are complementary and not in conflict with each other. Thus the two
kinds of law intersect, but still show the characteristics of each. The difference between contracts in general and
public contracts (publiekrechtelijke overeenkomst) is not very clear. Furthermore, according to Herlien
Budiono, the difference is relative, because basically all the provisions of civil contracts apply to public
contracts. This means that a public legal entity can use private legal instruments, and be bound by all related
rights and obligations, except in cases that are prohibited by statutory regulations.
The existence of a public element in the Oil and Gas Production Sharing Contract is inseparable from
social interests as the purpose of the management of Oil and Gas itself so that sometimes the meaning of the
balance in the contract shifts. According to Mariam Darus Badrulzaman(inHernoko,2013: 79), the principle of
balance has a meaning as a balance of the position of the parties who carry out the contract, therefore, in the
event of an imbalance in position that causes disruption to the substance of the contract, intervention from
certain authorized parties such as the Government is needed.
Unbalanced position between the subject of the Contract for Oil and Gas Rights, separated by experts
based on the status of the country as a sovereign state (jurio imperii) and the status of a country that commits
commercial action (juryi gestionis). Based on the principle of juryi gestionis, the state is deemed to have
renounced its sovereignty in relation to state actions in business, this is done so that the position of the parties in
commercial contracts can be in a balanced position (the principle of equality of the parties)(Adolf, 2008:56), but
the balance here is not only seen from the context a balance that can be calculated, but also in the process and
mechanism for the exchange of rights and obligations that takes place fairly(Hernoko,2013: 84).
In order to create a balance and maintain the rights possessed by the parties before the contract made
into a binding agreement for the parties, the Civil Code as a national law has set general principles which are
guidelines that become guidelines in regulating and forming a contract that is applies to the parties. These
principles include the principle of personality, the principle of consensuality, the principle of freedom of
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contract, the principle of balance, the principle of propriety, the principle of good faith, and the principle of
pacta sunt servanda (the contract applies as a law)(Hernoko,2013:107).
6.2 Concession Theory
The economic development of a developing country like Indonesia is inseparable from the
establishment of relations of foreign cooperation with other countries. In the case of oil and gas resource
management cooperation, one of the initial forms of contractual relations between the Government of Indonesia
(formerly the Dutch East Indies) and the oil and gas manager is the Concession system. The legal basis for the
implementation of the concession system in Indonesia is based on Indische Mijn Wet in Staatblad No. 124, 1899
was further amended in 1910 which was then followed by the Wet Ordonantie (Staatblad No. 38, 1930) which
was the legal basis for all forms of mining activities in Indonesia at that time(Simamora, 2000: 82).
Huala Adolf (2008:131) defines the concession agreement:"... is an agreement that permits a foreign
entity to enter the country in which the resources are located and, generally for royalty payments and other
remuneration to the host government, permits the company to remove the resources and sell the elsewhere."Free
explanation of the definition of concession according to Huala Adolf is an agreement between the Government
that gives permission to a foreign entity (company) to enter the country where the resources are located and in
general will be paid royalties and other benefits to the Government, and allow the company to take the source
southwest and sell it elsewhere.
Howard R. Williams and Charles J. Meyer(1994:196) in the Manual of Oil and Gas Terms provide the
following definition of concessions:"An agreement (usually from a host government) permitting a foreign
petroleum company to prospect for and produce oil in the subject area to the agreement. The terms ordinarily
include a time limitation and a provision for royalties to be paid to the government. "Free explanation of the
definition of the concession according to Williams and Meyer above is an agreement (usually from the host
government) that allows foreign oil companies to find and produce oil in the area in accordance with the
agreement. The requirements usually include a time limit and royalty terms that companies must pay to the
Government.
R. Subekti and R. Tjitrosudibio(1969:30) defines the concession as a permit from the government to
open land and run a business on it, open a road, mine and so on. R. Subekti's understanding is also related to
state authority in terms of the right to control the state contained in Article 33 paragraph (2) and (3) of the 1945
Constitution in conjunction with Articles 1 and 2 of the LoGA which constitutes the legal basis for managing
the Indonesian economy(Fuady, 2002:173).
