* Official accused of receiving more than $500,000 from Kernel Oil employees
* Indonesia is trying to attract investment into oil sector
* Latest high profile graft scandal in Indonesia
By Fergus Jensen and Andjarsari Paramaditha
JAKARTA, Aug 14 Indonesia's anti-graft agency on Wednesday arrested the head of the energy regulator to probe allegations he took more than half a million dollars from an oil firm, piling more uncertainty on energy policy in Southeast Asia's biggest economy.
The arrest is a new blow to Indonesia's attempts to attract more investment from international energy companies, several of which have threatened to scale back operations due to uncertainty about the investment environment.
The former OPEC member's oil output is declining, and the country has faced criticism for unclear regulations and complaints about a nationalist stance on resources.
Indonesia's Corruption Eradication Agency (KPK) said SKKMigas Chairman Rudi Rubiandini had been caught taking around $400,000 in a black brief case and ownership documents for a BMW motorcycle from the owner of Singapore-based Kernel Oil, Simon Tanjaya. An additional $190,000 was found in the chairman's residence, KPK spokesman Johan Budi said.
KPK said it was the biggest cash seizure by the agency in its 10-year history.
Kernel Oil officials in Singapore and Indonesia declined to comment, while Rubiandini could not be reached for comment.
The firm buys crude from Indonesia's SKKMigas and then sells it to international markets. It also supplies oil products to Indonesia.
Finance Minister Chatib Basri told Reuters that while the government was committed to zero tolerance of corruption the case did send a "bad signal to investors."
Some oil company officials were also shocked by the news.
"This industry is already tough to deal with and it shouldn't be weighed down by this sort of scandal," said an official at a foreign oil firm with operations in Indonesia.
The oil and gas sector is politically crucial, accounting for about a fifth of Indonesia's government revenue.
Indonesia was once self-sufficient in oil and gas but has been struggling for years to attract investment to halt declining output from a peak of around 1.6 million barrels per day in 1995. Indonesia produced an average 831,000 bpd in the first half this year.
LATEST HIGH-PROFILE GRAFT SCANDAL
Rubiandini was appointed in January to head SKKMigas after the independent industry regulator BPMigas was declared unconstitutional. Some experts say the motivation was to gain greater control over the sector after SKKMigas was placed within the energy ministry.
SKKMigas denied the arrest would damage Indonesia's oil operations. The agency has existing contracts with oil majors including BP Plc, Chevron and Exxon Mobil .
"Operations will continue to run. There is no impact," Biantoro said. "For now, with the vacuum in the top post, there are no crucial issues that need to be decided upon."
Energy Minister Jero Wacik said Rubiandini has been temporarily suspended as SKKMigas chairman and would be replaced by Vice Chairman Johanes Widjonarko.
The SKKMigas chairman is the latest high-profile government official to be accused of corruption in Indonesia.
KPK in December named Youth and Sports Minister Andi Alfian Mallarangeng as a corruption suspect, while senior police official Djoko Susilo is currently on trial for money laundering.
While foreign investment continues to pour into the resource-rich country, there are growing concerns that rampant corruption and an incompetent bureaucracy could throttle growth and see that investment turned away.