Indonesia as a maritime country has its own challenges in meeting its domestic needs, including the needs for oil and natural gas. The spread of large cities across Indonesia creates the need for sophisticated and efficient transportation equipment related to natural gas needs. Floating Storage and Regasification Unit or what is known as FSRU is one answer to this problem. The form of FSRU is in the form of a ship and most of it comes from foreign countries, making its procurement interesting to study further. Find out more of our insights on this topic in our Legal Publication.

1. Legal Brief
FSRU procurement for Oil and Gas
Upstream Business (Clauses and Legal
Concern)

2. BACKGROUND
Indonesia is One of the Biggest Natural Gas Producer in the World
Indonesia is one of the world’s biggest natural gas producer, with huge natural gas potential as proven with its reserve in 2021 at around 41.62
trillion cubic feet (TCF) and reserves potential at 18.99 TCF. Based on the Indonesia Gas Balance 2022-2030, the natural gas Indonesia produced
domestically can fulfil domestic needs. In 10 years, Indonesia is estimated to experience a gas surplus of up to 1,715 million cubic feet per day
(MMscfd).
Energy & Mineral Resources Sector Performance 2023: Oil and Natural Gas
On the upstream side, the realization of petroleum lifting reached 605.5
million barrels of oil per day (MBOPD) and gas lifting of 960 million barrels of
oil equivalent per day (MBOEPD). Optimization of oil and gas lifting are
continuously done hence petroleum declines are reduced to only 1.2% in
2023 (averaging 3-4%), while gas lifting increased 2.2%.
Throughout 2023, Indonesian oil and gas upstream industry broke history
records with the giant discovery of natural gas potential, including Layaran-1
South Andaman Block (North Aceh) and Geng North-1 North Ganal Block
(East Kalimantan). This natural gas discovery helped achieve targets in 2024,
namely petroleum lifting of 635 MBOEPD and gas lifting of 1,033 MBOEPD.
The Minister of Energy and Mineral Resources said, "We must build
infrastructure to accommodate additional gas supplies from new production.“
Domestic gas utilization in 2023 is at 68.2%, which is bigger compared to the amount of gas exported. Domestic needs are largely
absorbed by the industry sector, at 1,515.8 billion British thermal units per day (BBTUD). The total of natural gas distribution
realization in 2023 is 3,745 BBTUD, which is generally spread across the island of Java, whereas natural gas wells with adequate
reserve are generally located on other islands such as Sumatra, Kalimantan and Papua. Hence, transportation of natural gas is
required from the gas wells to Java island where more stakeholders utilize natural gas. The process of transporting natural gas from
gas wells to users can be done in two ways, namely using a transmission pipe or using a Natural Gas Transport Tanker which has
been converted into liquid form (LNG - Liquified Natural Gas) or known as Floating Storage and Regasification Unit (FSRU).
Indonesia Needs Natural Gas Transportation
(MoF, 2022)
(Ministry of Energy and Mineral Resources, 2024)
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3. Natural gas transportation process from gas wells to user can be done in 2 ways, which are:
Transmission Pipe Network, where the following conditions must be met:
Transport distance is under 3,000 km; and
Pipe networks can reach sea base/ depth of under or equal to 100m.
Natural Gas Transport Tanker, where the gas has been converted into liquid or usually called LNG (Liquified Natural Gas). The
unit that converts its form is called LNG refinery, while the floating unit (ship) that converts LNG into natural gas is commonly
called FSRU or LNG Floating Storage and Regasification Unit. Hence the law that regulates FSRU is shipping law.
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FSRU is a ship equipped with capable equipment transforming LNG (Liquid Natural Gas) to gas form (Regasification) for
distribution to users through the gas pipeline network. (Ridha Ababil, Vice President Corporate Communication PT PGN).
In FSRU, natural gas is converted into a liquid form which reduces the volume to 600 times less than its original volume, then gasified on a
moored ship and stored on the ship to be taken to its destination.
Why FSRU is needed can be summarized as follows:
FSRU works as a temporary container for newly mined natural gas that also works as a converter.
Because of its function to convert gas into a lesser volume, it becomes an economically viable option for gas transport.
Transporting gas using Transmission Pipe Network has bigger risks due to the conditions that need to be fulfilled, especially if the
gas wells exceeds 100m in depth and the distance to transport destination is more than 3,000 km.
There are no other technologies other than FSRU to carry gas from faraway gas wells.
