Oil and Gas Industry: An Exception in Newly Effective Indonesian Cabotage Regulation

Cabotage principle is formally introduced in Presidential Instruction No. 5 of 2005 concerning the Empowerment of the Shipping Industries, which gives the National Transportation Company rights to commercially operate exclusively within Indonesia’s territorial waters. It is a policy requiring that sea transportation activities on the country’s waterways use Indonesian flagged vessels manned by Indonesian crew. The word cabotage is taken from the Spanish word “cabotage” and refers to “sailing from cape to cape”. In the context of maritime law, the cabotage principle grants rights to a country to trade and navigate within its own coastal territories, and to operate and regulate the traffic inside its territorial waters.

Indonesia, under Article 8 of Law No. 17 Year 2008 dated 7 May 2011 regarding Shipping (“Shipping Law”), stipulates, “Sea activities in the country shall be convened by the national sea transport companies, organizers of the special marine transportation and shipping companies using the Indonesian flagged ship and by Indonesian crews”. Based on the provision, every vessel that operates domestic business in Indonesia, especially inter-island transport, shall be under Indonesian flag. This Article 8 of Shipping Law is also supported by the Government Regulation No. 20 of 2010 dated 1 February 2010 regarding Sea Transportation (“GR No. 20/2010”) as its implementing regulation.

The principle basically states that domestic shipping is entirely the right of the domestic state. The domestic state is entitled to forbid and restrict foreign vessels from sailing and conducting business in the state’s jurisdiction. In this vein, in accordance with the sovereignty of each independent state, every vessel, especially foreign flagged vessels, are required to obtain a permit to cross and even enter the territory of a state. However, it should be noted that the implementation of principle would not forbid any opportunities for the foreign investors. Shipping Law still allows foreign companies to participate in local trade, providing they do so in the form of joint venture with Indonesian partners. The Shipping Law allows up to 49% overseas investment in shipping ventures.

Meanwhile, Article 341 of the Shipping Law clearly stipulates that all foreign vessels involved in sea transportation in Indonesian waters may continue to do so as they currently are doing until three years after the law comes into force, after which they must operate under the Indonesian flag. It means that the principle will be fully applied on 1 January 2011. After that date, foreign vessels, which still operate in Indonesia, can be imposed by both administrative and criminal sanctions. Article 284 of the Shipping Law stipulates that the breach of the cabotage principle may be imposed by fines in the maximum amount of Rp 600.000.000,00 (six hundred million rupiah) and imprisonment for a maximum of five years.

The cabotage principle was issued in order to safeguard the national maritime industry’s development, support national economic security, defense, and prevent of dependency on foreign vessels and companies. It is also designed to improve working and business opportunities for the local population, and increase the state’s revenue from the ever increasing amount of maritime trade within Indonesia. On the other hand, this regulation has also raised a problem. The word ‘ship’ in the Shipping Law is not clearly defined and there is some question as to which type of ships are allowed to operate without Indonesia’s flag and Indonesian crews. If this problem is not overcome soon, it could create a huge loss within the oil and gas business sector in Indonesia. National ships offshore lack drilling equipment such as jack-ups, submersible rigs, drills and cable-pipes, using this foreign drilling equipment under time-constrained contracts. This is because Indonesia has little drilling technology and expertise, stemming from less investment. As a result, Indonesian ablility to drill self-sufficiently is severely retarded.

To solve the abovementioned problems, the House of Representatives of Indonesia (Dewan Perwakilan Rayat or DPR) has approved the government’s request to revise Article 8 and 341 of Shipping Law. The revision includes the exclusion of drilling ships on upstream oil and gas industries in offshore area from cabotage principle. The detailed explanations of the operations of special vessels used in offshore oil and gas activities which are not used to transport people and/or goods are governed in the government regulation. Thus, the implementation of cabotage principle within these regulations will not result in a sharp drop in Indonesia’s oil and gas production in offshore area. Oil and gas industries can continue their business without being concerned with any regulatory changes involved with shipping and drilling equipment.

Further, as the exception or dispensation for foreign ships from the cabotage principle to participate in activities oil and gas in off shore of Indonesia, on 4 April 2011, the Government issued the Government Regulation No. 22 of 2011 (“GR No. 22/2011”) as the amendment of GR No. 20/2010. The issuance of GR No. 22/2011 is expected to enable Indonesia to come out of the dilemmatic situation caused by the legislative demands and the demands from business communities venturing in Indonesia's oil and gas sector in offshore area. On the Article 206a of GR No. 22/2011 stipulates that foreign vessel can conduct activity outside passenger and/or goods transportation inside Indonesian domestic waters as long as there are not enough Indonesian flag vessels to complete the work. Those said vessels should obtain a permit from the Minister before operating. The activities outside passenger transportation are such as follow:

  • Exploration on oil and gas
  • Drilling
  • Offshore construction
  • Facilitation on offshore construction
  • Dredging
  • Salvage and underwater construction

Further, to implementing GR No. 21/2011, on 18 April 2011 the Department of Transportation also issued the Minister of Transportation Regulation No.PM. 48 of 2011 regarding the Procedures and Requirements for Granting Permission to Use Foreign Ships for Activities Excluding Transporting Passengers or Goods in Domestic Sea Freight (“MTR No. PM 48/2011”). The MTR No. PM 48/2011also provides detailed rules on the length of time foreign vessels can be used by type of activity and type of vessel.

Should you need any further information on this matter, please contact our partner, Maria Ardianingtyas (maria.ardianingtyas@malawfirm.net).

This article is prepared by MA Law Firm and edited by Michael Cefali.