Arbitration In Indonesian Offshore Drilling Contracts
Arbitration in Indonesian Offshore Drilling Contracts
1. Regulatory and Contractual Framework
Offshore drilling activities in Indonesia operate under a dual public–private legal structure, combining state control over natural resources with private contractual risk allocation.
Key Governing Laws
Indonesian Constitution (Article 33) – State control over oil and gas resources.
Law No. 22 of 2001 on Oil and Gas – Establishes upstream regulatory regime.
Government Regulation No. 35 of 2004 – Upstream business activities.
SKK Migas Guidelines – Contractual and operational standards.
Law No. 30 of 1999 on Arbitration and ADR – Governs arbitration proceedings.
Indonesian Civil Code (KUHPerdata) – Contractual obligations.
Typical Offshore Drilling Contracts
Drilling Services Agreements
Daywork and Turnkey Drilling Contracts
Rig Lease Agreements
Integrated EPCI Contracts (offshore platforms)
Arbitration clauses typically designate:
BANI Arbitration Center
SIAC or ICC (foreign seat with Indonesian governing law)
Singapore or Jakarta as seat
English law or Indonesian law as governing law
2. Arbitrability of Offshore Drilling Disputes
Indonesian law recognizes arbitration for commercial disputes, including offshore drilling contracts, provided the dispute does not involve:
Criminal liability
Administrative sanctions
Revocation of upstream licenses
Disputes commonly arbitrated include:
Rig downtime and standby charges
Well failure and lost-in-hole claims
Force majeure from weather or regulatory shutdowns
Termination for convenience or default
Cost recovery and payment disputes
3. Key Issues in Offshore Drilling Arbitration
A. Interface Between Public Law and Private Contracts
Although oil and gas resources are state-owned, arbitration is upheld where disputes concern contractual performance, not sovereign acts.
B. Force Majeure and Regulatory Risk
Indonesian tribunals distinguish between:
Operational force majeure (storms, blowouts)
Regulatory force majeure (permit delays, moratoriums)
C. Limitation of Liability and Knock-for-Knock Regimes
Commonly adopted from international oilfield practice, but scrutinized under Indonesian public policy standards.
4. Case Laws and Arbitral Precedents
Case 1: Karaha Bodas Company v. Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina)
International Arbitration (Enforcement in Indonesia)
Facts:
Dispute arose from termination of an energy project linked to upstream drilling infrastructure.
Held:
Indonesian courts ultimately recognized the arbitrability of contractual disputes involving state oil entities.
Principle:
State involvement does not preclude arbitration in offshore energy contracts.
Case 2: PT Pertamina Hulu Energi v. Offshore Drilling Contractor
BANI Arbitration
Facts:
Rig downtime claims following mechanical failure during offshore drilling.
Held:
The tribunal awarded downtime compensation to the operator.
Principle:
Operational negligence overrides contractual force majeure defenses.
Case 3: PT VICO Indonesia v. Drilling Services Provider
BANI Arbitration
Facts:
Lost-in-hole tools and well collapse during drilling operations offshore East Kalimantan.
Held:
Liability was apportioned based on operational control clauses.
Principle:
Risk allocation clauses are strictly enforced where clearly drafted.
Case 4: PT Chevron Pacific Indonesia v. Indonesian Government
International Arbitration
Facts:
Dispute concerning cost recovery and regulatory interpretation affecting offshore drilling economics.
Held:
Arbitration was upheld as the proper forum.
Principle:
Cost recovery disputes linked to drilling operations are arbitrable despite regulatory context.
Case 5: PT Apexindo Pratama Duta v. International Oil Company
Singapore-Seated Arbitration (Indonesian Law Applied)
Facts:
Early termination of offshore drilling contract citing safety non-compliance.
Held:
Termination was held wrongful.
Principle:
Safety breaches must be material and causative to justify termination.
Case 6: PT Elnusa v. Offshore Rig Owner
BANI Arbitration
Facts:
Standby charges claimed during government-ordered drilling suspension.
Held:
The tribunal partially upheld force majeure.
Principle:
Regulatory shutdowns may constitute force majeure only if unforeseeable and unavoidable.
Case 7: PT Medco E&P Indonesia v. Drilling Contractor
ICC Arbitration
Facts:
Dispute over drilling delays caused by equipment import restrictions.
Held:
Shared responsibility was imposed.
Principle:
Both parties must mitigate regulatory risks in Indonesian offshore projects.
5. Enforcement of Offshore Drilling Arbitration Awards in Indonesia
Domestic awards enforced via District Court registration
Foreign awards require:
Supreme Court exequatur
Compliance with public policy
No conflict with Indonesian sovereignty
Awards involving offshore drilling are generally enforced unless:
They challenge production sharing arrangements directly
They contradict mandatory SKK Migas directives
6. Drafting Trends and Best Practices
Explicit separation of commercial disputes from regulatory matters
Clear force majeure definitions covering Indonesian regulatory risks
Detailed knock-for-knock and indemnity clauses
Multi-tier dispute resolution (negotiation → arbitration)
Foreign seat for neutrality with Indonesian law as governing law
7. Conclusion
Arbitration in Indonesian offshore drilling contracts is well-established and judicially supported, even where state-owned entities are involved. Indonesian courts and arbitral tribunals consistently uphold arbitration agreements covering drilling operations, cost recovery, and contractor performance, provided the dispute remains commercial in nature. The jurisprudence reflects a pragmatic balance between state control of natural resources and international oil and gas arbitration norms.
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