Indonesia ushers in new carbon capture and storage regime

Two types of business schemes for CCS

Essentially, the regulation provides two schemes to carry out CCS activities in Indonesia:

• Working Areas: To be carried out by Cooperation Contract Contractors based on Cooperation Contracts, including Cost-Recovery and Gross-Split Production Sharing Contracts (PSCs).
• Carbon Storage Licence Areas: To be carried out by Exploration Licence and Storage Operation Licence holders.

CCS activities based on cooperation contracts 

The regulation allows CCS activities to be conducted within upstream oil and gas Working Areas as part of petroleum operations under the relevant Cooperation Contract. This can be implemented through an amendment to the relevant Cooperation Contract to include provisions on CCS (where the existing relevant Cooperation Contract does not already cover CCS arrangements).

In order to implement CCS activities in the Working Area of a Cooperation Contract, a PSC contractor must submit their CCS implementation plan (along with the carbon storage capacity certification documents):

• As part of their first Plan of Development (POD) or revision to the approved first POD to the Special Task Force for Upstream Oil and Gas Business Activities or the Oil and Gas Management Agency of Aceh (BPMA), as applicable, for MEMR approval.
• Or as part of their further POD or revision to the approved further POD to be approved by SKK Migas or BPMA, as applicable.

Once approved, the relevant Contractor must submit the proposed amendment to the Cooperation Contract (including the responsibilities of the Contractor in implementing CCS activities for carbon from upstream or non-upstream activities) to SKK Migas or BPMA (as applicable) for MEMR approval.

Licence-based CCS activites 

In addition to the CCS scheme based on Cooperation Contracts, the new regulation allows the implementation of CCS activities in a designated Carbon Storage Licence Area by obtaining an Exploration Licence (which may be held by Indonesian entities and foreign permanent establishments) and a Storage Operation Licence (specifically for Indonesian entities).

The Carbon Storage Licence Area may include open space areas, mining business licence areas and/or Working Areas designated by the MEMR (or designated by the MEMR based on a proposal from the applicants). The MEMR may allocate the Carbon Storage Licence Area to business entities or permanent establishments through either:

• limited selection (if the potential Carbon Storage Licence Area is proposed by an investor on a unsolicited basis, in which case the investor will have a right-to-match in the limited selection process); or
• a tender procurement process, taking into account the relevant technical and financial capabilities required for the proposed CCS activities.

For more detail on what this means for exploration licences and storage operation licences, read our comprehensive briefing.

Carbon transportation

The new regulation recognises carbon transportation as part of CCS operations, which may be performed by Cooperation Contract Contractors and Storage Operation Licence holders. Importantly, the new regime also recognises carbon transportation as a standalone business activity that may be carried out by third-party business entities.

In order to carry out carbon transportation activities, business entities (including Storage Operation Licence holders) must obtain a Carbon Transportation Licence. However, Cooperation Contract Contractors are not required to obtain a separate Carbon Transportation Licence when transporting carbon within or between Working Areas if that activity forms part of their CCS operations under the Cooperation Contract.

Under the regulation, Carbon Transportation Licences will be issued based on the mode of carbon transportation:

Overseas carbon storage capacity allocation

Cooperation Contract Contractors and Storage Operation Licence holders engaged in CCS activities must allocate at least 70% of their total carbon storage capacity for domestic carbon storage, while the remaining 30% can be designated for storing carbon from overseas. However, any allocation of storage for overseas carbon is limited to carbon producers investing in or affiliated with investments in Indonesia. The new regulation does not explain what would constitute a qualifying investment for purposes of storing overseas carbon. We expect this will be covered by future implementing regulations.

Monetisation of CCS activites 

Under the new regime, Cooperation Contract Contractors and Storage Operation Licence holders that carry out CCS activities are generally entitled to monetise their CCS operations by collecting storage fees from the carbon producers. However, Storage Operation Licence holders are subject to certain royalties payable to the Government for the storage fees received.

The regulation does not expressly regulate arrangements for the further monetisation of CCS activities through the generation (and sale) of carbon credits.

However, pursuant to PTK 070/2024, Cooperation Contract Contractors may also monetise their CCS operations by trading the carbon credits generated from CCS activities (subject to prevailing laws and regulations), and this monetisation may be treated as a reduction in operating costs (which will ultimately impact the calculation of the cost-recovery or gross-revenue production split based on the relevant PSC). 

Conclusion

The issuance of this new regulation is a significant development in the creation of a clear regulatory framework for the investment and promotion of CCS activities in Indonesia. This new regime provides the flexibility for existing oil and gas investors to continue to conduct CCS activities through Cooperation Contracts (including on a cost-recovery basis), while also providing opportunities for new investment and technology from specialist international and domestic CCS operators through the licensing regime.

We expect that further detailed regulations will soon be issued by the MEMR to provide further clarity on the implementation of several provisions in the regulation.

In respect of another important part of the CCS business, the Government has not yet regulated the fees that business entities offering standalone carbon transportation activities will be entitled to receive for providing carbon transportation services to their clients.

Nonetheless, the regulation represents an important step forward in unlocking Indonesia’s potential as a significant carbon storage region.