22 Apr 2024
Indonesia Moves to Provide Solid Legal Basis for Carbon Capture & Storage

1. Introduction

The Government of Indonesia recently issued Presidential Regulation No. 14 of 2024 on Carbon Capture and Storage ("PR 14/2024" or the “new regulation”).[[1]] Carbon capture and storage (“CCS”) has emerged as a key strategy in climate change mitigation as it provides a way to reduce greenhouse gas emissions by injecting carbon underground. The new regulation provides a legal framework for the development and implementation of CCS and is thus in line with Indonesia’s stated commitment to achieving net-zero emissions by 2060.

In this legal update, the key provisions of PR 14/2024 will be examined, including how CCS activities may be initiated, licensing requirements, monetization, business processes, and cross-border transportation of carbon.

While PR 14/2024 envisages fiscal and other incentives to encourage that development of CCS, the details of these have yet to be announced.

2. Initiation of CCS activities

PR 14/2024 provides that CCS may be undertaken in (i) an existing oil / gas block that has been developed based on a production sharing contract (“PSC”) or (ii) a specific area that have been designated as a “carbon storage permit area” (Wilayah lzin Penyimpanan Karbon).

A. Existing Oil and Gas Block

CCS may be undertaken in an existing oil / gas block (otherwise known as an oil / gas working area) as part of oil / gas extraction operations under a PSC.  If the existing PSC does not contain provisions on CCS and a CCS implementation plan is adopted by the PSC contractor, the PSC may be amended to incorporate such provisions.

Before undertaking CCS operations, the first thing that a PSC contractor must do is to submit a CCS implementation plan to the Special Upstream Oil and Gas Business Operations Task Force (“SKK Migas”) or the Aceh Oil and Gas Management Agency (“BPMA”) for a recommendation. This should be done at the same time as the contractor’s application for approval of:

1. their first field development plan or amendment of an approved field development plan; or
2. a subsequent field development plan or amendment of a subsequently approved field development plan

The CCS implementation plan (as part of the overall field development or amendment plan) is submitted to the Minister of Energy and Mineral Resources (“MEMR”), who may approve or reject it based on the recommendation provided by SKK Migas, or (ii) (specifically for existing oil and gas blocks in Aceh) upon coordination with the Governor of Aceh and consideration of input from BPMA.

SKK Migas or BPMA, as the case maybe, may directly approve or reject a CCS implementation plan as referred to in point (b) above.

B. Carbon Storage Permit Area

Under this mechanism, the MEMR identifies and designates a carbon storage permit area (“CSPA”) and holds a tender competition, or limited selection process, to select a potential operator for CCS exploration and exploitation activities. Alternatively, third parties may propose areas to MEMR to be designated as CSPAs. In all cases, a CCS operator must be an Indonesian company, or a foreign company that has a permanent establishment in Indonesia.

The general licensing sequence is as follows:

1. Tender or limited selection process

MEMR conducts a public tender for a CSPA that has been identified by MEMR, or a limited selection process for a CSPA proposed by a third party (i.e., a company that is interested in conducting CCS operations in that area).

2. Exploration Permit

Upon selecting the winner of the tender or limited selection process, MEMR grants it an exploration permit (“EP) to identify an exploratory injection target zone. The EP holder must then submit an implementation work plan setting out definite exploration commitments to MEMR for approval. An EP is granted for 6 years, extendable once for up to 4 years

3. Development and Operation Plan

Should the exploratory work find that an injection target zone has commercially viable carbon storage capacity, an application is then submitted to MEMR for approval of the CCS development and operation plan.

4. Carbon Storage Operation Permit

After obtaining approval for the development and operation plan, the EP holder must then apply for a carbon storage operations permit (“CSOP”) before it can carry out carbon injection and storage operations in the designated CSPA area. The holder of an EP that is a permanent establishment is required to establish an Indonesian limited liability company before it can apply for a CSOP.

The CSOP may be granted by MEMR for an initial period of up to 30 years, with the possibility of 20 year extensions thereafter. No limit is set on the number of extensions that may be obtained, save that they are subject to assessments of storage capacity.

3. CCS Monetization

Under related SKK Migas rules,[[2]] PSC contractors may monetize their CCS operations through:

1. carbon trading arising out of CCS activities; and/or
2. monetization of revenues from CCS operations to offset the PSC contractor’s operating costs, or in some other way that is in accordance with SKK Migas rules.

