On January 2, 2025, the Minister of Energy and Mineral Resources enacted Ministerial Regulation Number 1 of 2025 on Amendments to the Minister of Energy and Mineral Resources Regulation Number 37 of 2016 on the provisions of 10% (ten percent) Participating Interest Offer in Oil and Gas Working Areas ("MEMR Reg 1/2025" “MEMR Reg 37/2016”) which came into effect on January 6, 2025.
This alert provides a breakdown of the key changes of MEMR Reg 1/2025 and their potential implications:
1. Redefining the criteria for Regional Government-Owned Enterprises (Badan Usaha Milik Daerah (“ROEs”) eligible for a 10% Participating Interest ("10% PI") offer.
In general, contractors are required to offer a 10% PI in their mining projects to ROEs. The provisions in Art. 3 of MEMR 1/2025 redefine the scope of ROEs eligible for the 10% PI offer from contractors. The following are the differences in Art. 3 of MEMR 37/2016 and MEMR 1/2025:
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- An ROE as referred to in Article 2 must comply with the following provisions:
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- ROEs may take the form of:
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- A regional company whose shares are wholly owned by the regional government; or
| - A regional public company whose entire capital is owned by a single regional government and is not divided into shares; or
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- A limited liability company in which at least 99% (ninety-nine percent) of the shares are owned by the regional government, with the remaining shares being entirely affiliated with the regional government.
| - A regional limited liability company in which at least 99% (ninety-nine percent) of the shares are owned by the regional government, with the remaining shares being entirely affiliated with the regional government.
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- Its status must be ratified through a regional regulation; and
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- It shall not engage in any business activities other than the management of participating interests.
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Based on the differences outlined in the table above, the redefining is found in Art. 3 letter a point 1. These differences can be understood by referring to the definition of ROEs as stipulated in the legislative provisions on regional government, specifically in Art. 331 para. (3) of Law No. 23 of 2014 on Regional Government ("Law 23/2014"), ROEs are classified into two types:
a. Regional Public Companies ("Perumda") as defined in Art. 334 para. (1) of Law 23/2014, which states that a Perumda is an ROE whose entire capital is owned by a single region and is not divided into shares.
b. Regional Limited Liability Companies ("Perseroda") as defined in Art. 339 para. (1) Law 23/2014, which states that a Perseroda is an ROE established in the form of a limited liability company, with its capital divided into shares, with at least 51% (fifty-one percent) being owned by a single region.
Accordingly, referring to the above modification, MEMR 1/2025 restricts the eligibility of an ROE to an enterprise without share divisions, namely a Perumda.
Furthermore, considering the specific objectives of a Perumda based on Art. 8 of Government Regulation No. 54 of 2017 on ROEs that the establishment of a Perumda is prioritized to facilitate the provision of public benefits through the supply of high-quality goods and/or services to fulfill the essential needs of the community. These must be carried out in accordance with the prevailing conditions, characteristics, and potential of the respective region, while adhering to the principles of good corporate governance. Referring to the nature of a Perumda, Art. 3 MEMR 1/2025, reflects a shift in the regional government’s objective for a 10% PI offer from contractors—moving from a commercial to a public-oriented approach.
Therefore, MEMR 1/2025 redefines the forms of ROEs eligible for the PI 10%, limiting eligibility to ROEs without share divisions, namely Perumda, as well as altering the business nature of the ROEs receiving the 10% PI, shifting towards entities that are more socially beneficial to the community. This change enhances regulatory oversight and prevents private sector influence from diluting public interest.
2. Introducing reservoir coverage as a factor in shareholding distribution.
The allocation of reservoir coverage becomes particularly significant when oil and gas reserves extend across multiple regencies (kabupaten) or cities (kota). In these cases, Art. 5 of MEMR Reg 1/2025 introduces additional requirements for the allocation of shareholding percentages, aligning them with the proportional distribution of reservoir coverage while considering the social and economic wellbeing of surrounding communities. The purpose of this reservoir allocation is to determine the ownership proportions among relevant stakeholders.
