INTRO TO NATURAL RESOURCES AND LAND LAW

(Rafael Edy Bosko, S.H., MIL.)

rafael.edy@mail.ugm.ac.id

Natural Resources In the most basic sense, natural resources have long
been defined as naturally occurring raw materials and
phenomenon —timber, flowing water, and minerals
such as iron and coal—that are economically useful to
humans, particularly those materials important to major
industries or to a nation’s security (Encyclopedia of
global resources / Craig W. Allin, editor, 2010. Salem
Press)

Any material in its native state which when extracted

has economic value. Timberland, oil and gas wells, ore
deposits, and other products of nature that have
economic value. The term includes not only timber,
gas, oil, coal, minerals, lakes, and submerged lands, but
also, features which supply a human need and
contribute to the health, welfare, and benefit of a
community, and are essential to the well-being thereof
and proper enjoyment of property devoted to park and
recreational purposes. (Black’s Law Dictionary, West
Publishing Co., 1990).

→ really important for the state’s defense and security

(pertahanan negara), such as tanks (for the iron), or any
materials for making the military equipment

In the principle, natural resources: Law about the tenure of natural resources.

Tenure:
→ how people gain access to land, fisheries, forests
and other natural resources. Having secure and
equitable access to natural resources can allow people
to produce food for their consumption and to increase
income. Inadequate and insecure tenure rights to
natural resources often result in extreme poverty and
hunger.
 Land Tenure:
→ Land tenure is the relationship, whether legally or
customarily defined, among people, as individuals or
groups, with respect to land. (For convenience, “land”
is used here to include other natural resources such as
water and trees.) Land tenure is an institution, i.e., rules
invented by societies to regulate behavior. Rules of
tenure define how property rights to land are to be
allocated within societies. They define how access is
granted to rights to use, control, and transfer land, as
well as associated responsibilities and restraints. In
simple terms, land tenure systems determine who can
use what resources for how long, and under what
conditions.

Hak paling tinggi → Hak Milik

Bidding rights (Hak Guna Bangunan)
Hak Guna Usaha

Governance (=law) of Tenure (of natural resources):

→ The governance of tenure is a crucial element in
determining if and how people, communities and
others are able to acquire rights, and associated duties,
to use and control land, fisheries and forests, oil and
gas, and mineral resources. Many tenure problems arise
because of weak governance (=law), and attempts to
address tenure problems are affected by the quality of
governance (=law). (FAO, Governance of Tenure,
available at http://www.fao.org/nr/tenure/en/ )

When you have a land, you also need responsibility,

obligation and duties to be an owner of a land

How it differs from Environmental Environmental law

Law → law about the wise (sustainable) use and
management of natural resources in order to
avoid/prevent its depletion, destruction, pollution,
overuse and or extinction.

Natural Resources = Agrarian Law Literal Meaning:

 - Ager (Latin word): peasant, farmer, agricultural land,
or rural land
- Agrarius: about agriculture, about rice field, about
farming
- Lex Agraria: agricultural law.

Roman Law, agrarian Laws:

“laws for the distribution among people, by public
authority, of the lands constituting the public domain,
usually territory conquered from the enemy. In
common parlance the term is frequently applied to laws
which have for their object the more equal division or
distribution of landed property; laws for distributing
large properties and increasing the number of
landholders.” (Black, 1991).

So, in the original/literal sense, agrarian law is only law

concerning the land, even more narrowly, the law
related to the equitable distribution of land among
citizens. In other words, it has more to do with the
issue of land reform in the strict sense, i.e., structural
reform of land tenure and ownership in order to
achieve a more equitable land ownership.

In some Western countries (Europe and the US), the

term “agrarian law” in this sense is retained/used, but
with a more narrow scope, as in the literal sense, that is
only associated with "agricultural land" or "land of the
countryside". This can be inferred from the use of the
term "agrarian land law" (Grossman and Brussaard
(ed.), 1992).

Agrarian Law according to BAL The meaning of agraria includes earth, water and
natural resources contained therein. Even within the
limits as specified in article 48 of BAL, it also covers
air space.

According to BAL, earth covers the earth's surface (i.e.

ground), as well as the earth body below the earth
surface, and under water (inland waters and sea)
 (Article 1, art. 4 paragraph 4 in conjunction with
paragraph 1). Water covers both inland waters (rivers,
lakes) and sea (territorial sea of Indonesia). Natural
resources includes the natural wealth contained in the
earth (earth surface and body of the earth) such as
minerals, oil and gas, natural resources contained in the
water (inland water, territorial sea and ZEE), and also
any potentials and energy contained in the airspace.

BARAK Bumi, Air, Ruang, Angkasa, dan Kekayaan Alam

The Scope of Indonesian Agrarian Each of regulate the tenurial rights over natural
Law resources or agrarian resources covered within the
meaning of the agrarian. Its scope includes law areas,
such as:
a. Land Law, which regulates the tenure and use of
land, in the sense of the earth's surface (as stipulated in
art. 4 par. 1 and 2 of BAL); Most of the stipulations in
the BAL regulates tenurial rights over land. Including
in this area is Law/Act No. 41 of 2009 on the
Protection of Sustainable Agricultural Land)
b. Water law, which regulates the tenurial rights over
water (Law 7/2004)
c. Mining law, governing tenurial/property rights over
mineral deposits/mines, as intended by the Mining Law
(Law No. 11/1967, as has been changed/replaced by
Act No. 4 of 2009 on Mineral and Coal Mining) and
the Law on Oil and Gas (Law 22/2001);
d. Forestry law, governing property rights over forest
resources (regulated by Law No. 41/1999, which
replaced the previous Act No. 5/1967);
e. Fisheries law, governing property rights over natural
resources contained in the water, both inland water and
sea water (now regulated by Act No. 9 of 1985 on
Fisheries).
f. Law on Coastal Water and Small Islands,
governing the management and tenurial rights over
coastal water and small islands, together with natural
resources contained therein (Act No. 27 of 2007 on the
Management of Coastal Areas and Small Islands, as
 already been amended by the Act No. 1 of 2014 on the
Amendment of the Act No. 27 of 2007).

* Land law is a part of agrarian law. Land law is

relatively narrow in its scope, since in principle it is
only about the issues concerning the possession and
use of the earth surface.

Land: according to Article 4 of BAL, is the earth's

surface, and (in principle) not including air space above
the earth surface and the space and natural resources
below the earth's surface, except that the air space
above the surface of the earth and the space or the
resources beneath the earth's surface is used for the
purposes directly related to the use of the earth's
surface.

→ The concept of land (which is only limited to the

earth surface, in principle) as described above and set
forth in the BAL, is a consequence of the fact that we
adopt the principle of horizontal separation/division
which exists in customary land law.

Horizontal separation: where a party can construct a

building on land owned by another. → To be able to
protect their rights, the owner of the building requires
proof of ownership that is separate from the proof of
land ownership on which the building stands. As a
building is classified as immovable property, namely
an object adhered to the soil, a written proof
(certificate) is required as proof of ownership.

A brief history 1. Pre Colonial Period

Indonesia was a nation that has already known and

applied its own law, including laws related to natural
resources even before the Dutch colonialism. The
Indonesian people, in particular, Adat Law
communities in Indonesia, had Adat legal norms that
governed their own land tenure and land use within
their territory, including the possession and the use of
other agrarian resources, such as fish, forests, and
minerals. → adat land law

The scope of adat land law is broad, not only limited to

the surface of land, but also land, water, sea, its
surrounding environment, and natural resources
contained therein (Soesangobeng, 2003)

The Characteristics of Adat Land Law, are:

a. Unwritten;
b. plural, in the sense that the legal norms differ
according to the customary law community. At
least, according to the classification made by
Van Vollenhoven, there were 19 adat law areas
(adatrechtskringen) existed in Indonesia;
c. has a conception of communal religious;
d. to some extent and in some regions adat land
law was also feudalistic in nature, because of
the system of native kingdoms that existed in
those regions;

The land rights according to Adat Land Law

1. Communal rights, which is called ulayat rights
(right of disposal), and
2. Individual rights.

→Ulayat rights are the communal rights of adat law

communities (masyarakat hukum adat) upon the land
and its surrounding environment (forest, water) and
natural resources therein. The authority to manage,
control, and to
regulate the use of the communal land (by members of
the community, and also by non-members) is in the
hand of the Adat Law community leaders, which can
be tribal chiefs, or specially-appointed leaders.

