Navigating Carbon Capture in Indonesia: A Key Step Forward

Regulators have taken a significant step forward in the evolving landscape of carbon capture and storage (CCS) in Indonesia.

Indonesia's Minister of Energy and Mineral Resources (MEMR) has introduced regulation No. 16 of 2024 on the Implementation of Carbon Storage Activities within a Carbon Storage Permit Area in Relation to Carbon Capture and Storage Activities (MEMR 16/2024). It provides a structured framework for non-production sharing contract (PSC) contractors to engage in carbon capture and storage beyond traditional oil and gas work areas.

The regulation complements an existing regulation on the implementation, capture and storage of carbon as well as the capture, use and storage of carbon in the upstream oil and gas, namely MEMR Regulation No. 2 of 2023 on the Implementation, Capture and Storage of Carbon as well as the Capture, Use and Storage (CCUS) of Carbon within the Upstream Oil and Gas Business (MEMR 2/2023).

The new regulation also highlights the government's commitment to broadening the scope of CCS initiatives. It also opens the door for more diverse players in the CCS field, fostering innovation and competition.

However, the regulatory landscape remains complex, with distinct processes for PSC contractors and non-PSC entities. While PSC contractors can integrate CCS into their existing operations with relative ease, non-PSC entities must navigate a more intricate process involving auctions, tenders and licensing.

MEMR 16/2024 and other measures provide a comprehensive regulatory framework that seeks to balance state control with private sector involvement to enhance Indonesia's CCS capabilities and contribute to global emission reduction efforts.

Key Background

MEMR 16/2024 follows the issuance of MEMR 2/2023 and Presidential Regulation No. 14 of 2024 on the Implementation of Capture and Storage of Carbon (PR 14/2024).

PR 14/2024 is the umbrella regulation for CCS activities and sits above MEMR 2/2023 and MEMR 16/2024 (in terms of regulatory hierarchy).

While both MEMR 2/2023 and MEMR 16/2024 cover CCS in Indonesia, MEMR 2/2023 offers a framework for PSC Contractors^[1] to conduct CCS (and CCUS) activities within their designated upstream oil and gas areas set out in a PSC (Oil and Gas Work Areas).

In contrast, MEMR 16/2024 provides guidelines for non-PSC contractors to perform CCS activities in areas that the MEMR designates specifically for carrying out CCS activities, which are not limited to Oil and Gas Work Areas. MEMR 16/2024 details the key principles that were set out in PR 14/2024 for carrying out CCS activities in a Permit Area.

Two Regulations – With Slight Differences

MEMR 2/2023 defines CCS as an activity to reduce greenhouse gas emissions that includes the capture of carbon emissions and/or the transportation of captured carbon emissions to targeted injection zones or Zona Target Injeksi (ZTI) safely and permanently pursuant to good engineering practices.^[2]

In contrast, MEMR 16/2024 defines CCS as business activities that include the capture of carbon and/or the transportation of the captured carbon, the injection and the storage of carbon to a ZTI safely and permanently pursuant to good engineering practices.^[3]

While the definitions under each regulation seem similar, the use of the term "business" in MEMR 16/2024 definition of CCS suggests that the activities set out in the definition are conducted as main revenue-generating activities. In contrast, the MEMR 2/2023 definition of CCS implies that CCS is integrated with and ancillary to a PSC contractor main business activity (i.e. the extraction of hydrocarbons).

Oil and Gas Work Areas vs. Permit Areas

Under MEMR 2/2023, CCS activities must take place within existing Oil and Gas Work Areas under a PSC.^[4] If a PSC contractor wishes to conduct CCS activities, the PSC contractor must submit a proposal (CCS Proposal) to either to the MEMR or the Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) depending on the operational stage of a PSC contractor's Oil and Gas Work Area.^[5] The CCS plan will then be added to the PSC contractor's plan of development (POD) which must be approved by either the MEMR or SKK Migas depending on the PSC contractor's operational stage.^[6] If necessary, the relevant PSC will be amended accordingly.^[7]

MEMR 16/2024 offers a different framework from MEMR 2/2023 in relation to designating an area to carry out CCS activities, which under MEMR 16/2024, is referred to as a carbon storage permit area or Permit Area.^[8] A Permit Area may be in an open area, or within a mining area or Oil and Gas Work Area.^[9]

The MEMR will designate a Permit Area, following a process similar for the designation of an Oil and Gas Work Area. The MEMR can designate a Permit Area that it identifies itself, or a third party (such as a business player proposing a CCS project) can identify and propose an area for CCS activities to the MEMR for designation as a Permit Area.^[10]

Once the MEMR designates a Permit Area, the MEMR will then offer the Permit Area to bidders, either through an auction or through a limited tender^[11] (as discussed below).

