Indonesian Mining Law: New Domestic Market Obligation (DMO) Regulation

January 25, 2010

Effective 31 December 2009, the Ministry of Energy and Mineral Resources (the “Ministry”) issued a new regulation (No. 34 of 2009) (the “Regulation”) on prioritising mineral and coal resources for domestic usage. This Regulation is among the first ones in an expected series of implementing regulations under Indonesia’s sweeping update of Indonesia’s mining legislation last year pursuant to Law No. 4/2009 on Mineral and Coal Mining (the “Mining Law”). One of the key provisions of the Mining Law was the development of government policy on preference for allocating coal and mineral resources to meet domestic needs through production and export restrictions, commonly known as the “Domestic Market Obligation” or “DMO” requirement. The DMO requirement has been the subject of much discussion in the Indonesian mining community.

The Regulation requires coal and mineral producing companies to allocate a certain minimum percentage of its total production to the domestic market. The actual DMO percentage is to be determined on an annual basis by the Ministry each June and made available to mining companies prior to the year in which it will be effective. Mining companies will need to incorporate the DMO percentage in their annual work program and budget, which must be submitted for the approval by the Ministry at the latest in November prior to the year it will be put into effect.

The DMO can be implemented through sale of coal or minerals to a domestic trading company which holds a valid marketing and transportation license from the Ministry, Governor or the relevant head of region, as applicable. If the mining company fails to meet its minimum DMO in any particular quarter, they are required to make up any shortfall in the following quarter. Once the DMO plan has been approved, both the mining company and trading company must enter into binding sale and purchase contracts and failure to meet their obligations under the sale and purchase contracts are also subject to strict sanctions under the Regulation. Although not expressly addressed in the Regulation, we believe that the Ministry will also take into account any existing or ongoing domestic coal or mineral sales arrangements towards the DMO requirement.

The Regulation provides that DMO pricing should be based on the benchmark price applicable in the international market for the relevant mineral. The current language is fairly general and it is expected that a more detailed pricing formula will be published in a further announcements from the Ministry. We would expect pricing to be at some discount to international prices to compensate for differences in transportation costs, although there is currently no guidance on how this would be applied.

The Regulation contains strict sanctions for failure to comply with the DMO requirement, including a cut of up to 50% in quotas for mining production (for the mining company) or trading volume (for the trading company) in any relevant year.

While we believe most mining companies will already have some domestic sales channels, it will be interesting to see whether these are sufficient when the DMO percentages are announced in June. It is certainly possible that some companies may need to increase their domestic sales avenues and possibly renegotiate their long term offshore off-take arrangements in light of the new Regulation.

O'Melveny & Myers LLP is not licensed to practice law in Indonesia, and this Client Alert should not be construed as providing advice concerning the laws of Indonesia or of any other country or jurisdiction. The foregoing should not be construed as an opinion on the laws of Indonesia. Readers should consult with Indonesian counsel for legal advice on the matters addressed herein.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. O'Melveny attorneys Joel Hogarth and Ratih (Ipop) Nawangsari contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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