2. Colonial Period
Related to the land, the most important colonial legal
product was Agrarische Wet (Wet=Act) of 1870
(Staatsblad 1870-55) Provisions of this Act are as
follow:
(1) The Governor-General may not sell the land;
(2) Excluded from the ban are lands which are not
spacious, which are allocated for the expansion of
towns and villages, as well as lands for the purpose of
the development of industry;
(3) The Governor General may lease the land under the
provisions of the ordinance; but not to be leased, are
lands which are subject to adat law, including common
grazing lands;
(4) Under the terms of the Ordinance, the Government
grants the land with the erfpacht right with the
maximun time period up to 75 years; (erfpacht right is
a kind of lease right).
(5) Provision or grant of land to large corporations
must not violate the rights of indigenous/native people;
(6) Lands of the indigenous/native people can only be
taken for public use, through the process of right
revocation and accompanied by the provision of
adequate compensation;
(7) Customary ownership rights of indigenous/native
peoples, at the request of the owner, can be granted to
him with eigendom right with the restrictions and
requirements specified in their letter/certificate of
eigendom right, namely regarding the owner’s
obligations to the state and village concerned, as well
as for the owner’s authority to sell it to non-native
people; (note: eigendom right=western/dutch
ownership right, based on the Dutch Civil Code, article
570),
(8) Leasing by non-native of the land owned by native
people is subject to the provisions of the ordinance.

Agrarische Wet was made at the pressure of large

private employers/companies in the Netherlands. Prior
to 1870, based on the system of cultuur stelsel, the
colonial state applied in Indonesia (Dutch India) the
system of state monopoly and forced labor; large
employers/corporations/private companies got
difficulties to develop their businesses in Indonesia,
because for entrepreneurs who do not have large tracts
of land with the eigendom right, the only way for them
was to rent land from the government, and the rental
period is only 20 years old; and land lease rights could
not be used as security for loan; so it was not suitable
for businesses in plantation crops. To lease land from
the indigenous/native people was also not possible
because the natives were prohibited from selling or
leasing land to non-indigenous people. In line with the
spirit of liberalism that began to develop, including in
the Netherlands at that time, there was big pressure to
replace the system of cultuur stelsel and state
monopoly with free competition system which
originated from the conception of liberal capitalism.
The promulgation of the Agrarische Wet was to
facilitate this system of liberal capitalism, especially in
the private plantation.

The purpose of Agrarische Wet is to open up

possibilities and provide legal guarantees for private
entrepreneurs to develop in Indonesia. To that end:
- Private entrepreneurs can obtain from the
Government, vast land for large plantations
with erfpacht rights, with a time period up to 75
years. According to article 720 and BW 721,
erfpacht rights are property rights that provide
the most extensive authority to the holder of the
right to enjoy fully the usefulness of land
belonging to another party. Erfpacht rights
holder may use all of the authority contained in
eigendom rights over land. Erfpacht rights can
also be burdened with mortgages (used as
collateral for bank loan), so that entrepreneurs
can obtain credit by mortgaging theirlands;
- Entrepreneurs (especially sugar and tobacco
entrepreneurs) can also use the land belongs to
the people on a rental basis;
In order to further implement the provisions of the
Agrarische Wet, then various regulations and decisions
were later issued, among other well-known is
Agrarisch Besluit (S. 1870-118). Article 1 of this
Besluit (i.e. decision) contains Domein Verklaring
(Statement/Declaration of Ownership) which read:
"Without prejudice to the provisions of Articles 2 and 3
of
Agrarische Wet, it is maintained the principle that all
land that the other party can not prove as his/her
eigendom (ownership) right, is the domain of (belongs
to) the state."

The function of Domein Verklaring is as follows:

- As a legal basis for government who represents the
state as the owner of the land, in granting land to the
third parties, with land rights stipulated in the Dutch
Civil Code, such as erfpacht right, opstal right, etc.
- As a basis of proof of ownership. (If a person or
entity is in conflict with the state regarding the
ownership of the land, he is the one who has to prove
that the disputed land belongs to him).

Domains Verklaring seriously violated customary land

rights of Indonesian natives. Almost all native people
of Indonesia could not prove the legality of their land
ownership; most customary land rights has no written
proof which is required by the Domein Verklaring. And
the colonial government at that time used a very broad
interpretation of the domain verklaring, so that
practically all the lands belonged to the native were
claimed by the state as his domein.

Note:
There are three interpretations of the lands covered by
the Domein Verklaring (Domein State):
1. Land of the state domain is land that is not
subject to eigendom right as stipulated in
Article 570 BW/Civil Code;
 2. Land of the state domain is land that is not
subject to eigendom rights, agrarisch eigendom
rights nor lands owned by the natives which
had been separated from the jurisdiction of
ulayat rights;
3. Land of the state domain is land that is not
subject to eigendom rights, agrarisch eigendom
rights nor lands owned by the native which
were either already separated from the
jurisdiction of ulayat rights or still under the
jurisdiction of ulayat rights.

Narrow interpretation was used by those who aimed to

realize the protection of indigenous /native people's
rights as stipulated in paragraphs 5 and 6 of Article 51
of AW; But the colonial Government always used the
broad interpretation of the domain verklaring (i.e.
interpretation point 1), so that the land of state domain
covers/includes also lands which are subject to
customary ownership of native people and also ulayat
lands. Interpretation like this is tantamount to denying
the existence of the people's rights to land.

3. Period of BAL

Contents of BAL are influenced by:

a. Adat (customary) law
b. Dutch law
c. Religious norm (values)

Position/Role of adat law (article 5 of BAL and

Expalanatory Memorandum):
a. as a source of norms (to be accommodated in
statutory law by legislators)
b. as a complement to statutory law (to be
found/sought and applied by courts in judging
actual cases brought before them).
 - Some laws in statutory law originate from
customary law

Adat Law (customary law as the Adat law: Only members of the community can own
source of norms) the land; aliens or non-members only have use rights.
Ulayat land of the community is inalienable
permanently.

Statutory law: Only Indonesian citizens can have the

most complete relationship (i.e. ownership land right)
with the land . Transfer of ownership right to
alien/non-citizen is void (art. 26 of BAL)

Adat law: Principle of horizontal division (in contrast

to the principle of adhesion in western/Roman law:
cuius est solum, eius est usque ad coelum et ad
inferos).

Statutory law: Land rights covers only the surface of

the earth, and doesn’t include subsurface part of the
land and the airspace (except the use of those
dimensions directly relate to the use of the said land
surface (article 4 par. 1
and 2 of BAL) ;

- If indonesian sell the land to the foreigner, it is

“batal demi hukum”

Article 26 (2)
“Every sale and purchase, exchange, gift, and bequest
by a will and every other act which are intended to
either directly or indirectly transfer right of ownership
to a foreigner or to a person of Indonesian citizenship
who concurrently holds foreign citizenship or to a legal
entity other than those stipulated by the Government in
line with section (2) of article 21 is nullified for the
sake of law and the land in question goes to the State
with the understanding that any other parties’ rights
which encumber the land remains in existence and that
 all the payments which the owner of the land may have
received cannot be reclaimed.”

Article 4
(1) On the basis of the State’s right of control as
referred to in article 2, it is necessary to determine the
types of rights to the surface of earth, which is called
tanah (land), that can be granted to, and held by,
persons, either individually, jointly with others as well
as legal entities.