Further, CCS using the CSOP mechanism may be monetized through the charging of storage fees to carbon producers. However, such storage fees are subject to the payment of royalties to the government -- the precise amounts of these are expected to be provided for in the upcoming implementing regulations for PR 14/2024.

4. Business Processes

PR 14/2024 provides detailed descriptions of the business processes involved in CCS:

1. Capture

Carbon capture may be undertaken through: (i) carbon separation at oil and gas production facilities; (ii) capture of carbon from combustion; (iii) pre-combustion capture; (iv) oxyfuel combustion capture; and/or (v) such other methods as may be subsequently developed. The captured carbon is processed and purified to meet the specifications set out in the Indonesia Industrial Standards (SNI ISO 27914:2017) and/or international standards recognized by the Government.

2. Transportation

Carbon transportation may only be undertaken based on a carbon transportation permit (“CTP”) granted by MEMR. A CTP may be issued for any of the following modes of carbon transportation:

3. Injection and Storage

A CCS operator or PSC contractor must allocate 70% of their carbon storage capacity to domestic emissions. Carbon storage capacity may also be allocated to overseas emissions provided that the foreign producers or their affiliates have invested in Indonesia. But even then, no more than 30% of storage capacity may be allocated to foreign emissions.

4. Cessation of CCS operations

CCS activities may be discontinued in the following circumstances: (i) carbon storage capacity in the injection target zone is full; (ii) no further carbon injection is undertaken; (iii) the CSOP has expired and not been extended; (iv) the PSC has expired and no further CCS operations are undertaken; (v) on account of safety considerations; (vi) on account of force majeure; or (vii) CCS operations are no longer economically viable.

5. Investment Restrictions

With regard to foreign ownership limitations, no foreign shareholding restrictions are applicable to CCS (save in the case of a small number of business fields that are expressly closed to foreign investment or reserved to the central government under Indonesia’s foreign direct investment legislation[3]).

However, as mentioned earlier, it should be noted that CSOPs and CTPs may only be granted to Indonesian limited liability companies.

Further, PR 14/2024 imposes restrictions on share transfers:

1. the transfer of a majority interest in a business that holds an EP requires MEMR approval and may only be conducted after the EP holder completes all of its exploration commitments; and
2. The transfer of a majority interest in a business that holds a CSOP may only be conducted based on MEMR approval, having regard to long-term and safe continuity of operations.

6. CCS Asset Ownership

The new regulation provides that the cost of assets (goods and equipment) purchased by a PSC contractor for use directly in CCS operations may be deducted as operating costs. However, this means that such assets automatically become state property (Barang Milik Negara), and must therefore be managed and maintained as state assets.

By contrast, assets purchased for use in CCS by a CSOP holder become its own property.

7. Cross-Border Carbon Transportation

PR 14/2024 provides that cross-border carbon transportation of carbon may only be undertaken on the basis of bilateral cooperation agreements, and must be transported in accordance with safety, health, and environmental protection standards.

The new regulation also makes it clear that leaks of foreign carbon during cross-border transportation are not to be added to Indonesia’s greenhouse gas inventory. Overall, how leaks are addressed will be a crucial issue in the negotiation of bilateral carbon agreements at the international level, and agreements between carbon producers and CCS operators at the domestic level.

8. ABNR Commentary

MEMR says that PR 14/2024 and the related rules issued by SKK Migas provide a solid foundation on which CCS can develop in Indonesia, and that they represent an important step forward in the country’s efforts to mitigate climate change. In addition, both the ministry and the text of the new regulation stress the economic benefits of CCS to Indonesia.

As regards how CCS will work in practice under PR 14/2024, including the incentives that will be available to investors, we will have to wait for the government to issue the necessary implementing regulations. Thus, it is too early to make any judgment as to the likely effectiveness and success of the new regulation. However, overall, we believe it merits a cautious welcome as it finally provides a solid legislative basis for CCS operations in Indonesia.

By partners Mr. Ayik C. Gunadi (agunadi@abnrlaw.com), Mahatma Hadhi (mhadhi@abnrlaw.com) and associate Mr. Rizal Harahap (kharahap@abnrlaw.com)

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.