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What is FSRU and Why Its Needed
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Direct Purchase Partnership (Joint Venture)
Leasing Build-Operate-Transfer (BoT)
FSRU procurement can be carried out through several methods, depending on preferences, needs, and project situations, as follows:
Companies or entities in need of a FSRU may purchase
the FSRU unit directly from the manufacturer or
shipbuilding contractor, which allows the companies or
entities to have full control over the specification and
design of the FSRU.
More flexible option is to lease an FSRU from an existing
operator or owner, which such engagement maybe
adjust for specific period or for the amount of capacity
used.
In BOT model, for certain period, one of the parties
builds, operates, maintains the FSRU, and after the
contract period ends, the ownership of the FSRU will be
transferred to the other parties in the agreement.
The procurement of a FSRU can also be carried out
through partnership between multiple parties from
different background or sectors.
FSRU Procurement – Methods and Stakeholders
The choice of procurement method depends on factors such as project duration, funding availability, risk appetite, market
conditions, and regulatory considerations. Regardless of the method selected, thorough due diligence, comprehensive risk
assessment, and effective contract negotiation are essential to ensure the successful procurement and operation of an FSRU
facility.
Stakeholders
Project Owner
Lenders
Port Authority Offtaker
FSRU
LNG Supplier
Government
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5. Project Feasibility Studies:
Each FSRU project requires thorough
feasibility studies due to its unique
characteristics and site conditions,
involving specialized consultants to assess
site location and metocean conditions.
Supporting Marine Infrastructure: The
economic viability of FSRU projects
depends on associated marine
infrastructure costs, influenced by factors,
such as port facilities, technical solutions,
and pipeline lengths.
FSRU Procurement Model:
Project sponsors must decide between new-
build or existing vessel procurement,
considering lead time, cost efficiencies, and
charter terms flexibility.
Flexible Charter Terms:
Charter duration and flexibility are critical
considerations, with options for shorter
terms and extension flexibility impacting
charter hire and financing.
Negotiation of Bespoke Charters: FSRU
charter agreements often involve complex
negotiations and customized contractual
terms tailored to project needs and
performance requirements.
FSRU Ownership Structure:
The ownership structure may involve
separate head and disponent owners,
potentially complicating transfer and consent
processes.
Regulations and Tax: Project sites in
emerging countries may require bespoke
port concessions and regulatory approvals,
with varied taxation regimes influencing
project costs and structures.
Port and Marine Services:
Negotiating port services agreements can be
time-consuming, with liability considerations
and challenges in countries lacking
experienced service providers.
Financing:
FSRU projects may involve complex financing
arrangements and intercreditor issues,
requiring holistic financing structures and
negotiations with multiple lenders.
Investing in Existing FSRU Projects:
Investors should consider timing and risk-
sharing arrangements, particularly
regarding delays and failures during
construction and commissioning stages.
Separate FSRU Owner and Operator:
An alternative structure involves separate
ownership and operation contracts, offering
benefits in expertise utilization but potentially
introducing complexities in contractual
interfaces and liabilities.
key considerations for developers, sponsors, lenders, and
investors involved in FSRU projects:
FSRU Procurement – Key Considerations
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6. Rules for Classification of LNG/LPG Floating
Production and Storage Units or Installations
Minister of Energy and Mineral Resources
Regulation Number 4 of 2018 on Natural Gas
Business in Downstream Oil and Gas Business
Activited
Following is the FSRU governance regulations that need to be considered:
Law Number 17 of 2008 on Shipping
Government Regulation Number 36 of 2004 on
Downstream Oil and Gas Business Activities
Notable Principle in FSRU Procurement
Cabotage Principle is domestic maritime transportation activities that are conducted by national maritime transport companies using ships
flagged under Indonesia and manned by Indonesian crew members. The Cabotage Principle is aim to protect the sovereignty of the
national and supporting the realization of the Wilayah Nusantara, while providing the widest possible business opportunities for national
maritime transport companies to obtain cargo shares. Therefore, in carrying out procurement process, especially through a rental or BoT
scheme, it is mandatory to note the provisions so that agreements related to procurement are not null and void by law.
Learn More About The Principles Of Cabotage
Legal Provisions and Clauses (1/2)
The main basis and importance of applying the cabotage principle
are:
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Companies or entities in need of a FSRU may purchase
the FSRU unit directly from the manufacturer or
shipbuilding contractor, which allows the companies or
entities to have full control over the specification and
design of the FSRU.
More flexible option is to lease an FSRU from an existing
operator or owner, which such engagement maybe adjust
for specific period or for the amount of capacity used.
In BOT model, for certain period, one of the parties builds,
operates, maintains the FSRU, and after the contract
period ends, the ownership of the FSRU will be
transferred to the other parties in the agreement.