(2) The land rights as referred to in section (1) of this

article confers authority to use the land in question as
well as the mass of the earth and the water existing
under its surface and the space above it to a point
which is essentially required to allow for the
fulfillment of the interests that are directly related to
the use of the land in question, such a point being
within the limits imposed by this Law and by other
higher-level legislation.

(3) In addition to the land rights as referred to in

section (1) of this article, there are to be determined
water and air rights.

“Residue” of Dutch colonial law in - The Netherlands left some legacies in

BAL Indonesian law; e.g. the nomenclature of the
Act no. 5 of 1960 (BAL) is arguably taken from
the name of Dutch colonial law, namely
Agrarische Wet of 1870.
- In the BAL, two kinds of land rights are
actually transplants from the Dutch Civil Code.
They are (1) right of exploitation, which is
similar to erfpacht in Dutch Civil Code; and
right of building, also similar to opstal in Dutch
Civil Code.

The Objective of BAL a. to provide bases for the formulation of national

agrarian law, which shall serve as a means of
bringing prosperity, happiness, and justice to
 the State and the people, especially farmers, in
the context of establishing a just and prosperous
society;
b. to provide bases for the establishment of unity
and simplicity in land law; and
c. to provide bases for the provision of legal
certainty concerning land rights for all the
people.

BAL provides some important bases, namely:

1. principle of nationality
2. principle that the state has right to control
3. principle that ulayat right is recognized
4. principle that all land rights have social
function
5. principle that that only Indonesian citizens can
have a hak milik (right of ownership) to land
6. principle of non-discrimination in relation to
land rights for any Indonesian citizen.
7. principle of land reform and the principle that
“agricultural land shall be tilled or worked upon
by the owner himself.”
8. principle that any allotment, use, and supply of
the earth, water, and airspace are based on
planning

→ basis in defining and regulating the relationship

between the nation, the state, and the people of
Indonesia in one hm and the agrarian resources on the
other

The Principle of Nationality - claim about the eternal possession of territory

(people’s rights or people’s by the Indonesian people and the sovereignty
sovereignty) (Hak Bangsa) (Art 1. over the territory by the Indonesian nation;
Par. 1,2, and 3)
- The highest “property/tenure” rights over
natural resources; other property rights directly
or indirectly, derive from it.
- It refers to two aspects:
a. possesion → private aspect (dominium)
 b. sovereignity → public aspect
(imperium)
- This principle functions as a basis for what is
called “nation’s right” which is the highest
tenurial regime over natural resources in
Indonesia.
- Statement about the unity of possession and
permanent sovereignty by the Indonesian
people over Indonesian territory and natural
resources;
- Priority for Indonesia people in tenure and use
of natural resources. Thus, only Indonesian
citizens who can have the fullest relations with
natural resources, particularly land, in
Indonesia.

It is:
- The highest “property/tenurial” rights over natural
resources; other property rights directly or indirectly,
derive from it.
- Contains element of possession (dominium)
(civil/private aspects) and element of assignment/task
and authority to organize and lead the acquisition and
use of land that belong in common to the Indonesian
peoples (imperium) (public aspect)
- The holder of hak bangsa is all the people of
Indonesia as a nation, and the land covers all the land
in the territory of Indonesia.
- The implementation of the public aspect of this right
is held by the state as the State Right of Control.

The Right of the Indonesian Nation is arguably parallel

or similar to the right of sovereignty of the nation over
its territory/natural resources (Cf. permanent
sovereignty over natural resources).

Ad 2. Principle that the State has the Main provision in BAL: article 2 par. 1,2, and 3):
right to control
 - declaration of state rights to control: “....the
earth, water, and airspace, including the natural
resources contained therein, are at the highest
hierarchical level, controlled by the State in its
capacity as the whole people’s organisation of
powers.” What is meant by this right (i.e. State
right to control)?
- the contents of the right (i.e. State right to
control);
- What is it’s goal?
- Who hold or who posses the right

State right to control (SRTC): the meaning

- Derivation of public aspect
(imperium/sovereignty) of nation’s right.
Sovereignty over earth, water, airspace and
natural resources contained therein, which
constitutes the public aspect of nation’s right
(imperium) can not be exercised by the
Indonesian people (as the holder/possesor of
earth, water, airspace and natural resources
contained therein). It is the state
(i.e.government) who can exercise the
sovereignty, because the state is a public entity
(the entity who is entitled to govern, the entity
who has public power). As a public entity a
state can not function as possesor of the earth,
water, airspace and natural resources contained
therein in Indonesia. This private funtion
(dominium) is retained in the Indonesian people
as a nation.
- Thus, the principle of “domein” (i.e. the
principle of the state being the owner of land),
which was used by the colonial government as
a basis for agrarian legislation, is not
recognized in the new agrarian law;
- Thus, According to BAL, it is not necessary
and not appropriate for the Indonesian State to
act as land owner. It is more appropriate for the
 State, in its capacity as the people’s
organization of
- power, to act as Badan Penguasa (public
Authority Body);

Contents of the SRTC According to BAL (article 2 par. 2), the

entitlements/powers contained in the SRTC, are as
follow:
a. to regulate and administer the allotment, use,
appropriation, and maintenance of the earth,
water, and airspace;
b. To determine and regulate the legal relations
between persons and earth, water and air;
c. To determine and regulate the legal
relationships between people and legal acts
concerning earth, water, and airspace.

Is it possible to have relations between person and

land?

According to the Constitutional Court,

entitlements/powers contained in the SRTC, are:
1. Making policy (beleid);
2. Making regulation (regelendaad);
3. Conducting administrative action
(bestuursdaad);
4. Conducting management action (beheersdaad);
dan
5. Conducting supervisory action
(toezichthoudensdaad)

Goals of SRTC “...State’s right of control .... shall be used to achieve

the utmost prosperity--in terms of democracy, welfare,
and freedom for the society and legal State of
Indonesia which is independent, sovereign, just, and
prosperous.” → BAL

1. benefit/advantage for the people of the use of

the earth, water, airspace and natural resources;
2. the equality of distribution of the benefit;
 3. the level and quality of peoples’ participation in
deterimining the use earth, water, airspace and
natural resources;
4. respect towards the hereditary rights of local
people when using the earth, water, airspace
and natural resources .

See CC (MK) Decision # 3/PUU-VIII/2010, 16 June

2011 (judicial review on the Act 27 of 2007 on the
Management of Coastal Waters and Small Islands.

Ad. 3 Principle that Ulayat Right is Art. 3 of BAL:

Recognized “The implementation of the Ulayat Rights and other
similar rights of law communities --as long as such
rights in reality still exist-- shall be such that it is
consistent with national interests and the State’s
interests on the basis of national unity and shall not
contradict the laws and regulations of higher levels.”

- The recognition concerns two aspects:

a. Concerning its existence: “as long as such
rights in reality still…” Who and how to
determine; what are the criteria ?
b. Concerning its implementation: as long as “it is
consistent with national interests and the State’s
interests” . What is national interest?

Ad. 4 Social Function
- This means that whatever land right one has, it
is not justifiable for the individual in question
to use (or not to use) his land exclusively for his
own interests, much less so if this
disadvantages the people. The use of land has to
be adjusted to the condition of the land in
question and to the nature of the land right in
question so that it can improve the welfare and
happiness of the owner as well as benefit the
people and the State.
 - Public interests and individual interests should
balance each other.