Obtaining Rights Over An Area To Carry Out CCS

A PSC contractor that wishes to carry out CCS as part of its upstream oil and gas activities does not have to go through the process of bidding for an area to carry out its CCS activities. It may do so in its Oil and Gas Work Area.

However, the PSC contractor must obtain MEMR or SKK Migas approval of its POD which details the CCS Proposal as mentioned above.

On the other hand, a party that wishes to carry out CCS activities in a Permit Area, must participate in an auction or limited tender.^[12] It is worth noting that, if the MEMR designates a Permit Area within an Oil and Gas Work Area, the relevant PSC contractor may participate in a limited tender if it wishes to carry out CCS activities in that Permit Area pursuant to MEMR 16/2024.^[13]

The MEMR will carry out an auction^[14] for a Permit Area that the MEMR chooses and designates itself and will carry out a limited tender^[15] for a Permit Area that was proposed by a third party.^[16] MEMR 16/2024 provides that participants of a limited tender be parties that are registered on a shortlist that is maintained by the MEMR.^[17]

Similar to a limited tender for an Oil and Gas Work Area, if a party proposes a Permit Area and the MEMR offers such Permit Area to bidders through a limited tender, such party will have a "right to match" the winning bidder.^[18]

Ccs Activities Under A PSC Vs. Permitting For Ccs Activities In Permit Areas

POD Approval vs. Permit

MEMR 2/2023 does not require a PSC contractor to obtain a separate permit to carry out its CCS activities. Once MEMR or SKK Migas (as applicable) approves the PSC contractor's POD covering the CCS Proposal, the PSC contractor may carry out CCS activities within the relevant Oil and Gas Work Area.^[19]

To carry out CCS activities within a Permit Area, a party must hold a license to carry out injection and storage of carbon in a Permit Area (Operations License).^[20]

Prior to obtaining an Operations License, such party must first conduct exploration activities within a Permit Area under a license to carry out exploration activities within the ZTI of the Permit Area. Exploration activities can include data acquisition, drilling, sub-surface drilling and risk mitigations for leakage in the ZTI (an Exploration License). The exploration activities must show that it is feasible to carry out CCS operations within the Permit Area. This is analogous to the exploration stage and exploitation stage within an Oil and Gas Work Area.

 

 

Exploration License and Operations License

Exploration License

An Exploration License will be awarded to a winning bidder of the auction or a limited tender for the Permit Area. An Exploration License is granted for six years and can be extended one time for four years.^[21] To be awarded an Exploration License, the winning bidder must either be a company established in Indonesia (Business Entity^[22]), a company established overseas (a Permanent Establishment^[23]) or an unincorporated consortium consisting of Business Entities and/or Permanent Establishments (a Consortium).^[24]

A Consortium that is the winning bidder has the option to either establish a joint venture Business Entity or Permanent Establishment^[25], or have an Exploration License granted to the members of the unincorporated Consortium collectively.^[26]

Option 1

Option 2

A Consortium that is granted an Exploration License must appoint an operator to act on behalf of the Consortium from amongst the unincorporated Consortium’s members.^[27] This is similar to the concept of operatorship under oil and gas laws, where several participating interest (PI) holders (i.e. PSC contractors) can be awarded rights under a PSC and, amongst the PSC contractors, one PSC contractor will be appointed as the operator. However, in an upstream oil and gas scenario, it is clear what PI percentage each PSC contractor holds as the percentage of PI held by each PSC contractor is clearly stated in an approval issued by the MEMR. This is not the case for members of an unincorporated Consortium holding an Exploration License as there is no PI held by each Consortium member who holds an Exploration License.

Relatedly, MEMR 16/2024 also states that all members of the Consortium are bound to the main requirements with respect to the exploration activities and will be jointly and "fully" responsible for the implementation of an Exploration License.^[28] Accordingly, under the regulations, each Consortium member enjoys and is responsible for the rights and obligations attached to an Exploration License jointly and severally. However, there is no explicit restriction on Consortium members agreeing a different allocation of rights and obligations, as between themselves, contractually (although this only apply between the Consortium members and would not set aside the position applicable at law).