Prajudi Atmosudirjo(1988:98)defines the concession as a state administration determination which is
legally very complex because it is a set of dispensations, licenses, licenses accompanied by granting limited
government authority to the concessionaire.According to H. D. van Wijk(inRidwan, 2008:205), the concession
system is generally used for management related to public interests that cannot be carried out by the government
alone either for economic reasons or human resources, so the management is left to the private sector.
Concessions granted by the Government of Indonesia to private parties such as foreign companies were
initially granted for a long period of time and were exclusive (Hasan, 2009: 28), because the management
company was given extensive authority to exploit resources in full, in this case the country as the concession
giver would receive benefits including but not limited to royalties, bonuses and taxes(Simamora,
2000:55).Concession rights are then seen as a legal relationship which is detrimental to the state because the
management company is only profit oriented, therefore the UN General Assembly through the "Declaration on
the Establishment of a New International Economic Order" and Resolution 3202 (S-VI) concerning the
"Program of Action on the Establishment of a New International Economic Order "then ratifies the Charter of
Economic Rights and Duties of States, one of which stipulates that the state has full permanent sovereignty
rights over all assets , natural wealth, and economic activities.
With the adoption of the renewed Concession concept, the management company is bound to more
complex obligations other than natural resource management itself, such as social responsibility obligations,
supervision, use of local workforce and work program accountability. Another feature of the updated concession
concept is greater state profits, both directly through the amount of royalties and from government participation
through participating interests(Adolf, 2008: 132-133).The basic difference between the initial concession system
and the renewed concession system, namely the existence of contractual relationships that are subject to the
provisions of the state or government body, therefore the authority of the management company is no longer as
large as the initial concession concept(Simamora, 2000:56).
Based on the explanation above, the main characteristics of the concession system are: (1) KKKS will
act as operator as well as being responsible for operations management; (2) The ownership of oil and gas
produced is in the hands of KKKS; (3) Ownership of assets is in the hands of KKKS with certain restrictions;
(4) The state gets a share of royalty payments; and (5) Income tax is levied on net profits(Simamora, 2000:58).
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Currently the concession system is the most widely used Oil and Gas management system in the world,
which is approximately 57 (fifty seven) countries(Hasan, 2009:53). These countries include the United States,
the United Kingdom, Australia, Dubai, Brunei Darussalam and Canada.The number of oil and gas producing
countries that use the concession system does not necessarily make this system the best system among other oil
and gas management systems. The concession system still has weaknesses, namely the lack of state involvement
in management including the use of domestic component levels and the ability to determine the selling price and
availability of domestic oil.
VII. RESEARCH RESULTS
7.1 Mechanism for the Formulation of Oil and Gas Production Sharing Contracts
Oil and Gas Production Sharing Contracts compiled by the government with the KKKS begin with an
offer of a Work Area by the Minister of Energy and Mineral Resources to business entities or Permanent
Establishments (BUT). This offer can be made through an auction stage or direct appointment to a business
entity or permanent establishment. In contract theory, these two stages are in the pre-contractual stage, where
the parties have not been legally bound in the contract. This pre-contractual stage is a stage for the government
to be able to get a contractor who has qualifications in terms of both financial and expertise as a manager of
upstream business activities on the Work Area offered(Rahayu, 2017:338).
The existence of this auction process will result in the emergence of competition from bidders to get
the KKS on the WK offered in which are prone to illegal actions such as conspiracy. Therefore, special attention
is needed regarding legal principles which should be carried out in an auction as an entry point for the upstream
oil and gas activities(Rahayu, 2017:338). According to regulations regarding procurement, government
contracts should be given to bidders who provide the 'best value' to the government. Determination is based on
cost and non-cost factors such as technical excellence, management capability, and professional
experience(Berrios, 2006:120)..
WK auction participants who have submitted participation documents are required to submit a bid bond
(bid guarantee) which aims to avoid participants withdrawing from the auction that is being followed. The
required collateral is a guarantee stating the bank's ability to guarantee and provide funding in the amount of
100% (one hundred percent) of the value of the signature bonus offer.
The winner of the auction will receive a Cooperation Contract, where the contract in upstream oil and
gas activities is a type of commercial contract based on commercial criteria related to the discovery of oil and
gas reserves and exploitation that meets the standard, which is potential enough to generate large profits from
the production of upstream business activities. Government involvement in Oil and Gas Production Sharing
Contracts will affect justice for the nation and state, therefore its implementation must be based on the
philosophy of the implementation of Oil and Gas Production Sharing Contracts that are supported by strong
legal principles so that they can be realized dogmatically in regulations on oil and gas resources that are
managed with a Cooperation Contract in particular with the profit sharing system.
