Legal development

Changes to Indonesian Upstream Oil and Gas Procurement Rules – Revision of PTK 007

By Frédéric Draps, Jessica Davies and Norman Ibnuaji

11 July 2023

Introduction

The Special Working Unit for the Organization of Upstream Oil and Gas Business Activities (Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi or SKK Migas) has issued the fifth revision of the Working Guidelines for Supply Chain Management; Book Two on Implementation of Goods/Services Procurement No. PTK-007/SKKIA0000/2023/S9 (which is commonly known as PTK 007) on 4 April 2023 (PTK 007 Rev 5).
PTK 007 Rev 5 came into effect on 4 May 2023 (i.e., 30 days after its enactment date). This revision revokes the fourth revision of PTK 007, which was issued in 2017, and makes several changes to the existing procurement regime for upstream oil & gas contractors.
PTK 007 is complemented by the Tender Implementation Guideline (which is commonly known as the Juklak Tender) issued by the Business Support Deputy of SKK Migas. We understand that the Business Support Deputy of SKK Migas is mandated to and currently in the process of updating the Tender Implementation Guideline to conform with PTK 007 Rev 5.
PTK 007 Rev 5 was enacted with the aim of increasing effectivity and efficiency of procurement processes in the upstream oil & gas to support the achievement of Indonesia's 2030 lifting target in the amount of 1 million BOPD of crude oil and 12 BSCFD of natural gas.

Key Takeaways

PTK 007 Rev 5 introduces new provisions regarding the procurement process during the transfer of PSC operations to new contractors and for gross split PSCs (particularly on the cooperation between cost recovery PSCs and gross split PSCs).
PTK 007 Rev 5 also provides a higher contract value threshold for conducting direct appointments, which was previously up to IDR 200 million (USD 20,000), now being up to IDR 1 billion (USD 100,000). This will provide more flexibility to PSC contractors in conducting procurement processes.
PSC contractors must take note of the new price preference mechanism which will affect the tender result determination.
SKK Migas will soon issue the new Tender Implementation Guide which will provide the detailed steps and procedures for implementing the procurement of goods and services in the upstream oil & gas sector (e.g., procedures for bid submission and price evaluation).

Key PSC Principles – Why There Are These Procurement Rules

Upstream oil & gas concessions are implemented by way of entry into Cooperation Contracts between the Government of Indonesia (GoI) and upstream oil & gas contractors (in the form of Production Sharing Contracts or PSCs). There are two types of PSCs, namely cost recovery PSCs and gross split PSCs. As at January 2023 there are 105 cost recovery PSCs and 42 gross split PSCs in Indonesia.

Cost Recovery PSCs

Under cost recovery PSCs, the operational costs of the upstream oil & gas contractors will be reimbursed by the GoI (in return for a higher GoI's share in the production sharing – compared to gross split PSCs). This is a regime which is specific to the upstream oil & gas sector and does not have it equivalent in other business sectors in Indonesia.
Under cost recovery PSCs, the contractors are essentially purchasing goods/services on behalf of the GoI, subject to the fulfilment of certain requirements for the reimbursement of the operational costs. Such material and equipment purchased under a cost recovery PSC will be owned by the State due to the operation of the cost recovery mechanisms (i.e., the GoI effectively buys it back).
The GoI must govern the procurement process under cost recovery PSCs and has mandated SKK Migas (i.e., a special task force unit established by the President to implement the management of upstream oil and gas business activities under Cooperation Contracts), to set these procurement rules. Failure to comply with PTK 007 may result in the procurement of goods and services not being reimbursed by the GoI to contractors.

Gross Split PSCs

The concept of a gross split PSC was introduced in 2017 and involves the contractors only receiving the production split of hydrocarbons lifting without the reimbursement of operating costs. Upon the entry into force of the gross split PSC regime, the upstream contractors were no longer allowed to enter into new cost recovery PSCs. However, it quickly became apparent that the gross split model was insufficiently attractive to the market which had an impact on new investments in the sector. In 2020, the Minister of Energy and Mineral Resources (MEMR) subsequently issued a regulation which allows gross split PSC contractors to shift back to cost recovery PSCs.
Previously, the procurement rules under PTK 007 did not apply to gross split PSCs because of the fundamental difference in the basis for the revenue stream of the GoI and the PSC contractors. Now, PTK 007 Rev 5 includes several provisions on the procurement process which apply to gross split PSC contractors.

