The Government of the Republic of Indonesia is deliberating a draft Law on Oil and Natural Gas (“Draft Law”) that is intended to replace Law No. 22 of 2001 on Oil and Natural Gas, as amended by Law No. 6 of 2023 on the Enactment of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law (“Law 22/2001”). The Draft Law was submitted by the President and is dated 3 March 2026, and remains subject to deliberation and approval by the House of Representatives (Dewan Perwakilan Rakyat or “DPR”) before enactment.
The Draft Law is intended to overhaul the institutional structure of Indonesia’s upstream oil and gas sector by establishing a new state entity, the Special Oil and Gas Business Entity (Badan Usaha Khusus Minyak dan Gas Bumi or “BUK Migas”), to take over the management of upstream activities, alongside refinements to downstream licensing, domestic market obligations, state revenue, national capacity requirements, environmental obligations, and criminal sanctions.
New Upstream Institution: BUK Migas Replaces the Implementing Body
Under Law 22/2001, the State’s mining rights (Kuasa Pertambangan) over upstream activities are exercised by the Government, through a Special Task Force (Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi or “SKK Migas”) to control upstream activities and enter into Cooperation Contracts with contractors, while the Government retains control of operational management under those contracts (Articles 4 and 6 of Law 22/2001).
The Draft Law replaces the SKK Migas with BUK Migas, to which the Central Government delegates the entire upstream business, rather than merely oversight of it (Article 5 of the Draft Law). BUK Migas becomes the holder of the mining business authority for oil and gas, signs Cooperation Contracts directly, and is responsible to the President (Articles 5, 13, and 63 of the Draft Law). Where BUK Migas cannot itself carry out an upstream activity, it may tender the relevant Working Area to a Business Entity or Permanent Establishment (Article 5 (5) of the Draft Law).
BUK Migas is to have a supervisory board of seven members appointed by the President on the DPR’s nomination, and a board of directors of at least seven members appointed by the President (Article 64 and Article 65 of the Draft Law).
In parallel, the Draft Law establishes an Oil and Gas Downstream Regulatory Body (BPH Migas) to replace the existing Regulatory Body (Badan Pengatur), retaining broadly the same functions of regulating and supervising the supply and distribution of fuel and the transportation of natural gas by pipeline, alongside an expanded committee of one chairperson and eight members (Articles 70 and 71 of the Draft Law; compare Articles 8 (4), 46, and 47 of Law 22/2001).
Cooperation Contracts and Working Areas
Both Law 22/2001 and the Draft Law retain the Cooperation Contract (Kontrak Kerja Sama) as the legal vehicle for upstream Exploration and Exploitation activities. Both also maintain a maximum contract term of 30 years, an Exploration period of six years that may be extended once for up to four years, and the requirement for contractors to relinquish unused portions of the Working Area (Articles 14, 15, and 16 of Law 22/2001; Articles 14, 15, and 19 of the Draft Law). However, the Draft Law introduces several notable changes.
The Draft Law changes the counterparty to a Cooperation Contract from the Implementing Body to BUK Migas. It also provides that Working Areas will be offered by BUK Migas through either a regular tender or a direct offer mechanism, rather than being determined solely by the Minister (Article 17 of the Draft Law; compare Article 12 of Law 22/2001).
The Draft Law also removes the previous restriction limiting each Business Entity or Permanent Establishment to only one Working Area and requiring a separate legal entity for each additional Working Area. Accordingly, a single entity may now hold more than one Working Area (Article 18 of the Draft Law; compare Article 13 of Law 22/2001).
Although the maximum extension period for a Cooperation Contract remains unchanged at 20 years, the Draft Law introduces a procedural requirement for contractors to submit an extension application at least five years before the contract expires. BUK Migas is, in turn, required to issue its decision within one year of receiving the application (Article 14 paragraphs (3), (4), and (5) of the Draft Law; compare Article 14 paragraph (2) of Law 22/2001).