Ad 5. principle that only Indonesian - Only Indonesian citizens (single citizenship)

citizens can have a hak milik (right can have ownership right; foreigners are
of ownership) to land (art. 9 par.1, prohibited from having hak milik;
art. 21 par. 1, 2 and 3, art. 26 par. 2)
- In principle, corporate bodies basically cannot
have a right of ownership [Article 21(2)] on the
consideration that corporate bodies do not
necessitate a right of ownership for their
operation but another right will suffice for them
as long as it is equipped with an adequate
guarantee for the fulfillment of their specific
requirements (e.g. hak guna-usaha, hak guna-
bangunan, or hak pakai, according to Articles
28, 35, and 41).
- But, Government can determine certain
corporate bodies which can have ownership
right. And according to GR 38/1963, those legal
bodies which have been designated to have
ownership right are:
1. state-owned bank;
2. Agricultural co-operatives;
3. Religious institutions;
4. Social institutions
- And the Act 13 of 2012 on the Specialty of DIY
(article 32): Kasultanan and Kadipaten are also
corporate bodies which can have land with the
status of ownership right.

Ad 6. principle of - It is provided in Article 9(2) that “ every

non-discrimination Indonesian citizen, be it male or female, shall
have equal opportunities to acquire a land right
and to obtain benefits and yields thereof, either
for himself/herself or for his/her family.”
- However, affirmative action is also needed. For
that purpose, it is stipulated that:

Ad 7. principle of land reform and To guarantee the success of land reform, certain
the principle that “agricultural land provisions have to be made available:
shall be tilled or worked upon by the
owner himself.” (article 10 par. 1 &
2).
a. Every legal action concerning transfer of
ownership rights shall be controlled (art. 26 par.
1);
b. Legal relationships between people, including
bodies corporate, and the earth, water, and
airspace and the authorities derived there from
are to be regulated and that excessive control of
other people’s lives and occupations is
prevented (art. 11 par. 1).
c. Also differences in social conditions and the
legal needs of societal groups shall, wherever
necessary, be taken into account by providing
guaranteed protection for the interests of the
economically weaker groups, provided that this
is not contrary to the national interest (art.
11par. 2);
d. Every monopolistic enterprises and actions by
any organizations/corporate bodies and
individuals shall be prevented (13 par. 2 and 3)
- Article 13 in conjunction to Article 17,
concerning the minimum limits on land
ownership by a farmer in order that he can earn
enough income to enable him and his family to
lead a decent life;
- Article 7 which provides a very important
principle: that excessive land ownership and
possession shall be forbidden because that
harms public interests.
- Article 17 concerning the maximum limits on
land that can be possessed under a hak milik in
order to prevent accumulation of land in the
hand of strong groups. Agricultural land can be
used by parties other than the owners by way of
sewa (lease), bagi-hasil (product-sharing), gadai
(pledge/pawn/security), and others. However,
all this should be administered in line with
 other legal provisions and regulations so as to
prevent oppression/exploitation of the weak by
the strong (Articles 24, 41, and 53).

Ad 8. principle that any allotment, - It is necessary to make plans on the allotment,

use, and supply of the earth, water,
and airspace are based on planning
- A National Plan should first be made, which
use, and supply of the earth, water, and airspace
in support of the various living interests of the
people and the State.
covers all the territory of Indonesia, and
--subsequently-- it should be translated into
regional plans, one for each of the regions
(Article 14). With such planning, land use can
proceed in guided and orderly manners so that
it can produce utmost benefits for the State and
the people.

Tenure Rights over Natural What is Natural Resources Tenure?

Resources - is the relationship, whether legally or
customarily defined, among people, as
individuals or groups, with respect to natural
resources (be it land, water, mining resources,
forest, oil and gas, etc.).
- natural resources tenure is an institution and
system, which includes rules (substance), law
enforcement (structure), and legal culture.
- rules are invented by societies to regulate
behavior. Rules of tenure define how tenure
rights over natural resources are to be allocated
within societies. Rules define how access is
granted to rights to use, control, and transfer
natural resources, as well as associated
responsibilities and restraints. In simple terms,
natural resources tenure systems determine who
can use what resources, for how long, and
under what conditions.
- Rules necessitate the existence of good law
enforcement system, and also necessitate good
legal culture of the society.
 Adapted from the concept of land tenure proposed by
FAO, with adjustment following the concept of legal
system proposed by Lawrence M. Friedman

Theoretically, natural resources tenure is often

categorised as:

1. Private property: the assignment of rights to a

private party who may be an individual, a
married couple, a group of people, or a
corporate body such as a commercial entity or
non-profit organization. For example, within a
community, individual families may have
exclusive rights to residential parcels,
agricultural parcels and certain trees. Other
members of the community can be excluded
from using these resources without the consent
of those who hold the rights.
2. Communal/common property: a right of
commons may exist within a community where
each member has a right to use independently
the holdings of the community. For example,
members of a community may have the right to
graze cattle on a common pasture (but: common
property is not open access).
3. State property: property rights are assigned to
some authority in the public sector. For
example, in some countries, forest lands may
fall under the mandate of the state, whether at a
central or decentralised level of government.

Categories of Agrarian - Right of the Nation/Indonesian Peoples

Tenure/Natural Resources Tenure - State Right to Control
According to BAL (Law No. 5 of - Communal Ulayat Right
1960)
- Individual Right

Rights of the Indonesian - Article 1 par 1-3 of BAL

Nation/People (Hak Bangsa) - It is:
- The highest “property/tenure” rights; other property
rights directly or indirectly, derive from it.
 - Contains element of possession (private aspects) and
element of assignment/task and authority to organize
and lead the acquisition and use of land that belong in
common to the Indonesian peoples (public aspect)
- The holder of hak bangsa is all the people of
Indonesia as a nation, and the land covers all the land
in the territory of Indonesia.
- The implementation of the public aspect of this right
is held by the state as the State Right of Control.

The Right of the Indonesian Nation is arguably parallel

or similar to the right of sovereignty of the nation over
its territory/natural resources (Cf. permanent
sovereignty over natural resources).

State Right to Control Article 2 of BAL

- The earth (land), water, and airspace, including
the natural resources contained therein, are at
the highest hierarchical level , controlled by the
State in its capacity as the whole people’s
organisation of powers.
- The State’s right of control confers the
authority:
a. to regulate and administer the allocation, use,
supply, and maintenance of the earth, water, and
airspace;
b. to determine and regulate legal relationships
between people and the earth, water, and
airspace;
c. to determine and regulate legal relationships
among people as well as legal acts concerning
the earth, water, and airspace.

- The powers or authorities which are derived

from the State’s right to control as stated above
shall be used to achieve the greatest welfare of
Indonesian peoples.
- The authority to implement the State’s right to
control referred to above can be delegated—if
 deemed necessary and provided that it is not
contrary to the national interest—to
Autonomous Regions and to adat-law
communities by way of a Government
Regulation.

Ulayat Rights (Article 3 of BAL) Article 3 of BAL:

“...the implementation of the ulayat rights and other
similar rights of adat-law communities --as long as
such communities’ rights in reality still exist-- must be
such that it is consistent with the national interest and
the State’s interest and shall not contradict the laws and
regulations of higher levels....”

Ulayat right is a sui gereris land right that:

1. Ulayat right is a communal right, i.e. the right
that is possessed in common by the adat law
community as an entity;
2. Being possessed by adat law community, the
ulayat right gives to such a community public
(government- like) authorities to regulate and
control the use of the ulayat land;
3. Ulayat land are permanently inalienable.

