As a country with abundant resources of oil and gas and mining, Indonesia has a huge potential as a carbon storage area and its prospects as a carbon capture location both nationally and regionally. On January 2024, the President of the Republic of Indonesia issued Presidential Regulation No. 14/2024 (“Regulation 14/2024”) with the aim to provide a legal foundation and legal certainty for parties involved in emission reduction activities.
Regulation 14/2024 serves as a higher-level legal instrument that complements existing regulation lower level regulation, i.e., the Ministry of Energy and Mineral Resources (“MEMR”) Regulation No. 2 of 2023 on the Implementation of Carbon Capture and Storage (“CCS”), as well as Carbon Capture, Utilization, and Storage (“CCUS”) in Upstream Oil and Gas Activities (“MEMR Rule 2/2023”).
This alert covers some key aspects of Regulation 14/2024 as follows:
Legal basis for CCS implementation in Indonesia
CCS activities in the oil & gas work area is carried out by a contractor based on the relevant Production Sharing Contract (PSC). To get the approval, the contractor must submit a CCS implementation plan through Satuan Kerja Khusus Minyak & Gas (“SKK Migas” – the Special Task Force for Oil & Gas) or Badan Pengelola Minyak & Gas Aceh (“BPMA”) – the Oil & Gas Management Agency for Aceh Province). This CCS activities plan is part of the application for approval of the initial field development plan or subsequent field development plan. The Ministry of Energy and Mineral Resources (“MEMR”) or SKK Migas or BPMA according to their authority may approve or reject the proposed CCS plan.
CCS in Carbon Storage License Areas is carried out by license holders based on an exploration license and a storage operation license issued by MEMR.
Commercial Benefits from CCS Activities
In conducting CCS activities, a PSC contractor of a oil and gas work area should enjoy the following commercial benefits:
- CCS Operational Costs as Part of PSC’s Cost Recovery Component.
The transition provisions of Regulation 14/2024 grandfathered all existing provisions related to CCS implementation including MEMR Rule 2/2023 to be remained in effect to the extent that they are not in conflict with the provisions of Regulation 14/2024 including the treatment for CCS operational costs.MEMR Rule 2/2023 provides that CCS or CCUS implementation of carbon emissions from upstream oil and gas activities is considered as part of petroleum operations under the relevant PSC. Therefore, CCS costs may be deemed recoverable (cost recovery) under a cost recovery PSC, or non-recoverable if the PSC uses a gross split mechanism.
- Storage Fee as Reduced Operational Cost.
A PSC contractor providing storage for third party(ies) to inject CO2 based on the mutual agreement and approval from MEMR or SKK Migas or BPMA will receive storage fee from third party (CO2 injector). The storage fee shall be treated as a reduction of operational cost of the relevant PSC contractor and indirectly increasing the revenue split to the relevant PSC contractor.
- Potential Tax and Non Tax Benefits.
Regulation 14/2024 provides that a PSC contractor, exploration license holders, carbon transportation license holders, and/or storage operation license holders that conducting CCS are entitled for tax and non-tax incentives in accordance with prevailing regulations.
Status of Assets for CCS implementation
Regulation 14/2024 provides that all goods and equipment purchased by contractor and used directly for CCS implementation under PSC will become state-owned assets due to the concept of cost recovery. However, in case of CCS activities is conducted by non PSC contractor then all goods and equipment purchased by storage operation license holders become the property of the relevant license holders.