The procurement of a FSRU can also be carried out
through partnership between multiple parties from different
background or sectors.
The benefits and objectives of implementing the Cabotage
Principle are as follows:
01 Prevent and reduce dependence on foreign shipping
vessels.
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Facilitate the flow of goods or human services
throughout the archipelago at large with maximum
shipping at competitive costs, including to remote
areas.
One of the job providers.
Improve the nation's economy.
As a tool to support the national defense and security
system.
For state sovereignty.
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7. # Aspect Notes
1. Project Description
Providing provision of the engagement scheme between the parties, such as purchasing or
leasing, period of the engagement, as well as the FRSU specification and characteristic.
2. Inspection and Testing
Setting procedures for the inspection and testing of the FSRU before it is fully accepted by the
buyer, including the party which will be responsible for the costs of such inspection and testing,
as well as the mechanism of issuing the acceptance certificate.
3. Delivery Schedule
Regulating the term for delivery schedule of the FSRU, including the location for delivery, the
delivery time, condition, and consequences of the delivery is delayed or not as agreed.
4. Payment
The agreement shall include the amount that should be paid, procedure of the payment, the
condition for payment, and sanction for the delay.
5. Rights and Obligations
Stating the rights and obligations of each Parties, such as the obligation of the FSRU service
provider to acquire the relevant permit and providing warranty during maintenance period of
the FSRU.
6. Storage and Regasification
Determining the condition that shall be fulfilled for storage and regasification, such as tank
temperature condition, loading and unloading procedure.
7.
Applicable Law and Dispute
Resolution
Considering that the project is highly possible to have a multi-national parties, then it is
important to have the provision that stipulated the governing law that will be applied to interpret
and enforce the terms of the agreement, as well as the procedure and mechanisms for
resolving disputes between the parties.
8. FSRU Deployment and Operation
Providing clause that specifies the conditions and procedures fore the deployment of the
FSRU, including the responsibility to provide the relevant facilities or infrastructure, and
responsibilities as well as procedures for the operation of the FSRU, including the performance
standards, safety and maintenance obligation.
9. Purchase Option
Especially for Lease Agreement, it may include a provision for the lessee to have the chance to
purchase the FSRU at a price and term as set out in the Agreement.
10 Early Termination and Exit
Early termination and exit clauses are crucial for managing risks associated with long-term
investments in LNG infrastructure especially in FSRU procurement. These clauses provide
flexibility for the parties to respond to changing market conditions, regulatory requirements, or
unforeseen events that may impact the viability or profitability of the project.
11. Commercial Term
The agreements shall state clearly the responsible party for risks during FSRU shipping. Some
common commercial terms used in shipping:
i. Free on Board (FOB): the seller is responsible for delivering the goods to the named port
of shipment and loading them onto the vessel, meanwhile the buyer assumes
responsibility for the goods and costs once they are loaded onto the vessel.
ii. Cost and Freight (CFR): the seller is responsible for delivering goods to the named port of
destination and covering the costs of the transportation to the port, however the risk of
loss or damage transfers to the buyer once the goofs are loaded onto the vessel.
iii. Cost, Insurance, and Freight (CIF): the seller also arranges marine insurance coverage for
the goods during transit to the named destination. The seller bears the risk and the cost of
insurance until the goods reach the destination port.
Legal Provisions and Clauses (2/2)
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8. 2012
2014
2015
2024
2016
2017-2018
2021
LNG supply for PT Perusahaan Listrik Negara (Persero) (PT
PLN) to the Muara Tawar Power Plant in Bekasi, West Java
since November 2014.
FSRU Lampung only produce 1 cargos and whilst the lease
Costs for ranged from US$90,000,000 to US$ 110,000,000
Contract termination with PT PLN
Meanwhile, in the years 2017 and 2018, no cargoes were
produced at the FSRU Lampung. This is despite the contractual
period for the FSRU spanning 16 years.
"However, since 2016, the presence of FSRU Lampung has been
the subject of considerable controversy regarding double storage
with FSRU Jakarta, which is deemed suboptimal. Furthermore,
FSRU Jakarta is considered adequately utilized by PGN to serve
the community." stated Yayan to Kontan.co.id when contacted
separately. Moreover, he mentioned that FSRU Lampung is
considered excessively expensive in terms of rental costs,
ranging from US$90 to US$ 120 million per month under a 16-
year contract.
