New Regulation on Cost Recovery in the Oil and Gas Industry | White & Case LLP International Law Firm, Global Law Practice
New Regulation on Cost Recovery in the Oil and Gas Industry

New Regulation on Cost Recovery in the Oil and Gas Industry

The Government has recently issued Regulation No. 79 of 2010 which deals with cost recovery and tax arrangements for upstream oil and gas activities ("Regulation 79"). Regulation 79 has been in force since 20 December 2010 (the "Effective Date").

Scope Regulation 79 applies to all upstream oil and gas service and production sharing agreements. Contracts signed prior to the Effective Date will remain valid until they expire, provided that matters not specifically covered in such contracts will need to be made consistent with Regulation 79 by 20 March 2011 (i.e. within three months of the Effective Date).

Taxation Contracts signed prior to the Effective Date will be subject to the income tax rate which prevailed at the time of signing of the respective contract, while contracts signed after the Effective Date will be subject to the tax rate prevailing from time to time.

A transfer of participating interests in a production sharing contract during the exploration stage will be taxed at 5% on gross proceeds or 7% if the transfer takes place during the exploitation stage (unless the transfer is to a state-owned company).

Costs Regulation 79 also stipulates the categories of costs and obligations that may be recoverable by a contractor.

The wording of Regulation 79 is unclear in many respects. Additional regulations that implement the provisions of Regulation 79 are expected to be issued in due course although there is currently no indication as to the timing or content of such implementing regulations.

Government Issues Regulation on Reclamation and Post-mining Obligations of Mining Companies

On 20 December 2010, the Government issued Regulation No. 78 of 2010 ("Regulation 78") on reclamation and post-mining obligations applicable to mining permit ("IUP") and special mining permit ("IUPK") holders. Regulation 78 is one of four implementing regulations issued pursuant to Law No. 4 of 2009 on Minerals and Coal Mining (the "Mining Law").

Under the terms of the Mining Law, IUP and IUPK holders are obliged to restore the mining area to its original condition through a planned and sustainable programme upon completion of part or of the entire mining operation.

Regulation 78 requires IUP and IUPK holders to report their reclamation and post-mining operation plans and to provide a guarantee fund in support of such plans. In certain circumstances, the Minister, governor, regent or mayor (as the case may be) shall have rights to appoint a third party to carry out some or all of the reclamation and post-mining work using the guarantee fund in the event of a failure on the part of the IUP or IUPK holder to do so according to the agreed plan and criteria.

Details on the reporting requirements and approval mechanisms relating to reclamation and post-mining operation activities as well as sanctions for failure to comply with Regulation 78 are expected to be set out in future Ministerial Regulations.

Regulation 78 has been in force since the beginning of 2011.


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