In line with the concerted efforts of the Indonesian competition watchdog (Komisi Pengawas Persaingan Usaha, KPPU) to eradicate unhealthy business competition and promote a positive investment climate, KPPU has handed down two recent decisions to Indonesian petroleum industry players. These two decisions have sent a clear signal to the Indonesian petroleum industry that KPPU will investigate, prosecute and fine oil companies that are found to be involved in collusive tendering practices.
In 2010 alone, KPPU imposed fines on 29 companies for a total amount of around US$126m for collusive tendering and cartel practices.
This article highlights KPPU’s key findings and considerations in respect of the two recent decisions and the potential implications of the decisions for the Indonesian petroleum industry.
KPPU Decision in the Donggi-Senoro Project
On 5 January 2011, KPPU fined Indonesian oil companies, PT Pertamina (Persero) (Pertamina), PT Medco Energi Internasional (Medco), PT Medco E&P Tomori Sulawesi (MEPTS) and Mitsubishi Corporation from Japan (Mitsubishi) for conspiring with each other to:
- appoint Mitsubishi as the winner of a competitive tender (also referred to as a “beauty contest”) to participate as a partner in the Donggi-Senoro LNG Project in Sulawesi (Donggi-Senoro Project); and
- provide Mitsubishi with data and information obtained from a competitor for the Donggi-Senoro Project that provided Mitsubishi with an unfair business advantage over other tenderers.
The total fines imposed by KPPU amounted to IDR31bn. Mitsubishi faced the heftiest fine of IDR15bn whilst Pertamina was fined IDR10bn, Medco IDR5bn and MEPTS IDR1bn. These are the highest fines that KPPU has ever imposed. The underlying rationale for this apportionment appears to be that Mitsubishi was the party which had the “most to gain” and therefore should bear the heftiest penalty.
However, it is not clear why KPPU did not exercise the powers that it has to make orders to cancel the tender award to Mitsubishi and/or require Pertamina, Medco and MEPTS to re-tender for the Donggi-Senoro Project.
KPPU found that the manner in which Pertamina, Medco and MEPTS had conducted the beauty contest and determined that Mitsubishi presented the winning bid was in clear breach of Article 22 of Law No.5 of 1999 on the Prohibition of Monopolistic and Unfair Business Competition (Anti-Monopoly Law). Essentially, this provision prohibits businesses from conspiring with each other and/or other parties to determine the winner of any tenders in a manner which will cause unfair business competition.
In this case, Pertamina and Medco invited seven oil companies to tender for the Donggi-Senoro Project, namely Mitsubishi, PT LNG Energi Utama (LNGEU), LNG Japan Corporation, Toyota Tsusho Corporation, Itochu Corporation, Marubeni Corporation and Mitsui by sending an invitation letter as well as the Terms of Reference for the beauty contest (TOR).
KPPU’s investigation revealed that the Boards of Directors of Pertamina, Medco and MEPTS had provided Mitsubishi with opportunities to meet with them prior to and during the beauty contest. This provided Mitsubishi with a clear advantage as no other bidders were provided with these opportunities. KPPU determined that such meetings gave Mitsubishi an unfair ‘edge’ on its competitors.
Further, KPPU discovered that the invitations for the beauty contest were issued to the bidders at different times, thereby disadvantaging those bidders who had less time to prepare their tender bids.
Finally, the terms of the ‘scoring system’ applied to the tender bids were not clear by reference to the TOR nor were these terms ever properly explained. In any event, from a review of the various tender bids, it was clear to KPPU that Mitsui’s tender bid was in fact the most ‘competitive bid’ in that it was substantially better than Mitsubishi’s tender based on the objective criteria set in the TOR.
Access to confidential information
In addition, KPPU also accepted a complaint made by LNGEU that Pertamina and Medco had provided Mitsubishi with an unfair advantage because Mitsubishi had exclusive access to certain confidential information about the Donggi-Senoro Project.
By way of background, LNGEU is a company established by LNG International Pty Ltd (a wholly owned subsidiary of Liquefied Natural Gas Limited – ASX LNG) and an Indonesian entity that had entered into an agreement with Pertamina and Medco in 2005 to develop and own the Donggi-Senoro Project.