The subsidiary of PT PGN namely PT PGN LNG Indonesia (PLI),
initiated arbitration proceedings at the Singapore International
Arbitration Centre against PT Hoegh LNG Lampung (HLL).
PLI, PT PGN, and HLL have signed a new agreement to further
optimize their collaboration in managing the LNG FSRU
Lampung terminal.
"The agreement reached is formalized in a settlement
agreement, which stipulates the withdrawal of arbitration
proceedings and subsequent negotiations among the parties to
achieve a more optimal collaboration in the commercial aspects
of the LOM Agreement."
Corporate Secretary – PT PGN Tbk. Rachmat Hutama,
Jakarta, Tuesday, 6th February 2024
The agreement was signed by Nofrizal, the President Director of
PLI, and Irman Rumadja, the President Director of HLL, in
Jakarta on Monday 5th February 2024.
PT Perusahaan Gas Negara Tbk. (PT PGN) and Hoegh LNG Ltd
entered into Lease Operation Maintenance Agreement (LOM
Agreement)
https://industri.kontan.co.id/news/utilisasi-fsru-lampung-masih-rendah-simak-potensi-
dampaknya-ke-pgn
https://www.antaranews.com/berita/3951051/pgn-lng-dan-hoegh-sepakat-optimalkan-
pengelolaan-fsru-lampung
https://www.dpr.go.id/berita/detail/id/21344/t/Komisi%20VI%20Minta%20PGN%20Lap
orkan%20Keuangan%20Secara%20Transparan
https://www.dpr.go.id/berita/detail/id/21344/t/Komisi%20VI%20Minta%20PGN%20Lap
orkan%20Keuangan%20Secara%20Transparan
https://www.dpr.go.id/berita/detail/id/21344/t/Komisi%20VI%20Minta%20PGN%20La
porkan%20Keuangan%20Secara%20Transparan
https://www.medcom.id/nasional/hukum/4baXJQRN-kejagung-diminta-segera-
tuntaskan-kasus-fsru-lampung
FSRU Lampung only produce 11 cargos and whilst the lease
costs ranged from US$90,000,000 to US$110,000,000
FSRU Lampung only produce 2 cargos and whilst the lease
costs for in the year 2014 ranged from US$30,000,000 to
US$50,000,000
https://www.dpr.go.id/berita/detail/id/21344/t/Komisi%20VI%20Minta%20PGN%20La
porkan%20Keuangan%20Secara%20Transparan
https://www.medcom.id/nasional/hukum/4baXJQRN-kejagung-diminta-segera-
tuntaskan-kasus-fsru-lampung
FSRU Lampung Case
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9. Conclusion
FSRU Lampung – Lessons Learned
The procurement of FSRU Lampung serves one of its purpose in meeting the needs of PT PLN, which are directed to the
Muara Tawar Power Plant in Bekasi, West Java since November 2014. The presence of FSRU Lampung is deemed highly
strategic as it enhances LNG absorption for domestic use and reduces LNG exports, thereby enhancing the utilization of
natural resources for the national economy.
Nevertheless, it is understood that certain provisions of the LOM Agreement are perceived as disadvantageous to PT PGN
in terms of lease pricing and contract duration. Additionally, PT PGN failed to mitigate risks associated with the management
contract's failure to engage stakeholders in the operation of FSRU Lampung, including PT PLN. This has resulted in
suboptimal utilization of FSRU Lampung.
On the other hand, PLI, PT PGN, and HLL have successfully reached a settlement agreement and renegotiated the LOM
Agreement. PT PGN intends to maximize and continue the utilization of FSRU Lampung for the Lampung and West Java
regions.
In the end it can be concluded that Indonesia as a maritime country and one of the world's
largest natural gas producing countries requires transport technology such as FSRU to
accommodate the need for natural gas supplies in Indonesia.
The complexity of an FSRU indicates the need for an in-depth study (business case) first in
an FSRU procurement so that all project needs are thoroughly identified including legal
provisions, specifications, price and financing, time period, contract management between
stakeholders, linkages between infrastructure and so on.
From a legal perspective, the importance of regulating amendment, exit clauses and
renegotiation in agreements is very important to accommodate inconsistencies in project
preparation or procurement with what is happening in the field while being guided by
maximizing asset utilization.
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10. We will continue to follow the developments on this topic and provide additional information as it
becomes available. If you have any questions on this topic, please contact:
This publication has been prepared by AHRP for educational and informational purposes only. The information contained in this publication is not
intended and should not be construed as legal advice. Due to the rapidly changing nature of law, AHRP makes no warranty or guarantee
concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it
applies to your circumstances before deciding to take any action.
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