Constitutional Court Invalidates BP Migas

Date of publication: 
13 November 2012

The Constitutional Court on Tuesday annulled articles of the 2001 Oil and Gas Law that were the foundation for the creation of BPMigas, Indonesia’s upstream oil and gas regulator.

In a ruling published on its website on Tuesday, the court, known as MK, declared that the regulator must be abolished as the articles that gave BPMigas the right to represent the government, manage its oil and gas resources and sign contracts with foreign companies were unconstitutional.

“BPMigas is unconstitutional, and MK has the authority to annul laws that are unconstitutional,” said chief judge Mahfud MD.

The judicial review of the law had been sought by several noted Muslim figures, including Muhammadiyah chairman Muhammad Din Syamsuddin, former Nahdlatul Ulama chairman Hasyim Muzadi, Indonesian Council of Ulema chairman Amidhan, Muslim politician Ali Mochtar Ngabalin, former Manpower and Transmigration Minister Fahmi Idris and 12 Islamic organizations.

Supporters of the judicial review included public figures and political activists Rizal Ramli, a former coordinating minister for the economy, Kurtubi, an oil and gas analyst, Komaruddin Hidayat, rector of the State Islamic University, Marwan Batubara, director of the Indonesian Resources Studies think tank, and Adhie Massardi from a transparency activist group.

In a binding decree, the MK declared that articles 1, 4, 41, 44, 45, 48, 59, 61, and 63 of the 2001 Law on Oil and Gas had violated Article 33 of the 1945 Constitution.

All the scrapped articles relate to the authority, role and functions of BPMigas.

Article 63 of the law, for instance, spells out BPMigas’s authority to regulate production sharing contracts between state energy company Pertamina and what it describes as “other parties,” including foreign oil contractors.

Article 33 of the Constitution has five points, but the court based its decision on point 2 — that states that sectors of production that are important for the country and affect the life of the people shall be under the powers of the state — and point 3 — that states that the land, waters and natural resources within shall be under the powers of the state and shall be used to the greatest benefit of the people.

The MK found that although BPMigas is a state-owned entity, the scrapped articles in the 2001 law did not give it enough control and power over the country’s resources as a regulatory and monitoring body, so it was not able to directly run oil and gas businesses and instead relied on private companies to run the businesses.

“State control over the country’s natural resources through BPMigas is degraded, and hence, violated the Constitution,” said the MK.

The court said that to provide the greatest benefit to the people, the state must directly or through its representatives manage and run the oil and gas businesses.

The court also ruled that BPMigas had the potential to create inefficiency and power abuses, and thus failed to achieve the goal of giving the greatest benefit to people. “So, it also violates the Constitution,” the court ruling said.

Seven of the eight members of the panel of judges, headed by Mahfud, agreed that the articles should be scrapped.

But one judge, Harjono, dissented, saying that the MK had failed to thoroughly review whether the plaintiffs had the legal standing to ask for the review, and that BPMigas is a representatives of the state and therefore its existence did not violate the Constitution.

Despite disbanding BPMigas, the MK ruled that all contracts made under BPMigas shall remain in force until their expiration dates to avoid unnecessary legal uncertainty.

The court also ordered that all BPMigas’s authority and responsibilities be transferred to the Directorate General of Oil and Gas at the Ministry of Energy and Mineral Resources “until there is a new law adopted” on the issue.

“The function and role of the upstream oil and gas regulator should be carried out by the government or the related ministry until a new law related to the matter is issued,” Mahfud said.

Energy and Mineral Resources Minister Jero Wacik said the government was likely to merge BPMigas with state-controlled energy company Pertamina.

Muhammadiyah chairman Dien Syamsuddin declared after attending the MK hearing that he was happy with the decree because “BPMigas is unconstitutional, so the decree represents a people’s victory.”

Muhammadiyah hopes that the government will better manage its natural resources, with the goal of giving the utmost benefit to the people of Indonesia, he said.

Former minister Rizal, who had testified at the court hearing as an expert witness, along with his successor as coordinating minister for the economy, Kwik Kian Gie, and energy industry expert Kurtubi, said that the spirit of the judicial review was to “promote national sovereignty in energy,” so that “natural resources, including energy resources, must be utilized for the utmost benefit of the people of Indonesia in line with Article 33 of the Constitution.”

Ramli told the Jakarta Globe on Tuesday night that “a sovereign nation must have a sovereign energy policy” because “if a law is the result of orders from elsewhere, that law will not side with national interests.”

“We are the biggest gas producer in this part of the world, but why is it so difficult for [state electricity company] PLN to obtain gas? Go to India and see how they use gas to feed vehicles. Go to Singapore and see there is no pollution because they use gas that is more environment-friendly. Why can’t that happen here?”

Ramli explained that the reason is that under the oil and gas law, only 25 percent of domestically produced gas can be used inside Indonesia. He blamed the government’s tendency to prioritize other issues above the national interest as the cause of this situation.

“If a natural resource law is the result of orders from abroad, usually it is compensated for with foreign aid, and this will lead to government formulation of neoliberal policies that will not bring the utmost good for the people of Indonesia,” Ramli said.

“This was what former President Sukarno and Vice President Mohammad Hatta consistently fought against.” He added that the MK had made two important decisions. One was to disband BPMigas, and the other was to rule that domestic prices of oil and gas shall not be left entirely to free-market mechanisms — otherwise that also would be unconstitutional.

Ramli said that the MK had made the right decision because, at a time when Indonesia’s crude oil production has dropped to 900,000 barrels per day from 1.4 million bpd, BPMigas has allowed cost recovery to swell exuberantly.

Another expert on the industry’s performance who refused to be identified told the Jakarta Globe that “BPMigas has become a huge kingdom by itself” so the MK’s decree to disband it was “a very timely move.”

Golkar Party deputy chairman Theo L. Sambuaga cautioned, however, that the drive to return oil and gas regulation authority to the ministry needed to lead to increased efficiency and better legal certainty, so the outcome will be better than when it was still handled by BPMigas.

Political analysts said on Tuesday that one of the reasons why the MK had scrapped BPMigas’s authority was that it was “too liberal” to the extent that the national interest had been sacrificed. They argued the court opted to express this sentiment through ruling its founding documents unconstitutional. Several political analysts welcomed the MK decree on Tuesday.

Ramli argued that the ruling was a reflection of the fact that the Oil and Gas Law had been too favorable to foreign interests and undermined Indonesia’s energy sovereignty.

Minister Jero said that given the MK is the highest legal authority in the country, its decree is final and binding and that the government will “get ready to execute the decree.”

He said, however, that his ministry would need to implement a transition plan for the functions performed by BPMigas given then changed circumstances.

“Our position is that if this is a decree of the MK, all we have to do is follow,” Jero said.

“But we now have to make sure that the investment climate will not be adversely affected. So we will make proper preparation and anticipation so that oil and gas investments will be secured and better protected.

“We will study all the possibilities and implement the ones most suitable and beneficial for the interests of the state. So do not jump to hasty conclusions just yet,” he added.

Julian Aldrin Pasha, a spokesman for President Susilo Bambang Yudhoyono, said the head of state had received reports on but was waiting for reports from the relevant ministers before calling a special cabinet meeting.

Din Syamsuddin said that the court’s ruling represented a triumph for all Indonesian people.

“This oil and gas law caused losses for [Indonesian] people, so, this is a victory for the people,” Din said, as quoted by “We hope that with this ruling, oil and gas resources will be better managed.”