This provision seeks to balance shareholder responsibilities with sustainable reservoir management, mitigating the risk of purely profit-driven investments that overlook long-term resource sustainability. By linking shareholding proportions to reservoir distribution, the government aims to promote responsible investment, ensuring that stakeholders contribute equitably to resource management.
The changes in Art. 5 also provide legal certainty for contractors in determining the proportional responsibility of 10% PI recipients. This certainty is essential as regulated in
Art. 1338 of the Civil Code, which stipulated that a legally binding agreement holds the force of law for the parties involved.
Additionally, Art. 6 of MEMR Reg 1/2025 mandates compliance with data access procedures to enhance transparency, bolster investor confidence, and foster a favorable investment climate. This provision underscores the importance of open data-sharing mechanisms to facilitate accurate decision-making and strengthen regulatory oversight.
Accordingly, Art. 5 of MEMR 1/2025 regulates the allocation of shareholding percentages, ensuring alignment with the proportional distribution of reservoir coverage while considering the social and economic wellbeing of surrounding communities. While Art. 6 of MEMR 1/2025 mandates compliance with data access procedures to enhance transparency, bolster investor confidence, and foster a favorable investment climate.
3. Bid directly to the Minister of Energy and Mineral Resources.
Art. 9 para. (3) of MEMR Regulation 01/2025 revises the 10% PI offer submission process. Previously, Regional-Owned Enterprises (ROEs) interested in acquiring the 10% PI were required to submit their offers through the Director General. However, under the revised procedure, bids must now be submitted directly to the Minister of Energy and Mineral Resources.
This ensures more direct supervision, enabling faster decision-making and improved oversight. The removal of intermediaries minimizes the risk of collusion and corruption, while centralized monitoring strengthens transparency and accountability. These changes aim to streamline the process, ensuring greater government control and efficiency in overseeing 10% PI allocations.
4. An ROE subsidiary replaces Perseroda’s right to offer PI 10%.
According to Art. 1 point 7 of MEMR 1/2025, an ROE Subsidiary refers to a company whose shares are wholly or partially owned by an ROE, established by a regional government with administrative jurisdiction over a field for which the initial field development plan has been approved, as well as existing fields within a work area extension or transferred work area. The subsidiary's shareholding participation is determined based on reservoir distribution.
An ROE subsidiary’s right to offer and/or manage a 10% PI may be utilized if the conditions set forth in Art. 7 para. (1) jo. Art. 10 of MEMR Regulation 1/2025 are met. Specifically, if the ROE designated by the Governor:
a. has previously managed a 10% PI in a work area;
b. has operated another work area; or
c. has engaged in business activities outside of upstream oil and gas operations,
If these conditions have been met, the management of the 10% PI shall be carried out by another ROE or an ROE subsidiary appointed by the Governor.
This shift aligns with the separate legal entity principle, affirming that subsidiaries operate independently from their parent companies with distinct rights, obligations, and liabilities. Furthermore, the transition enhances 10% PI management flexibility and strengthens operational independence, ensuring a clear separation between parent ROEs and their subsidiaries for more efficient administration and resource allocation.
Key Points:
MEMR 01/2025 fundamentally restructures 10% PI management by adding Perumda, incorporating reservoir-based shareholding, refining the bidding process, and shifting eligibility to subsidiaries of ROEs. Contractors with approved development plans for initial production onshore and/or offshore, up to 12 nautical miles, must understand their obligation to offer the 10% PI and understand the mechanism for the proportional allocation of the 10% PI in cases where the mining working area extends across multiple regencies and cities. Likewise, ROEs and their subsidiaries seeking participation must comply with the revised criteria and requirements. Lastly, these reforms seek to enhance efficiency, transparency, and sustainable resource management. Moving forward, it is imperative that regulators provide clear guidance and comprehensive technical support to ensure a seamless transition and mitigate potential governance challenges arising from these regulatory modifications.
If you require further information on the new regulation, please do not hesitate to contact:
| Vera Noviani Harwanto Partner + 62 21 5151788 vera.noviani@nurjadinet.com |
| Jenica Susanto Associate + 62 21 5151788 jenica.susanto@nurjadinet.com |
| Norma Lathifatunnisa Associate + 62 21 5151788 norma.lathifatunnisa@nurjadinet.com |