Oil and gas revenue sharing contracts are signed by SKK Migas and KKKS as the parties. Things that
are different from contracts in general, besides being signed by the parties, the Oil and Gas Production Sharing
Contract is also signed by the Minister of Energy and Mineral Resources on behalf of the Government of
Indonesia. Article 11 of the Oil and Gas Law regulates that every Cooperation Contract that has been signed
must be notified in writing to the House of Representatives of the Republic of Indonesia by sending a copy of
the contract to the House of Representatives Commission of the Republic of Indonesia in charge of Oil and Gas
as a form of ratification and a form of confirmation of state control.
The form of Oil and Gas Production Sharing Contract shall be made in written form between SKK
Migas and the winning bidder KKKS. The contract can be made in both bilingual and bilingual forms according
to where the parties come from or in accordance with mutual agreement. As stipulated in Article Article 37
Paragraph (1) of Oil and Gas PP, Oil and Gas Production Sharing Contract shall be made in Indonesian and / or
English, afterwards Paragraph (2) regulates if the Cooperation Contract is made in Indonesian and English, in
the event of a difference in interpretation then what is used is interpretation in Indonesian or English according
to the agreement of the parties.
These provisions are in addition to being a form of freedom of contract as well as the implementation
of the provisions of Article 31 of Law Number 24 of 2009 concerning Flags, Languages, and National
Emblems, as well as National Anthems. The sound of the provisions of the Article is as follows: Paragraph (1)
"Indonesian must be used in a memorandum of understanding or agreement involving state institutions,
government agencies of the Republic of Indonesia, Indonesian private institutions or Indonesian citizens."
Paragraph (2) "Memorandum of Understanding or the agreement referred to in paragraph (1) involving a foreign
party shall also be written in the national language of the foreign party and / or English. "
The Cooperation Contract shall be carried out for a maximum period of 30 (thirty) years. KKKS may
submit an extension of no more than 20 (twenty) years. This contract consists of a period of exploration and
Compatible Concept of Contract Law with Oil and Gas Production Sharing Contract in Indonesia
DOI: 10.9790/0837-2409031021 www.iosrjournals.org 17 |Page
exploitation. The exploration period is 6 years and can be extended for 4 years.During the exploration period,
SKK Migas supervised the implementation of the commitments promised by KKKS. If during the first 6 (six)
years, the KKKS does not carry out commitments or fail to find commercial reserves, SKK Migas will provide a
recommendation to the Ministry of Energy and Mineral Resources to terminate the contract or extend the
contract for 4 (four) years. If successful in finding sufficient commercial reserves, the contractor will prepare a
first development plan or Plan of Development (POD) I. SKK Migas will submit an evaluation and
recommendation for this POD I to the Minister of Energy and Mineral Resources. The decision to approve POD
I is in the hands of the Minister of Energy and Mineral Resources. This approval of POD I indicates that a work
area has entered the production phase.
In the production phase, SKK Migas continues to control the cooperation contract through the approval
of the annual Work Program and Budget (WP&B) from the PSC contractor and the authorization for
Expenditure (AFE). SKK Migas also gave approval for the second POD and the subsequent POD. The control
carried out by SKK Migas aims to maximize the results of upstream oil and gas business activities for the
people's welfare.
All proceeds from state revenues from upstream oil and gas activities, both those from revenue sharing
and from tax revenues entering the state treasury through the Minister of Finance. These funds are then
distributed to all Indonesian people through the APBN mechanism. Distribution of results in Production Sharing
Contracts will not be separated from the achievements of the object of the contract that must be divided in
accordance with their rights and distributed proportionally. However, the proportionality referred to is limited to
the rights and obligations stipulated in the agreed contract.
The success of the entire process of oil and gas management as outlined above cannot be separated
from the application of general principles of good governance. One of them is the principle of transparency
because it is related to the type of contract that contains the public element. In addition, the role of the principle
of transparency in the implementation of Oil and Gas Production Sharing Contracts is also important to obtain
optimal results so that it will fulfill a sense of fairness over the results obtained without suspicion of results that
are not appropriate for the implementation of upstream Oil and Gas activities.