In addition, the Draft Law introduces a new participating interest requirement. Following the approval of the first Plan of Development for a Working Area, the contractor must offer a 10% participating interest to a regionally owned enterprise (Badan Usaha Milik Daerah or BUMD). The participating interest may be provided in the form of a grant, profit-sharing arrangement, or another mechanism, and may not be transferred to a third party (Article 27 of the Draft Law).
The Draft Law also revises the domestic market obligation by changing it from a maximum threshold to a minimum requirement. Under the Draft Law, contractors must allocate at least 25% of their entitlement share of oil and gas production to meet domestic demand (Article 26 of the Draft Law), whereas Law 22/2001 requires contractors to supply no more than 25% of their entitlement share for domestic needs (Article 22 of Law 22/2001).
Licensing for Downstream Activities
Downstream business activities, namely Processing, Transportation, Storage, and Trading, continue to require authorisation from the Central Government under both Law 22/2001 and the Draft Law (Article 8 of the Draft Law; Article 6 of Law 22/2001). While the overall licensing requirement remains unchanged, the Draft Law introduces several important changes to the downstream licensing framework.
The Draft Law replaces the previous Business Licence (Izin Usaha) terminology with Business Licensing (Perizinan Berusaha), thereby aligning the oil and gas sector with Indonesia’s broader risk-based licensing regime. It also requires applications for Business Licensing to be submitted through an electronic licensing system administered by the Central Government (Article 29 of the Draft Law; compare Article 23 of Law 22/2001).
The Draft Law further revises the enforcement framework applicable to downstream activities by introducing a new sanction regime for entities conducting downstream business activities without the required Business Licensing. Under the Draft Law, the Central Government may impose administrative sanctions in the form of business or activity suspension, fines, and/or government compulsion (Article 30 of the Draft Law). By comparison, Law 22/2001 provided for written warnings, suspension, freezing, or revocation of the relevant Business Licence (Article 25 of Law 22/2001).
Fuel and Gas Pricing
Law 22/2001 adopts a market-based approach to fuel and gas pricing by leaving prices to be determined through fair and healthy business competition, without prejudice to the Government’s social responsibility towards certain segments of society (Article 28 paragraphs (2) and (3) of Law 22/2001). The Draft Law, however, marks a significant departure from this approach by expanding the Central Government’s role in determining fuel and gas prices.
Under the Draft Law, the Central Government is authorised to regulate and/or set a uniform fuel price across Indonesia, as well as regulate and/or set gas prices, including a uniform price for certain segments of society and a nationwide uniform price for LPG or gas fuel. The Draft Law also provides that incentives may be granted to business entities operating in specified regions (Articles 36 and 37 of the Draft Law).
In addition, the Draft Law introduces a new oversight mechanism by requiring the Central Government to obtain the approval of the DPR before determining a uniform fuel price across Indonesia or gas prices for certain segments of society (Article 36 paragraph (4) and Article 37 paragraph (5) of the Draft Law).
National Capacity, Environmental and Technical Obligations
The Draft Law introduces a dedicated chapter on national capacity, requiring Business Entities, Permanent Establishments, and/or cooperatives engaged in oil and gas business and supporting activities to strengthen national capacity through the use of Indonesian manpower, domestic goods, services, technology, and engineering and design capability, domestic banking and insurance services, technology transfer to partner companies, community development, and the application of Indonesian National Standards (Standar Nasional Indonesia or SNI) and the Indonesian National Work Competency Standard (Standar Kompetensi Kerja Nasional Indonesia or SKKNI) (Article 51 of the Draft Law). Law 22/2001 does not contain an equivalent standalone chapter, although it similarly requires the prioritisation of domestic manpower, goods, and services under its supervision and Cooperation Contract provisions (Articles 11 and 40 of Law 22/2001).
Beyond strengthening local content and national capacity requirements, the Draft Law also provides a more comprehensive regulatory framework governing the technical and environmental aspects of upstream, downstream, and supporting business activities (Articles 88, 89, and 90 of the Draft Law). In particular, it expressly incorporates reservoir management principles, carbon capture, storage, and utilisation obligations into Cooperation Contracts, and introduces post-mining obligations (Article 13 paragraph (2)(g) and Article 90(a) of the Draft Law).