In 2006, Mitsubishi sought to become LNGEU’s partner in the Donggi-Senoro Project and conducted a detailed due diligence investigation. In doing so, Mitsubishi had access to commercially sensitive and confidential information in relation to the Donggi-Senoro Project, including all relevant technical, financial, modeling, planning and development information. In late 2006, Pertamina and Medco decided to put the Donggi-Senoro Project out to tender and allowed Mitsubishi to compete in the tender.
LNGEU protested to the Government of Indonesia, KPPU and BPMIGAS when it discovered that Mitsubishi had been allowed to tender for the Donggi-Senoro Project and was subsequently successful in winning this tender. LNGEU is currently considering legal action to recover the investment it had made in advancing the Donggi-Senoro Project.
Essentially, KPPU found that:
- the information and data which Mitsubishi had accessed through its due diligence of PTLNG were “trade secrets” in accordance with Article 3 of Law No. 30 of 2000 on Trade Secrets; and
- Mitsubishi had used these trade secrets in preparing its tender bid and when presenting to the Boards of Directors of Pertamina, Medco and MEPTS.
On the basis of this conduct, KPPU determined that Pertamina, Medco and Mitsubishi had breached Article 23 of the Anti-Monopoly Law which, in essence, prohibits parties from conspiring with each other to obtain and use confidential information or company secrets of their business competitors that would result in unfair business competition.
Pertamina, Medco and MEPTS are in the process of appealing KPPU’s decision to the relevant District Court.
KPPU decision in Madura Block 2009
The KPPU decision in respect of the Donggi-Senoro Project followed a similar decision on 9 December 2010 in which KPPU fined two Chinese oil companies, Huabei Petroleum Services (Huabei) and SPE Petroleum, IDR2bn each for collusive practices in relation to a tender for integrated services relating to the drilling of exploration wells in the Madura Block 2009.
Although the KPPU decision has not been formally published, it is well understood that KPPU held that the tender process was “rigged” in favour of Huabei insofar as other bidders for the drilling contract were not afforded the same time in which to prepare and provide their bids. It was also found that Huabei was an affiliated entity and therefore the tender process was not independent.
Potential implications of the decisions on the petroleum industry
Clearly, these recent decisions by KPPU reflect its continued appetite to investigate allegations of collusive dealings and to prosecute and impose fines where such conduct is proven.
The key implications for those involved in the Indonesian petroleum sector may be as follows:
- KPPU is prepared to act independently of BPMIGAS as the relevant industry regulator responsible for promulgating and enforcing the relevant rules and regulations relating to tendering in respect of oil and gas products, particularly those under Minister of Energy and Mineral Resources Decree No.35 of 2008 on the Procedure for Determination and Offering of Working Areas for Oil and Natural Gas. In certain circumstances, this may also mean that KPPU will review arrangements or tender awards that have been ostensibly approved by BPMIGAS.
- KPPU may investigate certain practices based on complaints made by business competitors, particularly those that have been unsuccessful in a tender.
- Although KPPU only imposed fines in relation to the Donggi-Senoro Project and the Madura Block 2009, KPPU may become emboldened in the future to impose heavier penalties or make more far reaching orders, including acting retrospectively in granting orders for the cancellation and/or reopening of certain contracts and arrangements that it determines are in breach of the Anti-Monopoly Law.
- In practical terms, oil and gas companies need to ensure that they are careful in managing their tender processes properly. In particular, they need to ensure that such arrangements with tendering parties are kept objectively independent and that no one party can be actually or constructively deemed to have been afforded an “unfair advantage” as a result of prior dealings or involvement with the principals.
KPPU is now recognised as a competition regulator to be reckoned with, and is seriously committed to promoting healthy business competition and a positive investment climate in Indonesia.
The authors of the article are Fadjar Kandar, who is a Partner with the firm, and Nicholas Watts, who is Foreign Counsel (Freehills Secondee) with the firm.
Fadjar Kandar can be contacted at firstname.lastname@example.org or on +62 21 574 0088.
Nicholas Watts can be contacted at email@example.com or on +62 21 574 0008.