What is stipulated in Article 3 of - That ulayat right is not granted by law or by

BAL state;
- Rather, the state/the law just recognizes the
reality that ulayat right exists together with the
existence of adat law community;
- However, the recognition by state depends on
two conditions/requirements:
a. That ulayat right still exists in present reality
(but what are the criteria of its existence; who
will determine its existence; and how?);
b. That the implementation/use of ulayat right by
adat law community must be in line with the
state interest (what is state interest)
- BAL article 3: Recognition not yet Respect, not
yet Protection
- Compare:

Individual/Private Tenure Rights Examples:
over Natural Resources
Tenurial Rights over Mining
Resources (Mining Law)
a. Act 39 of 1999 (article 6)
b. Constitution (article 18 B and 28 I)
c. Act 41 of 1999 (article 5)
- Land (article 16 of BAL): ownership right, right
of exploitation (HGU), right of building (HGB),
right of use (Hak Pakai)
- Forestry (Act 41 of 1999, article 28 & 29):
business license for utilisation of non-timber
forest products (IUPHHnonK, business license
for utilisation of timber forest products
(IUPHHK)
- Mining (Act 4 of 2009): business mining
license, special business mining license
- Coastal water and small islands (Act 27 of
2007): location permit and management permit
- The current legal and regulatory regime for
mining in Indonesia has its basis in Law No. 4
of 2009 on Minerals & Coal Mining (“2009
Mining Law”),which was promulgated in
January 2009. It replaces Law No. 11 of 1967
on the Main Provisions of Mining. (Note: Law
4/2009 has been amended by Law No. 3 of
2020)
- Under Law No. 11 of 1967 on the Main
Provisions of Mining (“Old Mining Law”),
foreign parties/corporations could participate in
large-scale mining projects through Contracts
of Work (“CoWs” {Kontrak Karya/KK}) and
Coal Contracts of Work (“CCoWs”
{KKB/Kontrak Karya Batubara} ) while
relatively small-and medium-scale mining
projects could only be conducted by Indonesian
national parties/corporations by virtue of
Mining Licenses (“KPs” {Kuasa
Pertambangan}).
- In other words, neither (i) a foreign entity nor
(ii) an Indonesian foreign investment company,
 in which a foreign party is able to legally hold
shares (“PMA Company {Perusahaan
Penanaman Modal Asing}”), could hold a KP
under the Old Mining Law. A PMA Company
could, however, hold a CoW or a CCoW.
- On January 12, 2009, the Old Mining Law was
replaced by the 2009 Mining Law. Unlike the
Old Mining Law, the 2009 Mining Law allows
a Mining Business License (“IUP”) to be held
by any type of Indonesian business entity,
including a PMA Company, without any initial
restriction or limitation on share ownership.

CoWs/CCoWs 1. Nature of CoWs/CCoWs

A CoW/CCoW was a contract between the
Government of Indonesia (“GoI”) and an individual
mining company, which contract has been individually
(i) approved by the Indonesian Parliament (“DPR”)
and signed by the President of Indonesia.

- Over time, GoI decided that CoWs/CCoWs

were unduly favorable to mining companies
and overly restrictive on GoI. Accordingly, in
the 1990s GoI stopped entering into
CoWs/CCoWs and all new mining concessions
were, henceforward, granted on the basis of
KPs.
- GoI considered itself obliged, however, to
honor and otherwise allow to continue until the
end of their term those CoWs/CCoWs already
in existence. Although CoWs/CCoWs
contemplate the possibility of extensions, GoI
has indicated it will not agree to any further
extensions of CoWs/CCoWs.
- There are seven generations or versions of
CoWs/CCoWs. Each of the 7 generations or
versions of CoWs/CCoWs has somewhat
different provisions reflecting the evolution,
over time, of GoI’s thinking as to what should
be included in a CoW/CCoW.
 +

- In 1998, Indonesia introduced “regional

autonomy” pursuant to which GoI, as the
central government, retained control of only six
specific areas of government activity while
control over all other areas of government
activity was devolved to the Provincial
Governments and the Regional Governments.
- Among the areas of government activity,
control which are devolved to the Provincial
Governments and the Regional Governments,
was the licensing of activities taking place
exclusively within a particular Province or
Regency.
- In the case of mining, regional autonomy meant
that (i) where a mining concession was located
wholly within a particular Regency, the relevant
Regional Government now had the authority to
issue a KP and (ii) where a mining concession
crossed the borders of two or more Regencies
in the same Province, the relevant Provincial
Government now had the authority to issue a
KP. GoI only retained the authority to issue KPs
in the case of those mining concessions which
crossed the borders of two or more Provinces.

Mining Regime According to Law Mining Areas

4/2009
- Mining Areas (“WP/Wilayah Pertambangan”)
are areas determined to have mineral and coal
potential. WPs are divided into three categories,
namely (a) Mining Business Areas (Wilayah
Usaha Pertambangan/“WUPs”), (b) Community
Mining Areas (Wilayah Pertambangan
Rakyat/“WPRs”), and (c) State Reservation
Areas (Wilayah Pencadangan Negara/“WPNs”).
WPs are to be determined by coordination
between the relevant Government authorities,
being the relevant Regent/Mayor, Governor, or

Mining Business Licenses (Izin →
Usaha Pertambangan)
MoEMR in accordance with their respective
authority (“Relevant Government Authority”)
and following consultation on the same with the
DPR.
- A WUP is that part of a WP in respect of which
there is available sufficient geological data or
information regarding local mineral potential to
enable mining business activities to proceed.
- WPs include Mining Business License Area
(Wilayah Izin Usaha Pertambangan/“WIUPs”).
WIUPs will be granted in the following
manner:
a. WIUPs for nonmetal minerals and rocks will be
granted on the basis of an application; and
b. WIUPs for metal minerals and coal will be
granted on the basis of a tender.
- A WPR is that part of a WP where community
mining business activities take place. A WPN is
that part of a WP reserved for the purpose of
national strategic interests. The DPR will
determine that part of the WPN that can be
utilized for certain minerals such as copper, tin,
gold, iron, nickel, bauxite, and coal. The status
of this part of the WPN will then be converted
to become a Special Mining Business Area
(“WUPK”). Any mining activities carried out in
a WUPK must be on the basis of a Special
Mining Business License (Izin Usaha
Pertambangan Khusus/“IUPK”).
a mining license granted by the Relevant
Government Authority to a business entity, which is
1. engaged in mining activities,
2. domiciled in Indonesia, and
3. established under Indonesian law (“Business
Entity”);
4. a cooperative an individual;
5. for the purpose of carrying on mining business
activities
 A Business Entity, cooperative, or individual, intending
to carry on mining business activities, must fulfill all
applicable administrative, environmental, financial, and
technical requirements.

There are two types of IUPs:

a. Exploration IUP → An Exploration IUP
enables the holder to carry out preliminary
mining activities, being general survey,
exploration, and feasibility study activities; and
b. Production Operation IUP→ A Production
Operation IUP enables the holder to carry out
various main mining activities such as
development, mining, processing, refining,
transportation, and sales activities.

The Exploration IUP will be granted - The relevant Regent/Mayor of the relevant
by: Regency/City, if the area to be covered by the
IUP falls within one Regency or City;
- The relevant Governor if the area to be covered
by the IUP falls partly within the boundaries of
one Regency and partly within the boundaries
of another Regency as long as both Regencies
are in the same Province. The Governor will
grant the IUP on the basis of a recommendation
from the relevant Regents/Mayors; and
- MoEMR if the area to be covered by the IUP
falls partly within the boundaries of one
Province and partly within the boundaries of
another Province. MoEMR will grant the IUP
on the basis of a recommendation from the
relevant Governors.

The Production IUP will be granted - The relevant Regent/Mayor of the relevant
by: Regency/City, if the area of the mining,
processing and refining activities, and the
relevant port, fall within one Regency or City;
- The relevant Governor if the area of the mining,
processing, and refining activities, and the
relevant port, fall partly within the boundaries
 of one Regency and partly within the
boundaries of another Regency as long as both
Regencies are in the same Province. The
Governor will grant the IUP on the basis of a
recommendation from the relevant
Regents/Mayors; and
- MoEMR, if the area of the mining, processing,
and refining activities, and the relevant port, fall
partly within the boundaries of one Province
and partly within the boundaries of another
Province. MoEMR will grant the IUP on the
basis of a recommendation from the relevant
Governors.

In addition to IUPs, there are also Special Mining

Business Licenses for national and strategically
important mining projects (“IUPKs”) and Community
Mining Licenses for local community mining projects
(“IPRs”).