MEMR 16/2024 also states that the operator must have the "largest portion of consortium membership".^[29] In the context of the observations above, this requirement is unclear as an Exploration License does not allocate PI to Consortium membership. Accordingly, it is not obvious how the MEMR would determine which Consortium member holds the “largest portion of consortium membership.” It may be, however, that this could be determined pursuant to any unincorporated joint venture arrangements as between the Consortium members that determine the level of participation of each Consortium member in an unincorporated Consortium as agreed between themselves.

Additionally, PR 14/2024^[30] and MEMR 16/2024^[31] clearly state that an Exploration License cannot be transferred. Thus, unlike PSC contractors holding PI, members of an unincorporated Consortium do not appear to have the flexibility to transfer their rights under an Exploration License (i.e., they appear to hold the rights and obligations associated with an Exploration License jointly and severally and also indivisibly with other Consortium members).

Note, however, that PR 14/2024 allows for transfer of a majority of shares in the holder of an Exploration License^[32], subject to the holder of an Exploration License fulfilling certain "firm" commitments and obtaining the MEMR’s approval.  Accordingly, should the holder of an Exploration License be an incorporated Business Entity, shares in that entity could be transferred by shareholders in the relevant Business Entity.

Operations License

If an Exploration License holder believes its exploration shows potential for CCS activities in the Permit Area, it must submit a development and operations plan (PFDO) to the MEMR^[33], which is similar to a POD in the upstream oil and gas context.

In the upstream oil and gas context, the POD typically serves as a basis for a PSC contractor to recover costs under a cost recovery scheme. In the CCS context, however, the PFDO is simply a step required prior to the MEMR granting an Operations License to an Exploration License holder.

Once the PFDO is approved by the MEMR, an Exploration License holder may apply for an Operations License from the MEMR. An Operations License is granted for 30 years and may be extended every 20 years thereafter.^[34]

MEMR 16/2024 does not allow for an Operations License to be issued to a Permanent Establishment but it may be issued to a Business Entity^[35] or an unincorporated Consortium of Business Entities, meaning the party or parties holding an Operations License must be in the form of a limited liability company or limited liability companies (as applicable) established in Indonesia.

Accordingly, if an Exploration License was granted to a Consortium consisting of Business Entities and Permanent Establishments, any Permanent Establishment must be replaced by a Business Entity incorporated in Indonesia prior to an Operations License being granted.

Scenario 1

Scenario 2

MEMR 16/2024 does not explicitly address whether a Consortium holding an Exploration License may subsequently establish an incorporated joint venture Business Entity to hold an Operations License. However, as noted above, while MEMR 16/2024 states that an Operations License must be granted to an Exploration License holder,

MEMR 16/2024 does not permit an Operations License to be issued to a Permanent Establishment with the intention that any Permanent Establishment be replaced by a Business Entity before an Operations License can be issued. This implies that any members of an unincorporated Consortium that holds an Exploration License may also incorporate a joint venture Business Entity to hold any proceeding Operations License that is granted. While  this is not explicitly permitted under MEMR 16/2024, this conclusion is consistent with the logic applicable to a Permanent Establishment Exploration License holder being replaced by a Business Entity Operations License holder and we note further is not explicitly prohibited by MEMR 16/2024.

Like an Exploration License, an Operations License may not be transferred. However, PR 14/2024 allows for transfer of a majority of shares in the holder of the Operations License^[36], subject to consideration on continuation of the project following the share transfer and MEMRs approval. Accordingly, it would appear logical for an unincorporated Consortium with an Exploration License to incorporate a Business Entity to hold an Operations License so as to facilitate future transfers of interests by the Consortium members.

Storage Fees And Storage Agreements

MEMR 2/2023 briefly mentions that a PSC contractor may store carbon generated by third parties in its CCS facilities and may earn income from these storage services.^[37] PR 14/2024 further states that both a PSC contractor and an Operations License holder may receive storage fees.^[38]

MEMR 2/2023 does not provide details on storage services provided by a PSC contractor to third parties. On the other hand, MEMR 16/2024 provides detailed guidelines on the business arrangements for Operations License holders, specifying the key points a storage agreement must include, which require MEMR approval.^[39]

Ownership Of Assets

As is typical in the upstream oil and gas sector, all assets related to CCS that were purchased by the PSC contractor belongs to the state.^[40] This is normal given that PSC contractors recover their costs from the state. This means that PSC contractors may not give security over upstream oil and gas assets as the PSC contractors do not own the upstream oil and gas assets which remain the property of the state. The government of Indonesia also cannot give security over upstream oil and gas assets (even though they are the owners) given that the government of Indonesia is subject to a negative pledge under its loan arrangements with the World Bank's lending arm (the World Bank Negative Pledge or WBNP).