Regarding the contents and provisions in the Oil and Gas Production Sharing Contract, Article 26 of
the Oil and Gas Regulation stipulates that the Contract must contain at least the main provisions, namely: state
revenue, working area and return, obligation to release funds, transfer of ownership of the production of oil and
gas, the period and conditions of contract extension, dispute resolution, obligation to supply petroleum and / or
natural gas for domestic needs, contract termination, post-mining mining obligations, occupational safety and
health, environmental management, transfer of rights and obligations, required reporting, field development
plans, prioritizing the use of domestic goods and services, development of surrounding communities and
guaranteeing the rights of indigenous peoples, prioritizing the use of Indonesian workers.Furthermore, Article
32 of the PP Migas regulates in the event that a Contractor cannot carry out his obligations in accordance with
his Cooperation Contract and the applicable laws and regulations, the Implementing Body may propose to the
Minister to terminate the Cooperation Contract.
7.2 Oil and Gas Production Sharing Contract Dispute Resolution Mechanism
Differences in the national legal system, the location of business activities, as well as the provisions of
contract law in each country open up opportunities for conflicts and disputes. It is different with contracts that
are carried out by legal subjects originating from countries that adhere to the same legal system, of course in
resolving disputes the same legal choice can be used. In a commercial contract, arrangements for dispute
resolution mechanisms are very commonly included. Arrangements regarding disputes are closely related to
which legal choices are agreed upon by the parties which will later become a reference if disputes
arise(Anindita, 2008:537).
Alan Schwatz and Robert E. Scott(2003:547) argued that contract law has a tendency to contain more
clauses governing various aspects of contractual relations than the clauses needed to carry out their enforcement
and interpretation functions. Usually the clause regarding dispute resolution is made in a standard form because
it is considered to only function as a control when the parties do not carry out the contract.Oliver Hart in the
Incomplete Contract(2013)states that because the contract is basically unable to accommodate all the desires of
the parties, both for the achievements that are being carried out and for the achievements that will be carried out
in the future, in a contract needs to involve the public sector, in this case the institution that has the authority to
later resolve and decide legal issues. In legal institutions, there are two ways to resolve disputes over legal
relations, namely through litigation and non-litigation or alternative dispute resolution (APS).
Settlement of disputes taken by the parties through litigation is the ultimate means (ultimum remidium)
after other alternative dispute resolutions that do not reach agreement. According to Suyud Margono (2004:23),
litigation is "a lawsuit over a conflict that is ritualized to replace the actual conflict, where the parties give the
decision maker two conflicting choices."As a form of government attention to business needs that move quickly
Compatible Concept of Contract Law with Oil and Gas Production Sharing Contract in Indonesia
DOI: 10.9790/0837-2409031021 www.iosrjournals.org 18 |Page
and reduce the number of cases in civil court that have not been resolved, the government established an
institution for resolving disputes outside the court (non-litigation) through Law Number 30 of 1999 concerning
Arbitration and Alternative Dispute Resolution (Rahayu, 2014:450). The concept of dispute resolution through
Alternative Dispute Resolution is rooted in the self-governing system, which is a consequence of the enactment
of private law in the business world which is a legal regime that gives freedom to the parties to determine their
own dispute resolution based on their concepts and interests (the principle of freedom of
contract)(WeinribinPrasetianingsih, 2014:371). For example, the freedom to choose experts in certain fields who
are considered to have the competence to resolve disputes (FuadyinSutiyoso, 2012:168).
Alternative Dispute Resolution (APS) or Alternative Dispute Resolution (ADR), hereinafter referred to
as APS, is an effort to settle disputes outside litigation (non-litigation). In APS there are several forms of dispute
resolution. The forms of APS according to Suyud Margono(in Kapindha, 2014:7) are: (1) consultation; (2)
negotiations; (3) mediation; (4) conciliation; (5) arbitration; (6) good offices; (7) mini trial; (8) summary jury
trial; (9) rent a judge; and (10) arbitration mediation.Article 1 number 10 of the APS Law provides limits on the
definition of Alternative Dispute Resolution namely, the dispute resolution agency or dissent through a
procedure agreed by the parties, namely settlement outside the court by means of consultation, negotiation,
mediation, conciliation, or expert judgment.
