Indonesia: BPMigas relaxes stance in requiring BANI arbitration clauses in regulated contracts

In an important recent development for oil and gas companies operating in Indonesia, BPMigas has relaxed its stance in requiring BANI arbitration clauses in regulated contracts. Officials at BPMigas now state that companies entering into contracts in Indonesia may use other arbitral institutions, such as SIAC or ICC, provided that the seat of the arbitration is within Indonesia.

Indonesia, a country well known as a place with abundant natural resources, continues to be an attractive destination for energy investment.

Many multinational energy companies have long established operations in Indonesia, and new international investors, particularly from China and India, are also increasingly being drawn to Indonesia’s energy assets. In addition to its natural resources, the Indonesian political environment is relatively stable and continues to improve. Indonesia has not seen any civil unrest issues for the past decade – problems that its Asian neighbours, particularly Thailand and the Philippines, have had very recently. This, combined with its low labour costs and economic growth, makes Indonesia an extremely attractive place for foreign investors.

Amidst this climate of busy investment, there are still significant challenges for foreign investors. Indonesia’s legal system and its courts are still perceived as being rife with corruption and undue influence. Nationalistic sentiment from Indonesian lawmakers has also led to recent new laws that set restrictions on how overseas operators can structure their investments within Indonesia.

One example of the restrictions that were placed on foreign investors was the limitation placed on dispute resolution clauses within contracts operated under the control of BPMigas, the Indonesian Upstream Oil and Gas Supervisory Agency. BPMigas previously compelled all BPMigas-regulated contracts to be subject to “domestic” arbitration, requiring that parties choose BANI, the Indonesian National Arbitration Body, to settle any disputes arising from the contract. Whilst BANI is a credible local organisation, and generally preferable to the Indonesian courts for overseas investors, its practices and procedures differ from most internationally recognised arbitral institutions. For example, BANI arbitrations tend to have regular hearings at weekly or bi-weekly intervals, which – as a consequence – means that arbitrators from outside Jakarta are often not prepared to take BANI appointments as they are not willing to fly in and out of Indonesia regularly. BANI also requires that the arbitrators are chosen from its own approved list, and the pool of non-Indonesian, international arbitrators in Jakarta is rather limited.

A Jakarta seat for arbitrations also brings an increased risk of one party seeking to use and influence the local courts to interfere with the arbitral process, although Herbert Smith and its associated office in Jakarta, Hiswara Bunjamin & Tandjung, have successfully resisted applications in local Indonesian courts aimed at disrupting pending or ongoing arbitration proceedings.

One important recent development for oil and gas companies operating in Indonesia, therefore, is that BPMigas has somewhat relaxed its stance in requiring BANI arbitration clauses to be written into regulated contracts. Officials at BPMigas now say that they are allowing companies to consider other arbitral institutions, provided the seat of the arbitration is still in Indonesia (whether Jakarta or elsewhere). This new development gives some welcome options to in-house counsel drafting Indonesia-seated arbitration clauses. Lawyers can now take advantage of the benefits offered by institutions such as the ICC, SIAC or LCIA.