Key Provisions of PTK 007 Rev 5 and Changes from the Rev 4

In essence, PTK 007 requires PSC contractors to obtain SKK Migas' approval prior to commencing each phase of a procurement process (i.e., the procurement "list", pre-qualification plan, tender plan, tender implementation results, and work variation).
PTK 007 does not apply to the procurement of land and insurance (there are separate SKK Migas guidelines for this).
PSC contractors are only allowed to procure goods and services set out in the "procurement list". There are exceptions for procurement that (i) if not implemented will hinder upstream oil & gas operations, (ii) is already included in ongoing work program and budget, (iii) is already added to the procurement list revision, and (iv) does not require SKK Migas approval (e.g. where the tender package is below IDR 50 billion/USD 5 million).
There is no change to the timing of the SKK Migas approval, which should be given no later than 15 business days after the PSC contractor submits a complete and correct application to SKK Migas.
Payment to goods/services providers must be disbursed via local banks (note: in the exploration phase, PSC contractors must only utilise state/regionally owned banks). This requirement does not apply to foreign goods/services providers which can be paid offshore.
PSC contractors must conduct monthly, quarterly, and 6-monthly reports to SKK Migas on the implementation of the procurement process.
There are several notable changes to the procurement rules introduced under PTK 007 Rev 5. Some of these are set out below (provisions that apply to gross split PSCs are set out in sections 6 and 7):

1. Exemption to the Tender Implementation Guideline

The Business Support Deputy of SKK Migas can make special determinations to exempt contractors from the Tender Implementation Guideline as long as such exemption is in line with the provisions of PTK 007. Under the 4th revision there were pre-qualifications that contractors must meet for an exemption to be made, as set out in the table below, which are now no longer required under PTK007 Rev 5.

PTK 007 Rev 4

PTK 007 Rev 5

Pre-requisites include:

(a) the need to implement strategic procurement to achieve a larger national multiplier effect;

(b) operational activities facing challenging subsurface conditions, difficult business environment, and project developments with high economic sensitivity;

(d) PSC contractors requiring business certainty by considering objective operational costs.

There are no qualifiers as pre-requisites to an exemption being granted.

2. Timing to Commence Procurement

Under PTK 007 Rev 5, the date for PSC contractors to commence the tender process has been significantly shortened to 10 business days after the issuance of the SKK Migas approval, instead of 30 calendar days as previously.

3. Contract Variation

PTK 007 Rev 4	PTK 007 Rev 5
Change to the contract value is allowed for a maximum of 10% from initial value.	Change to the contract value higher than 10% from initial value requires SKK Migas' approval.
Change to the scope of work is allowed for handling (i) emergency situation (i.e., abrupt event which may cause safety hazard, loss of life, or environmental damage) and (ii) force majeure.	Change to the scope of work is allowed for handling (i) emergency situation, (ii) crisis situation (i.e., situation which may harm reputation, business interest, and business continuity), and (iii) force majeure.
Contract extension is allowed for utilisation of remaining contract value for a maximum of two years period.	Contract extension is allowed for utilisation of remaining contract value (note: the two years maximum contract extension period is deleted).

4. Local Content Target

In addition to the local content requirements PSC contractors must already satisfy, PTK 007 Rev 5 sets out further compliance measures and also requires SKK Migas to publicly announce procurement plans for domestic goods and services.

PTK 007 Rev 4	PTK 007 Rev 5
PSC contractors must comply with local content provisions under the prevailing laws.	Further to compliance with prevailing laws, PSC contractors must also comply with local content achievement targets set out in the Plan of Development, Work Program and Budget, and the "procurement list".

5. Percentages of Price Preference

PTK 007 provides for certain price preference mechanisms based on the fulfilment of local content targets which are used for evaluating the quotation price submitted by bidders. In line with the PTK007 Rev 4, price preferences will still be granted in certain circumstances to specific vendors during the procurement process. The key change in PTK 007 Rev 5 is the percentage of local content targets that vendors must reach to qualify for a price preference from the GoI. The amendments introduced by Rev 5 include:

Specific Circumstances for Price Preference to be Granted	PTK 007 Rev 4	PTK 007 Rev 5
Bidders who achieve the local content target	A maximum of 15% price preference will be granted.	A maximum of 25% price preference will be granted.
Service procurement	If the local content target is a minimum of 30%, a maximum price preference of 15% is granted.	If the local content target is a minimum 25%, a maximum price preference of 25% is granted.
Local companies	If they achieve 30% of the local content target.	If they achieve 25% of the local content target.