Frans Hendra Winarta (2012:1-2)believes that conventionally, dispute resolution in the business world,
such as in trade, banking, mining projects, oil and gas, energy, and infrastructure is carried out through litigation
or litigation. In the litigation process, the parties are opposed to one another. Unlike the settlement of disputes
through litigation, the resolution of disputes carried out on a non-litigation basis will enable the parties to
achieve a peace or win-win solution. Erman Rajagukguk(inNeveyVaridaAriani, 2012: 279) believes that
business people prefer to settle disputes through non-litigation channels. Business practitioners' preference for
preferring non-litigation paths is because business dispute resolution is carried out in private, judges have the
ability or expertise in the field that is the object of the dispute, and decisions made through non-litigation
institutions are oriented to the results of compromise rather than right or wrong. Aside from this, dispute
resolution outside the court is relatively inexpensive and requires a shorter time than litigation
settlement(MuryatiandHeryanti, 2011:49).
The tendency of business actors to settle business cases through non-litigation is the reality that
litigation disputes are undergoing a crisis of trust due to obstructed bureaucracy and procedures that tend to be
rigid and long and more oriented to bureaucratic justice(S. SusantoinAriani, 2012:278). Williamson argues that
arbitration institutions have advantages over court institutions because they have better capacity in terms of
knowledge to evaluate contract disputes and fill contract gaps(Robin A. danUlfa, 2013:14).
Related to the resolution of Oil and Gas Production Sharing Contract disputes in which there are
foreign elements, parties usually prefer to use alternative dispute resolution through arbitration institutions, both
domestically through BANI (Indonesian National Arbitration Board) or international arbitration such as SIAC
(Singapore International Arbitration Center ), even though at the stage of implementation the decision still refers
to national law.
Huala Adolf in Natasha Yunita Sugiastuti(2015:40-41) revealed the fact that the majority of Indonesian
entrepreneurs (especially small and medium-sized entrepreneurs) did not pay much attention to contracts.
Generally, if they sign a contract, they are less concerned about the sound of the clauses in the contract. For
those who are important is a business transaction. In their minds, it is enough how to carry out the transaction.
Article 38 PP Migas regulates that Oil and Gas Production Sharing Cooperation Contracts comply with
and apply Indonesian law in it. However, both the provisions of PP Migas itself and the provisions of other
relevant laws do not regulate the procedure or mechanism for dispute resolution. The absence of norms that
specifically designate which dispute resolution mechanism should be used by the parties is a space for the
parties to choose the method they use in resolving Oil and Gas Production Sharing Contract disputes. this is a
form of implementation of the principle of freedom of contract which can be used by the parties to determine the
best mechanism and benefit the parties or each party.
Agreement on choosing a forum for dispute resolution can be done in 2 (two) ways, that is, prior to the
dispute where the clause regarding the forum choice is included in the main contract (pactum de
compromittendo), or after a dispute in which the contract or agreement regarding its settlement is made
separately from main contract (compromise deed).
Achmad Madjedi Hasan is of the opinion that if a dispute is settled through litigation it will make the
position between the parties unequal. This is because the tendency of disputes in the business world involves
parties with different cultural and legal backgrounds. After all, in international trade arbitration is preferred as a
dispute resolution option. this is because the arbitrators who have specific knowledge related to the disputed
field. Furthermore Sylvia Tee Director of Arbitration and Alternative Dispute Resolution ICCAsiadalam
Hukumonline said that the selection of arbitrators is an important thing that must be considered by the parties in
Compatible Concept of Contract Law with Oil and Gas Production Sharing Contract in Indonesia
DOI: 10.9790/0837-2409031021 www.iosrjournals.org 19 |Page
resolving disputes in the oil and gas sector because people who understand the problems in the energy sector
comprehensively are still minimal(Sutiyoso, 2012:169).
In drafting an arbitration clause in a contract, there are several other things that should not be
overlooked. First, the effect of national and international arbitration decisions on the contract, second, the state's
track record in enforcing contracts to mediate and award arbitration in the jurisdiction, and Third, the neutrality
and impartiality of law enforcement in that country towards the arbitration award.