These restrictions mean that project financings in the upstream oil and gas sector in Indonesia frequently uses highly structured mechanisms such as the “trustee borrowing scheme” to obtain debt financings. These considerations will also apply to CCS assets managed by the PSC contractor.

In contrast, assets purchased by the holder of an Operations License belong to the Operations License holder.^[41] Although, MEMR 16/2024 does require that certain CCS facility assets are transferred to the government once an Operations License expires.^[42]  Accordingly, Operations License holders may provide asset security to financiers of a CCS project developed under the MEMR 16/2024 scheme, provided that such Operations License holders are not otherwise subject to restrictions under the WBNP (i.e. an Indonesian state-owned entity may still have to consider the WBNP restrictions).

---

[1] MEMR 2/2023 offers a framework for parties that have a cooperation contract with the government of Indonesia to carry out upstream oil and gas exploration and exploitation activities. Most upstream oil and gas exploration and exploitation activities in Indonesia are carried out under a Production Sharing Contract. However, MEMR 2/2023 covers all types of upstream oil and gas cooperation contracts with the Government.
[2] Article 1 of MEMR 2/2023.
[3] Article 1 of MEMR 16/2024.
[4] Article 3 of MEMR 2/2023
[5] Article 11 of MEMR 2/2023
[6] Article 16 of MEMR 2/2023
[7] Article 17 of MEMR 2/2023
[8] Article 1 of MEMR 16/2024 defines carbon storage permit area as a specific area within Indonesia to carry out CCS.
[9] Article 3 paragraph (4) of MEMR 16/2024
[10] Article 3 paragraph (1) and (2) of MEMR 16/2024
[11] Article 3 paragraph (7) and (8) of MEMR 16/2024
[12] Article 3 paragraph (7) and (8) of MEMR 16/2024
[13] Article 3 paragraph (12) of MEMR 16/2024.
[14] Article 3 paragraph (7) of MEMR 16/2024
[15] Article 3 paragraph (8) of MEMR 16/2024
[16] Article 9 of MEMR 16/2024.
[17] Article 10 of MEMR 16/2024.
[18] Article 24 paragraph (1) of MEMR 16/2024.
[19] Article 28 paragraph (1) of PR 14/2024.
[20] Article 28 paragraph (1) of PR 14/2024
[21] Article 28 paragraph (6) of MEMR 16/2024.
[22] MEMR 16/2024 defines Business Entity as is a company in the form of a legal entity that runs a permanent, continuous type of business and is established in accordance with applicable laws and regulations and works and is domiciled within the territory of the Republic of Indonesia
[23] MEMR 16/2024 defines Permanent Establishment as business entity established and incorporated outside the territory of the Republic of Indonesia that carries out activities in the territory of the Republic of Indonesia and must comply with the prevailing laws and regulations in the Republic of Indonesia.
[24] Article 28 paragraph (2) of MEMR 16/2024.
[25] Article 25 paragraph (3)(d) of MEMR 16/2024.
[26] Article 28 paragraph (3) of MEMR 16/2024.
[27] Article 12 paragraph (8) of PR 14/2024 and Article [28] paragraph (3) of MEMR 16/2024.
[29] Article 28 paragraph (3) of MEMR 16/2024.
[30] Article 17 paragraph (3) of PR 14/2024.
[31] Article 28 paragraph (5) of MEMR 16/2024.
[32] Article 19 of PR 14/2024.
[33] Article 37 of MEMR 16/2024.
[34] Article 40 paragraph (6) of MEMR 16/2024.
[35] Article 40 paragraph (2) of MEMR 16/2024.
[36] Article 27 of PR 14/2024.
[37] Article 42 paragraph (2) of MEMR 2/2023.
[38] Article 42 paragraph (1) of PR 14/2024.
[39] Article 57 of MEMR 16/2024
[40] Article 45 of MEMR 2/2023
[41] Article 61 paragraph (1) of MEMR 16/2024.
[42] Article 61 paragraph (2) of MEMR 16/2024.