Expiration and Revocation of IUPs
- An IUP will expire if (i) the term of the IUP
comes to an end, (ii)
- the IUP is returned by the holder to the
Relevant Government Authority, (iii) the IUP is
revoked by the Relevant Government
Authority, or (iv) in the case of a Production
Operation IUP, the IUP is not renewed before
its term comes to an end.
- An IUP may be revoked by the Relevant
Government Authority if any of the following
events occur:
a. The IUP holder does not fulfill its obligations
as provided for in the IUP or is not otherwise in
compliance with the prevailing laws and
regulations;
b. The IUP holder is guilty of certain criminal
acts, which are specified in the 2009 Mining
Law; or
c. The IUP holder is declared bankrupt.

The rights of an IUP holder
Obligations of IUP Holder
The temporary cessation (penghentian sementara) of
mining activities does not reduce the validity period of
the IUP.
- An IUP holder may carry on the designated
mining business activities, in whole or in part,
whether exploration activities or production
operation activities.
- An IUP holder may use public facilities (e.g.,
roads, bridges, railroads) for the purpose of
carrying on its mining activities subject to
compliance with the provisions of the relevant
regulations.
- An IUP holder has the right to sell the minerals
derived from its IUP area and in accordance
with the prevailing laws and regulations
although the minerals belong to the State until
all applicable royalties and taxes are paid.
- In the event that an IUP holder determines there
are minerals present in its IUP area, other than
the minerals specified in its IUP, the IUP holder
has a first- priority right to exploit these other
minerals by obtaining from the Relevant
Government Authority a separate IUP for these
other minerals.
- Subject to certain limited exceptions, an IUP
holder may not transfer its IUP to another party.
- The most important exceptions to (e) above are
(i) where the IUP holder has found at least two
prospective mining sites in its IUP area during
the course of its exploration activities and (ii)
transfers to subsidiary companies, the issued
shares of which are owned as to not less than
51% by the transferor.
An IUP holder is obliged to:
a. Apply good technical mining principles;
b. Manage its finances in accordance with the
Indonesian accounting system;
c. Add value to its mineral resources;
d. Assist with local community development; and
e. Protect the environment.
- An IUP holder must guarantee the
implementation of all applicable environmental
quality standards.
- An IUP holder is obliged to preserve the
availability and quality of local water resources
in accordance with the prevailing laws and
regulations.
- An IUP holder is obliged to prepare and submit
a Reclamation and Post-mining Plan when
applying for the Production Operation IUP.
- An IUP holder is obliged to carry out the
processing and refining of mining products in
Indonesia. The IUP holder may also process
and refine mineral products that are produced
by other IUP holders.
- The IUP holder must give priority to the
utilization of local employees and domestic
goods and services in accordance with the
prevailing laws and regulations.
- In order to conduct operational production
activities, the Business Entity holding an IUP
must also allow participation by local
entrepreneurs in accordance with the prevailing
laws and regulations.
- An IUP holder is obliged to prepare a
Community Development and Empowerment
Program for the local community surrounding
the mine.
- An IUP holder must submit to the Relevant
Government Authority all information derived
from the activities of exploration and
production operation.
- An IUP holder is obliged to submit a periodic
written report regarding its work plan and the
 implementation of its mining activities to the
Relevant Government Authority.
- Commencing in the fifth year of production, an
IUP holder must divest, in annual installments,
part of its foreign shareholding (if any) to the
Government, Regional Government, BUMN,
BUMD, or BUMS (not including PMA
Companies) such that local parties hold not less
than 51% of the issued capital of the IUP holder
by the end of the tenth year of production.
- The IUP holder is obliged to contribute to State
Revenue and Regional Revenue by way of a tax
on its net profits.
- The Production Operation IUP holder, in the
case of the mining of metal minerals and coal,
is obliged to pay 4% of its net profits to the
Central Government and 6% of its net profits to
the Regional Government.

Oil and Gas Law - All hydrocarbon resources in the soil and the
subsoil, in interior waters and in the territorial
sea, on the continental shelf and in the
exclusive economic zone are typically the
province of the state. However, it is often the
case that states with significant hydrocarbon
resources do not have easy access to risk capital
and lack the technical expertise to explore and
develop the hydrocarbon resources located in
their territory. In these cases, the task of finding
and extracting oil and gas is delegated to
business entity (mainly international oil
company (hereinafter, IOC) which possesses
the expertise and financial resources to
undertake the task. (Note: In Indonesia, major
IOCs that are involved in oil exploration and
exploitation include Chevron Pacific Indonesia,
Total E&P, ConocoPhillips and ExxonMobil)
- The relationship between the state and the IOC
must be regulated by some type of legal
instrument or contractual framework which
 specifies the rights and obligations of each
party. In general, there are four most important
regimes developed to govern such a
relationship: (1) license, (2) concession, (3)
production sharing contract (PSC), and (4)
service contract.
- The choice of the regime which is used is
mainly influenced by the tensions (interests)
inherent in the relationship between the state
and the IOC. Broadly speaking, these
tensions/interests can be divided into two
categories:
a. the allocation of risk/cost between the parties
(i.e. the state and IOC) and;
b. the provision of incentives to the IOC to
accomplish the state’s objectives.

- The upstream petroleum sector is faced with

physical, commercial and political risks at
every stage of the exploration and production
process. Oil and gas sector is distinctive in
terms of the significant investment required for
the exploration and production of oil and gas
and the large uncertainty often surrounding the
ability to profit from such investment. Prior to
attempting to extract hydrocarbons from the
subsoil, seismic exploration and exploratory
drilling must be carried out, and sufficient
reserves must be found to make the project
commercially viable. Unfortunately, more often
than not, a commercial discovery will not
occur, in which case it will not be possible to
recover the exploration costs. Even if a
commercial discovery is declared, significant
uncertainty affects the actual cost at which the
hydrocarbons can be extracted, developed and
produced. History is witness to the dramatic
fluctuations in the international price of
hydrocarbons. The high cost of extraction and
production and the fluctuations in the price of
 hydrocarbons together translate into risk with
respect to the profitability of the venture.

- Generally, under every prevailing upstream

license/contractual regime, it is the IOC that
shoulders the exploration risks. However, the
regimes are very different in how they define
ownership of the hydrocarbons and the legal
nature of the instrument granting rights to the
IOC.
- The four upstream regimes are also quite
different in how quickly the exploration costs
can be recovered by the IOC at the production
stage, and in the ways in which they allocate
the other risks between the state party and the
IOC.
- Under both licences and concessions, all
hydrocarbons produced belong to the IOC,
whereas under both PSCs and service contracts,
it is the state that owns the hydrocarbons
produced with a portion of these hydrocarbons
being allocated by the state to the IOC as
payment for the risks taken and services
rendered. In addition to ownership, the licence
and concession regimes allocate most of the
exploration risk to the IOC, whereas under the
PSC and (especially) the service contract
arrangements the state retains a relatively larger
portion of the risk associated with the
commercialisation of any discovery.
- What type of regime a state chooses will
depend on its own capabilities, the extent of
competition among IOCs, the size of the risk at
each stage of the production process and the
requirements of its constitution. The state will
naturally be more keen to bear the exploration
risks arising from less uncertain fields, while
delegating to the IOC the more significant risks
associated with speculative fields.
Brief description of 1. Licence regime
Contractual/Tenurial Regimes in Oil A licence (referred to in some countries as a lease) is
and Gas Business essentially a permission granted by a state to an IOC to
exploit a certain geographical area in return for a fee or
a royalty. All hydrocarbons are owned by the state in
situ, but ownership of any extracted hydrocarbons
transfers to the IOC at the well-head. Therefore, the
licence grants the licensee a proprietary right over the
hydrocarbons at such point and any profits obtained by
the IOC from sale of the hydrocarbons are taxed by the
state. The licensing regime is a relatively free market
regime, under which the IOC bears most of the risk and
enjoys a significant share of the benefits and is allowed
to pursue its interests with relative freedom, subject to
environmental, timing and other constraints imposed
by the terms and conditions of the license. The United
Kingdom, Canada, Norway and, more recently, Russia
are the main countries using a licensing regime to grant
access to their hydrocarbon resources.
- In most countries, licenses are considered
contractual instruments rather than regulatory
instruments. This has important legal
consequences for the licensee: contractual
relationships cannot generally be amended
unilaterally, whereas regulatory instruments are
subject to unilateral amendment by the state. In
the United Kingdom, the relationship between
the licensee and the state is generally regarded
as a contractual one, albeit with a strong
regulatory flavour in the sense that a
considerable degree of discretion remains with
the state.