6. Procurement Under Gross Split PSCs

PTK 007 Rev 5 includes certain provisions on the procurement process conducted by gross split PSC contractors, including a specific "procurement list" for gross split PSCs which must be prepared under the work program discussion.

7. Cooperation between Cost Recovery PSCs and Gross Split PSCs

In previous PTK 007 revisions, no provisions governed the cooperation between cost recovery PSCs and gross split PSCs. PTK 007 Rev 5 now sets out specific circumstances for where joint procurement and utilisation between cost recovery PSCs and gross split PSCs may be implemented.

Matter	PTK 007 Rev 5
Procurement	Gross split PSC contractors may conduct joint procurement with cost recovery PSC contractors.
Utility	Gross split PSC contractors may jointly utilise goods and services contracts of cost recovery PSC contractors.
Conditions of Implementation	The payment obligation of cost recovery PSC contractors is a maximum amount of IDR 50 billion or USD 5 million. There is an exception to this provision for the following services with SKK Migas approval: (a) construction services; (b) drilling tower work or re-work; and (c) drilling support work or re-work.
	Cost recovery PSC contractors must firstly obtain a technical recommendation from SKK Migas.
	Cost recovery PSC contractors must comply with provisions regarding sanctions under PTK 007.

8. Procurement during PSC Transfer of Operations

So far, there were no provisions regarding procurement process during a PSC transfer of operations . PTK Rev 5 now sets out a number of requirements for contractors to comply with during this period.

Requirements	PTK 007 Rev 5
1	The previous PSC contractor must cooperate with the new PSC contractor for the transition of the contract.
2	The new PSC contractor will need to accept a mirrored contract (i.e., a contract on exactly the same terms as the previous PSC contractor's contract), where: (a) the contract with the previous PSC contractor is still valid for 6 months before the PSC transfer of operations; and (b) the contract with the new PSC contractor is valid for a maximum 12 month period after the effective date of the new PSC.
3	The value of the new contract must be the same as the previous contract which receives SKK Migas approval.

9. Direct Appointment

In line with the 4th revision, specific conditions still apply when a direct appointment (i.e., the process of vendor appointment by only inviting one bidder who fulfils the pre-qualification requirements) is conducted under PTK Rev 5. However, changes have been made to the thresholds of procurement which allow for a direct appointment.

Specific Circumstance Giving Rise to Direct Appointment	PTK 007 Rev 4	PTK 007 Rev 5
Automatic appointment	The procurement value is IDR 200 million (USD 20,000) or lower.	The procurement value is IDR 1 billion (USD 100,000) or lower.
Conditional appointment where one of the following conditions is met (where the procurement value is higher than the automatic appointment threshold)	There is only one goods/services provider who meets pre-qualification requirements.
	For mandatory goods when, based on the Domestic Product Appreciation Book, there is only one state or regionally owned goods/services provider.
	For emergency work
	N/A	Procurement is in the exploration phase.
Conditional appointment with written justification from a senior executive of the PSC contractor, where one of the following conditions is met (where the procurement value is higher than the automatic appointment threshold)	Work for increasing production or accelerating exploration activities based on a request from SKK Migas.
	Work needed for maintaining the production level.
	Bridging of the ongoing contract for a period of one year when a replacement contract is not available.	Bridging of the ongoing contract for two further 6 month periods where a replacement contract is not available.
	N/A	If a replacement contract is available then the ongoing contract must provide more economic value than entering into a replacement contract.
	Where there are existing leases for houses, apartments, office spaces, shore bases, ports, FSOs, FPSOs, and FPUs.	Where there are existing leases for houses, apartments, or office spaces based on approval from SKK Migas.
		Where there are existing leases for shore bases, ports, FSOs, FPSOs, FPUs, and MOPUs.

Conclusion

In line with the intention to increase effectiveness and efficiency, PTK 007 Rev 5 simplifies certain aspects of the procurement process in the Indonesian upstream oil & gas sector. This is particularly the case with the higher threshold for direct appointment (which used to be below IDR 200 million and now is up to IDR 1 billion). This relaxation will help PSC contractors in implementing routine procurements in support of their operations.

It should be noted that the implementation of the procurement processes by PSC contractors must also follow the Tender Implementation Guide which has not yet been conformed to the PTK 007 Rev 5 yet. It is anticipated that the new Tender Implementation Guide will be issued later this year. In the interim, upstream oil & gas contractors should closely coordinate their procurements with SKK Migas to mitigate any issues in the interpretation of applicable rules.