The Draft Law further requires the preparation of a National Oil Balance, a National Gas Balance, and a National Gas Infrastructure Master Plan, each with a ten-year validity period and subject to annual evaluation. These planning instruments have no equivalent under Law 22/2001 (Articles 81, 82, and 83 of the Draft Law).
Oil and Gas Fund
The Draft Law introduces a new Oil and Gas Fund to be managed by the Minister in a transparent and accountable manner, in coordination with the minister responsible for state finance. The fund will be financed through a percentage of the state’s net oil and gas revenue, bonuses received by BUK Migas, and other statutory levies (Article 85 of the Draft Law).
The Draft Law provides that the fund is to be used to increase conventional and unconventional oil and gas reserves, develop oil and gas infrastructure, and finance research and development. In addition, with the Minister’s approval, the fund may be invested in cooperation with the Investment Management Agency (Article 85 paragraphs (5) and (6) of the Draft Law).
This dedicated funding mechanism, together with the requirement that its management be audited by the Supreme Audit Agency, represents a new feature of Indonesia’s oil and gas regulatory framework and has no equivalent under Law 22/2001 (Article 86 of the Draft Law).
Criminal Sanctions
The Draft Law materially strengthens the criminal enforcement regime applicable to the oil and gas sector by increasing the severity of penalties and introducing additional sanctions not found under Law 22/2001.
For example, conducting Exploration and/or Exploitation without the required Business Licensing or Cooperation Contract is punishable under the Draft Law by up to ten years’ imprisonment and a fine under the highest applicable fine category (Article 94 of the Draft Law), compared with a maximum penalty of six years’ imprisonment and a fine of up to IDR 60 billion under Law 22/2001 (Article 52 of Law 22/2001).
The Draft Law further introduces an aggravating circumstance whereby criminal penalties are increased by one-third if the offence is committed by an official responsible for the oil and gas sector (Article 101 of the Draft Law). It also expands the range of supplementary penalties available to the court, including the revocation of specific rights, forfeiture of proceeds, payment of compensation for environmental damage, environmental restoration, revocation of specific licences, and the fulfilment of local customary obligations (Article 100 of the Draft Law).
Transitional Arrangements
The Draft Law contains transitional provisions governing the establishment of BUK Migas and the implementation of the new regulatory framework. It requires BUK Migas to be established, either as a newly formed entity or by designating an existing state-owned oil and gas enterprise, within one year of the Draft Law’s enactment. Until BUK Migas is established, the Special Working Unit for Upstream Oil and Gas Business Activities will continue to perform its existing functions (Article 102 paragraphs (a) to (d) of the Draft Law).
Upon the establishment of BUK Migas, all rights, obligations, and legal consequences arising from existing Cooperation Contracts and related agreements will automatically transfer to BUK Migas. Existing Cooperation Contracts and related agreements will otherwise remain valid and continue in force until their respective expiry dates (Article 102 paragraphs (e) to (g) of the Draft Law).
The Draft Law also sets out the transition for implementing regulations. It requires all implementing regulations to be issued within one year of the Draft Law’s enactment, while providing that implementing regulations issued under Law 22/2001 will remain effective to the extent that they are not inconsistent with the Draft Law (Article 103 of the Draft Law).
Concluding Remarks
The Draft Law represents a substantial restructuring of Indonesia’s oil and gas regulatory framework rather than an incremental update. Its most significant feature is the transfer of upstream business authority into a BUK Migas, coupled with an expanded set of obligations concerning national capacity building, environmental and technical compliance, participating interest for regional enterprises, and a materially strengthened sanctions regime. Businesses currently operating in, or considering entry into, the Indonesian oil and gas sector should closely monitor the Draft Law’s progress through the legislative process, given its potential impact on licensing structures, contractual arrangements, and compliance obligations across both upstream and downstream activities.
As the Draft Law remains under deliberation and has not been enacted, its final form, including the numbering and substance of its provisions, may still change before it is passed into law.
Disclaimer: The information herein is of general nature and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. Specific legal advice should be sought by interested parties to address their circumstances.