2. Concession Regime
- Concession was the most common
framework/regime that was used in the early
twentieth century. In this regime, IOCs acquired
the right to explore and produce hydrocarbons
on what very often were large portions of the
host government’s territory.
- The term ‘concession’ describes a relationship
between a state and an IOC under which the
state concedes sovereign control over its
hydrocarbon resources. These old-style
concessions were usually very favourable to the
IOC; the state granted to the IOC absolute
authority over the territory and surrendered to
the IOC the title to all the hydrocarbons in situ.
Furthermore, the concessions were granted for
relatively long periods of time (up to 75 years),
during which the terms of the concession were
often preserved and the state had very little say
on how the area was developed and how the
recovered hydrocarbons were disposed of.
- The post-1950s concessions are significantly
different with respect to ownership of
hydrocarbons. The state has permanent
sovereignty over the hydrocarbons within its
territory and the concessions grant an IOC a
legal title to the hydrocarbons, but only once
recovered at the well-head. As with licences,
the concessionaires have proprietary rights over
the concession areas.
- In addition, the modern concessions are for
shorter periods of time and the concession areas
are limited to smaller geographical areas that
may be required to be relinquished depending
on the work program and budget. The IOC
takes most of the exploration risks and the state
generally derives all its revenues from royalties,
income taxes and other similar payments.

- The concession will typically take the form of a

concession agreement which will contain the
terms and conditions on which the concession is
granted.
- The agreement will create a mini-legal system
applicable only to the concessionaire and will
cover a range of regulatory matters such as the
right to import and export goods, work permits,
 foreign exchange, health and safety, taxation,
planning and environmental issues.
- In the past, it was likely that the concession
agreement would have been directly negotiated
with the IOC. Nowadays it is more likely that
their terms, and the conditions on which they
are granted, will be regulated. For example,
standard terms may be laid down by legislation
(the Libyan Petroleum Law of 1955 is an early
example of this). Further, these standard terms
may be circulated among interested oil
companies on a take-it-or-leave-it basis. In
other words, there may be little or no room for
negotiation – instead, the risks posed to the IOC
(including political risk) would need to be
reflected in the bid price. Whether concession
agreements are contractual or
regulatory/administrative instruments has been
a disputed issue. The question was considered
in the Aramco1 and Texaco2 oil arbitrations, in
which it was held that concession agreements
are not mere administrative instruments capable
of unilateral amendment by the state. In both
these cases, it was held that interference with
these contractual rights would amount to
expropriation, for which compensation would
be payable by the state.

3. Production Sharing Agreement/Contract (PSC)

A production sharing agreement (PSC) is a contractual
relationship between an
IOC and the state, authorising the IOC to explore for
and exploit oil and gas in
a defined area and for a defined period. The state, as
the owner of the
hydrocarbons, hires the IOC as a contractor for the
conduct of exploration and
production work in exchange for an entitlement on the
part of the IOC to a
stipulated share of revenues from the hydrocarbons
produced as compensation
for the risks taken and services rendered.

- The fundamental legal difference between a

PSC and a licence is that the relationship
between the IOC and the state under a PSC is
that of a contractor or service provider. Under a
PSC, the state always remains the owner of the
resources in the ground – although the contract
establishes the agreed compensation that the
IOC will receive for services rendered, part or
all of which will be in hydrocarbon revenues.
The IOC will therefore have a contractual right
to be delivered a portion of the hydrocarbon
production which becomes available (usually
after treatment and processing) at the point of
transfer.
- In other words, the PSC is a service contract
with payment in kind. The key document will
be the PSC itself. The parties to the PSC will
usually be the state (acting through the relevant
ministry or government official), the state oil
company (which will take delivery of the state‘s
share of production) and the IOC. A ‘licence’
may be built into the PSC or granted separately.
The rights of the IOC under the PSC are
designed to be contractual, rather than
proprietary.
4. Service Contract
- The service contract is a regime under which
the host state at all points retains full ownership
of all the hydrocarbons being produced on its
soil and the IOC performs the exploration and
production work as a service to the state. They
have been adopted in countries with strong
elements of nationalism, including those in
which the constitution actually prohibits foreign
control or ownership of natural resources, such
as Saudi Arabia, Kuwait and Iran. These
 countries usually have substantial capital at
their disposal, but seek the technical expertise
of IOCs to carry out the exploration and
production activities.
- In a risk service contract, the IOC is responsible
for the capital expenditure and management of
exploration and development and all
exploration is undertaken at the IOC’s own risk,
which means that, unless hydrocarbons are
found in sufficient quantities, the IOC will not
be compensated. If oil can be produced in
commercial quantities, the capital expenditure
and operating costs incurred are treated as a
loan by the IOC to the state, which may be
recovered (plus interest) from the state.
- In a pure services contract, all exploration and
production risks and rewards are retained by the
state. The IOC is contracted to perform certain
services (eg consulting, engineering,
construction, operational, managerial services
and so on), as defined by the agreement, in
return for a fee. The IOC is a mere contractor,
working under the supervision of the state, and
it has no legal or beneficial interest in the
enterprise itself. This category of contracts
includes management contracts (eg, contracts
for management services, start-up and
operational assistance and so on) and turnkey
contracts (under which the contractor will be
responsible for the construction and
commissioning of a whole facility).
Occasionally, the IOC may be given the right to
buy back a proportion of production from the
state, under separate sales arrangements.

LEGAL REGIME ON OIL AND The law regulating oil and gas activities is Law No.
GAS PRODUCTION IN 22/2001 dated 23 November 2001 (Law No. 22). The
INDONESIA objectives of this Law, as stated in art. 3, are to:
 1. guarantee effective, efficient, highly
competitive and sustainable exploration and
exploitation;
2. assure accountable processing, transport,
storage and commercial businesses through fair
and transparent business competition;
3. guarantee the efficient and effective supply of
oil and gas as a source of energy and for
domestic needs;
4. promote national capacity;
5. increase state income;
6. enhance public welfare and prosperity
equitably, as well as, maintaining the
conservation of the environment.

Tenure of Oil and Gas (Articles 4-10 State Right to Control (art. 4)
and Articles 38-43)
Oil and gas contained within Indonesia’ s jurisdiction
which constitute national assets are controlled by state;
this right of control shall be conducted by Government
as the holder of the Mining Authority; for that purpose,
the Government shall establish the Implementing Body,
a body which assigned to perform the management of
the Upstream Business.

Law No.22 differentiates between upstream business

activities and downstream business activities; upstream
business activities consist of exploration and
exploitation and downstream business activities consist
of processing, transport, storage and commerce/trading
(Article 5) and stipulates that upstream activities are
controlled through “Joint Cooperation Contracts”
(which are predominantly PSCs) between the business
entity/permanent establishment and the executing
agency (BP Migas, since replaced by SKK Migas – see
below) and downstream activities are controlled by
business licenses issued by the regulatory agency (BPH
Migas) (Article 7).
The oil and gas sector comprises upstream and
downstream activities, which are separately regulated.
Upstream activities include exploration and
exploitation, and are regulated under Government
Regulation No. 35 of 2004 regarding Upstream Oil and
Natural Gas Business Activities as has been amended
several times, the latest by Government Regulation No.
55 of 2009 (“GR 35”). The upstream sector is managed
and supervised by the Special Task Force for Upstream
Oil and Natural Gas Business Activities (“SKK
Migas”). Due to the unique territorial composition of
the archipelagic state of Indonesia, upstream oil
activities may be undertaken in onshore and offshore
areas. Work areas for onshore and offshore operations
are determined by the MoEMR based on consultations
with and recommendations from the respective
regional governments.

