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Decree of the Minister of Energy and Mineral Resources Number 13 of 2022: New Provisions on Domestic Market Obligation

Domestic Market Obligation

In early January this year, the Government of Indonesia through the Ministry of Energy and Mineral Resources (“MEMR”) issued a new regulation regarding the obligation to supply coal for domestic purposes or so-called Domestic Market Obligation as outlined in Decree of the Minister of Energy and Mineral Resources Number 13.K/HK.021/MEM.B/2022 on the Prohibition of Coal Exports, and Guidelines for the Imposition of Fines and Compensation Fund for Fulfilling Domestic Market Obligation (“Decree 13/2022”). This Ministerial Decree is a further regulation in implementing Domestic Market Obligation (“DMO”) as previously regulated in Decree of the Minister of Energy and Mineral Resources Number 139.K/HK.02/MEM.B/2021 on the Fulfillment of Domestic Market Obligation (“Decree 139/2021”) as a response to the non-compliance of coal producers causing the State Electricity Company (Perusahaan Listrik Negara, “PLN”) (Persero) as a national electricity producer experience a fuel crisis to operate its Coal-Fired Power Plants (Pembangkit Listrik Tenaga Uap, PLTU”), which had an impact on the national electricity system at the end of 2021.

 

Domestic Market Obligation 

 

Historically, the DMO policy was issued in 2009 as stipulated in Regulation of the Minister of Energy and Mineral Resources Number 34 of 2009 on Prioritizing the Supply of Mineral and Coal Needs for Domestic Interest (“MR 34/2009”). MR 34/2009 regulates the amount of coal that must be allocated for domestic purposes, including for national power generation and fuel consumption in the industrial sector, which has been in effect since 2010 and is still being implemented today. The DMO policy in essence requires coal producers to fulfill domestic coal needs, the amount of which is regulated annually by the Government of the Republic of Indonesia so that coal producers are obligated to supply their coal production in accordance with the policy of the Government of the Republic of Indonesia. Currently, the latest DMO policy that is still in effect is contained in Decree 139/2021. 

 

Decree 139/2021 regulates that the percentage of coal sales for DMO to holders of the following mining permits: 

 

  1. Mining Business Permit for Coal Production Operation stage (Izin Usaha Pertambangan tahap Operasi Produksi, ”IUP OP”);
  2. Special Mining Business Permit for Coal Production Operation stage (Izin Usaha Pertambangan Khusus tahap Operasi Produksi, ”IUPK OP”);
  3. Coal Contract of Work for Production Operation stage (Perjanjian Karya Pengusahaan Pertambangan Batubara tahap Operasi Produksi, “PKP2B”); and
  4. Special Mining Business Permit as Continuation of PKP2B

 

(hereinafter referred to as the “Coal Mining Company”) is 25% (twenty-five percent) of the approved Annual Work Plan and Budget (Rencana Kerja dan Anggaran Belanja, “RKAB”)

Domestic Market Obligation

Provisions Before Decree 139/2021

Decree 139/2021 is a regulation that revokes the previous DMO policy as stipulated in Decree of the Minister of Energy and Mineral Resources Number 255.K/30/MEM/2020 on the Fulfillment of Domestic Coal Needs in 2021 (“Decree 255/2020”). The difference found in Decree 255/2020 is regarding the decision of the Government of Indonesia not to impose sanctions on coal producers who do not fulfill the minimum percentage of coal sales for DMO in 2020 as regulated in the seventh Dictum by stipulating exemption from the obligation to pay compensation for the non-fulfillment of the minimum percentage of DMO coal sales in 2020. Based on the verbal information provided by the officer of the MEMR, the exemption was granted by the Government of the Republic of Indonesia as a support for coal mining business companies considering the Coronavirus Disease (COVID-19) pandemic impacting on the mining sector. That the policy is different from currently applicable Decree 139/2021, which stipulates sanctions for the non-fulfillment, as follows:

 

  1. prohibition of coal exports until domestic coal needs are fulfilled;
  2. obligation to pay a fine equal to the difference in the export selling price; and
  3. obligation to pay compensation equal to the unfulfilled minimum percentage obligation of coal sales for DMO.

 

Provisions in the Decree 13/2022

Decree 13/2022 stipulates several provisions as a continuation of the regulation in Decree 139/2021, as follows:

 

  • DMO Fulfillment Scheme

Decree 13/2022 outlines a DMO fulfillment scheme, which is carried out through:

 

  1. Direct Realization of DMO – carried out by Coal Mining Companies to their domestic end users; and/or

 

  1. Indirect Realization of DMO – carried out by Coal Mining Companies through the holder of Coal Transportation and Sales Permit (Izin Pengangkutan dan Penjualan Batubara, “IPP”). Through this scheme, the IPP holders have an obligation to fulfill their sales contract with domestic end users as the DMO fulfillment of the Coal Mining Companies.

 

If the Coal Mining Company and the company holding the IPP, being a partner of the Coal Mining Company, do not have any domestic sales contract, or the coal does not meet domestic market specifications, the Coal Mining Company must pay compensation funds.