For example, in the Oil and Gas Production Sharing Contract between BP Migas (before SKK Migas
was formed) with the Union Oil Company of California, or Unocal, provisions regarding dispute resolution in
Chapter XII regarding Consultation and Arbitration shall be initiated by means of consultation to amicably
resolve all issues. problems that arise. If there is a dispute arising between BP Migas and the Republic of
Indonesia in connection with the implementation of the contract or the interpretation and implementation of one
of the clauses in the contract will be settled amicably, and mutually understand within 90 (ninety) days of
receipt of notification by one of the parties regarding the dispute. Disputes as intended which cannot be settled
amicably will be submitted to arbitration decisions.
BP Migas on one party and KKKS on the other party appoint an arbitrator and then advise the other
parties and both arbitrators appoint a third arbitrator. If each party fails to appoint an arbitrator within 30 (thirty)
days after receiving a written request to do so, the arbitrator will, at the request of the other party, if both parties
disagree, with the appointment by the president of the International Chamber of Commerce ( President of the
International Chamber of Commerce). If the first two appointed arbitrators fail to approve the third arbitrator
within 30 (thirty) days after the appointment of the second arbitrator the third arbitrator will, if the parties to the
dispute do not also approve, be appointed, at the request of both parties, by the President of the International
Chamber of Commerce . If an arbitrator fails or is unable to carry out, his successor will be appointed in the
same manner as the arbitrator he replaces.
The decision of the majority votes of the arbitrators is final and binding on the parties. Arbitration will
take place at a place agreed by both parties and refers to the Conciliation and Arbitration rules of the
International Chamber of Commerce.
VIII. CONCLUSION
The development of upstream oil and gas law in various countries presented the prevailing legal
relationship regarding Oil and Gas Production Sharing Contracts related to the legal relationship between the
government and the private sector (Business to Government) which seeks to form a transition from business
results. In Indonesia, the current regulations regarding Oil and Gas Production Sharing contracts are still guided
by the Civil Code in general and specific oil and gas regulations. Therefore, regulations regarding the
relationship between the government and the government have not been unified, making Oil and Gas Production
Sharing Contracts approved by private law and / or public law so that legal certainty is not achieved because it is
more dominant
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Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on “contracts as reference points”. Including a contingency of the form, “The buyer will require a good in event E”, has a benefit and a cost. The benefit is that if E occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in E can hinder (re)negotiation in states outside E. We show that if parties agree about a reasonable division of surplus, an incomplete contract can be strictly superior to a contingent contract.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
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The U.S. government embraces the concepts of privatization and market competition, but the realm of contracting shows that it has not always been able to put its principles into practice. Although the contracting system is supposed to be open and competitive, in recent years the government has often awarded contracts with little or no competitive bidding, has chosen to award mostly cost-plus type contracts that force the government to assume more of the risk, and lacked efficiency in monitoring and overseeing private contractors. While the number and value of contracts have increased, the workforce to oversee these contracts has been reduced, preventing the government from adequately enforcing compliance with the contractors, and the government has not made use of past performance evaluations in its contracting system. Private contractors that do business with the U.S. government are for the most part well-established firms with ample resources and inside contacts; many contracts are still being awarded on preferential treatment and to the larger and well-established contractors.
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A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Others argue that competition promotes innovation by increasing the cost to a firm that fails to innovate. This lecture surveys the literature at a level that is appropriate for an advanced undergraduate or graduate class and attempts to identify primary determinants of investment in R&D. Key issues are the extent of competition in product markets and in R&D, the degree of protection from imitators, and the dynamics of R&D competition. Competition in the product market using existing technologies increases the incentive to invest in R&D for inventions that are protected from imitators (e.g., by strong patent rights). Competition in R&D can speed the arrival of innovations. Without exclusive rights to an innovation, competition in the product market can reduce incentives to invest in R&D by reducing each innovator's payoff. There are many complications. Under some circumstances, a firm with market power has an incentive and ability to preempt rivals, and the dynamics of innovation competition can make it unprofitable for others to catch up to a firm that is ahead in an innovation race.
Indonesia Property Tax Policy on Oil and Gas Upstream Business Activities to Promote National Energy Security: Quo Vadis
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HaulaRosdiana, (et.al.), "Indonesia Property Tax Policy on Oil and Gas Upstream Business Activities to Promote National Energy Security: Quo Vadis",JurnalProcedia Environmental Science, Vol.28 2015
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