Downstream activities encompass processing,

transportation, storage and trading, and are regulated
under Government Regulation No. 36 of 2004
regarding Upstream Oil and Natural Gas Business
Activities as has been amended by Government
Regulation No. 30 of 2009 (“GR 36”). Downstream
operations fall under the auspices of the MoEMR and
BPH Migas (Badan Pengatur Hilir Minyak dan Gas
Bumi) (different from BPH Migas: Badan Pelaksana
Kegiatan Usaha Hulu Migas).

Through Government Regulation No. 79 of 2014, the

Government has stipulated national energy policy to be
implemented from 2014 to 2050, focusing primarily on
energy availability for national needs, prioritisation of
energy development, utilisation of national energy
resources, and national energy reserves. The target for
the availability of primary energy, which includes
natural oil and gas, is approximately 400 million tonnes
of oil equivalent (“MTOE”) in 2025 and approximately
1,000 MTOE in 2050.
 In early 2016, the President of Indonesia announced a
list of national strategic projects, which include several
downstream oil and gas projects, namely the
development of the Bontang and Tuban refineries,
upgrading existing refineries, and construction of the
Banten LPG terminal, Belawan–Sei Mangkey gas
pipelines, an LNG mini-refinery, and an LNG-LNCG
station on Java island. A Presidential Decree and
Presidential Instruction seek to accelerate these
projects and mandate enhanced cooperation among
relevant Government institutions in ensuring the
achievement of these objectives.

What is the Tenurial Regime which Private companies earn the right to explore and exploit
is available? oil and gas resources by entering into cooperation
contracts, mainly based upon a production sharing
contract (PSC), with the Government (through SKK
Migas), thus acting as a Contractor to SKK Migas. One
entity can hold only one PSC, and a PSC is normally
granted for 30 years, typically comprising six plus four
years of exploration and 20 years of exploitation. All
financial risks of operations under the PSC are borne
by the Contractor. If a work area proceeds to the
exploitation stage, the Contractor is entitled to cost
recovery.

Throughout the PSC term, expenditures are planned

ahead by the Contractor in an annual Work Plan and
Budget (“WP&B”) to be approved by SKK Migas. A
Contractor must also prepare an Authorisation for
Expenditure (“AFE”) for specific work and can only
execute the work upon SKK Migas’ approval of the
relevant AFE.

When a commercial discovery is made, the Contractor

must prepare a Plan of Development (“POD”) for the
relevant field. The first POD is approved by the
MoEMR based on the considerations of SKK Migas
and kicks off the exploitation stage. Subsequent PODs
are approved by SKK Migas.
 Extracted oil and gas remains owned by the State until
it passes the point of export or other delivery point.
Thereafter, the Government is entitled to a certain
percentage of the production output as apportioned
under the PSC, as is the Contractor.

Under the Oil and Gas Law, entities in the form of a

state-owned enterprise (“SOE”), regional-owned
enterprise (“BUMD”), a cooperative, small business or
private business entity may enter into a PSC with SKK
Migas to undertake upstream oil and gas business
activities. Pertamina, as an SOE and the state oil
company, can hold participating interests in numerous
PSCs as a Contractor of SKK Migas. There is no
maximum limit on the participating interest that an
SOE, BUMD or Pertamina may hold.

Upon the first POD approval, a Contractor is required

to offer 10% Participating Interest (“PI”) in its PSC to a
BUMD. The BUMD may accept or decline based on its
financial capability, and in the latter event the offer
must be tendered to an SOE.

Revenue Issues Indonesia does not impose royalties on PSCs, but

secures the State’s minimum income through the FTP
mechanism in later generation PSCs. FTP is the first
take of oil or gas immediately after production in a
work area in one calendar year that is received by the
State prior to cost recovery and profit calculation. FTP
therefore secures the State’s minimum income.

The amount of FTP is determined in the PSC. Taxes

applicable to PSCs include income tax, VAT, import
duties, regional taxes and other levies. The PSC may
stipulate whether the tax laws and regulations
applicable at the time of the PSC execution shall apply
(stabilised) or whether the PSC shall follow every tax
law and regulation issued over time. In addition,
Contractors are required to pay non-tax state revenues

Restrictions related to the transfer of During the Firm Commitment period, a Contractor is
Participating Interest (PI)
such as exploration and exploitation fees and bonuses,
including signing bonus and production bonus. The
sharing proportion between the Government and the
Contractor is typically 85:15 for oil and 70:30 for gas,
respectively. For nonconventional oil and gas, the
production sharing is progressive based on annual
cumulative production, with or without an operational
cost-recovery mechanism. This is one of the
Government’s recent moves to encourage investment in
non-conventional oil and gas activities, as contained in
MoEMR Regulation No. 38 of 2015 regarding
Expediting Non- Conventional Oil and Gas Operations.
not allowed to (i) transfer the majority of its PI to a
non-affiliated party, or (ii) transfer a certain percentage
of its PI that would result in the PI transferee holding a
higher percentage of PI than any other initial
Contractors. Change of operatorship in a PSC during
the Firm Commitment is also prohibited. After such
period, transfer of PI may be conducted upon approval
of the MEMR based on the consideration of SKK
Migas.
A PSC typically provides an approval or notification
requirement for the transfer of all or a portion of the
Contractor’s PI to an affiliate or non-affiliated third
party. From 2007 onwards, PSCs have stipulated that
transfers of participating interests to affiliates and
changes of control in a party to a PSC require prior
written consent of the MEMR (through SKK Migas).
GR 35 also imposes a requirement that if all or a
portion of the rights of the Contractor are transferred to
a non-affiliate or to another company that is not a
partner in the same working area, the MEMR can
“request” that the Contractor offer the interest to a
national company.
 The party receiving the transfer is subject to SKK
Migas’ review and approval since an entity must
possess the requisite financial capability and skills in
order to hold PI in a PSC.

Post-Operation Obligations New-generation PSCs stipulate an express obligation to

carry out an abandonment and site restoration (“ASR”)
program and to provide ASR funds.
The Oil and Gas Law highlights post-operation
obligations as a means of ensuring environmental
management and protection, and GR 35 obligates
Contractors to allocate funds for post-operation
activities. More specific decommissioning obligations
are contained in various regulations, such as MEMR
Regulation No. 02P/1992, which requires land
reclamation, and Government Regulation No. 17 of
1974 Regarding Supervision of Implementation of
Offshore Oil and Gas Exploration, which requires
dismantlement of facilities that are no longer used. A
Working Guidelines in 2015 on Work Completion
Approval also lists well plugging as one of the items
constituting completion of drilling work. The
procedures to reserve and deposit ASR funds are set
forth in the Working Guidelines 040/2010.

Mining Law (See PwC, 2022. Mining Business Licences

“Mining in Indonesia” To whom it can be granted?
Who is authorized to issue?
License term and extension (Time period of license)
Rights, Obligations and Prohibitions of Holders of
Mining Business
Licences

Royalties and the Fiscal Regime

Royalties and Non-Tax State Revenue
Fiscal regime
Divestment of Foreign Shareholdings
Oil and Gas Law (PwC, 2020. “Oil - (Conventional) Production Sharing Contract
and Gas in Indonesia - Gross Split Production Sharing Contract

- Judicial Review of Law 22/2001

- Decision No. 002/PPU-I/2003
- Decision No. 36/PUU-X/2012