Domestic Market Obligation

  • Administrative Sanctions

Coal Mining Companies that do not fulfill their DMO obligation, especially the obligation to pay fines and/or compensation funds are subject to administrative sanctions in the form of:

 

  1. temporary suspension of all production operations, or a statement of negligence within a maximum period of 60 (sixty) calendar days if they do not pay the fine or compensation within 30 (thirty) days from the imposition of the fine or compensation as stated in the statement of fine or compensation payable submitted by the management agency; and

 

  1. revocation of Mining Business Permit, Special Mining Business Permit, Special Mining Business Permit as Continuation of Contract/Agreement Operations, or termination of PKP2B if coal producers do not carry out the obligation to pay fines or compensation until the end of the temporary suspension period.

 

  • Imposition of Sanctions and the Calculation

Coal Mining Companies that unfulfilled minimum percentage obligation of coal sales for DMO or do not fulfill the coal sales contract are subject to sanctions:

 

  1. prohibition of coal exports until the Coal Mining Companies fulfill domestic coal needs according to the percentage of sales or in accordance with sales contracts, except for those who do not have sales contracts with domestic coal users, or their coal specifications do not have a domestic market;

 

  1. Obligation to pay fines includes:
  1. Fine amounting the price difference between the selling price to foreign countries and the coal benchmark price for the provision of electrical power for general public interests (domestic market obligation) multiplied by the overseas sales volume in the amount of the obligation to fulfill domestic coal requirements that are failed to be met by Mining Business Entities that fail to fulfill the domestic coal requirements for the provision of electrical power for general public interests with the following formulation:

Fine = A x V

 

 Information:

 

A : (Penalty rate (USD/ton) determined based on:

 

  1. the price difference between the average selling price of coal to foreign countries based on the quality specified in the sales contract at the Free on Board Vessel delivery point during the reporting period for coal fulfillment from domestic coal users and the average coal benchmark price for the provision of electricity for the public interest based on the quality specified in the sales contract; or

 

  1. based on the price difference between the average benchmark price of coal based on the quality specified in the sales contract and the average benchmark price of coal for the supply of electricity for the public interest based on the quality specified in the sales contract in the event that the selling price of coal export is not available.

 

V : Volume of coal supply shortage determined based on 

    sales contract fulfillment reports from domestic coal users   

    that have been clarified to Coal Mining Companies or 

    holders of IPP.

 

(2) Fine amounting the price difference between the selling price to foreign countries and the coal benchmark price multiplied by the volume of sales abroad in the amount of the obligation to meet domestic coal needs that are not fulfilled by the Coal Mining Companies that do not meet domestic coal needs other than for the supply of electricity for the public interest by determining the formulation as follows:

Fine = A x V

Information:

A : (Penalty rate (USD/ton) determined based on:

 

  1. based on the price difference between the average selling price of coal to foreign countries based on the quality specified in the sales contract at the Free on Board Vessel delivery point during the reporting period of coal supply constraints from domestic coal users and the average benchmark price of coal other than for the supply of electricity for public interest based on the quality specified in the sales contract; or

 

  1. based on the price difference between the average benchmark price of coal based on the quality specified in the sales contract and the average benchmark price of coal other than for the supply of electricity for the public interest based on the quality specified in the sales contract in the event that the selling price of coal abroad is not available;

 

V : Volume of coal supply shortage determined based on:

  sales contract fulfillment reports from domestic coal users       

  that have been clarified to the Coal Mining companies or 

  holders of IPP;

 

The payment of fine mentioned above uses the currency in accordance with the coal sales transaction, especially the rupiah currency if the exchange rate adjustment uses the middle rate of Bank Indonesia on the date of the coal sales transaction, which is carried out through the PNBP Online Information System (“SIMPONI”) application based on the account code set no later than 30 (thirty) calendar days after the date of the first invoice for the fine; and

 

  1. Obligation to pay compensation funds in the amount of sales shortage in accordance with the percentage of sales for Mining Business Entities that do not have sales contracts with domestic coal users or whose coal specifications do not have a domestic market with the following formulation

Coal Ban

Compensation Fund = A x (P – R)

Information:

A : Compensation Rate (USD/ton) based on coal quality and changes in 

  the reference coal price

P : Coal Sales Obligation for Domestic Needs (tonnes) based on the 

         percentage of coal sales obligation for domestic needs to the total 

         coal production plan approved by the Government; and

R : Realization of Coal Sales for Domestic Needs (ton).

 

  1. Revocation of Sanction

If the need for coal based on reports of the fulfillment of sales contracts from domestic users has been fulfilled and the fine has been paid by the Coal Mining Companies or the holders of IPP, the prohibition on coal exports is revoked by the Director General of Mineral and Coal (“DGMC”) after submitting a report clarifying the fulfillment of domestic coal needs accompanied by proof of payment of a fine to the DGMC.

 

  1. Report

Determination of the realization of coal sales for DMO is based on the results of the evaluation of the coal sales report submitted by the Coal Mining Companies every month, which is submitted no later than 10 (ten) calendar days after the end of each month.

 

With the issuance of Decree 13/2022, it is expected that coal producers will pay more attention to fulfilling their DMO obligations, especially for the national interest, and the Government of the Republic of Indonesia is expected to immediately disseminate information regarding the recently issued Decree 13/2022.

 

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