Indonesia to renegotiate mine contracts to raise income

JAKARTA, July 3 (Reuters) - Indonesia plans to renegotiate existing mining contracts to seek more revenue for the country, the country's energy minister said on Thursday, a move analysts said would hurt investment in the mining sector.

Indonesia is keen to earn more revenue from the sector after many commodities rallied to record prices on strong demand from China and India.

"...there should be a change of contracts. We (the government) agree the contract is to be changed based on recent developments," Energy Minister Purnomo Yusgiantoro told reporters, referring to the recent jump in commodities prices.

Since 2006, parliament has been discussing a long-awaited mining law which also aims to provide more security for firms that have shied away from one of the world's most mineral-rich nations due to legal uncertainty and disputes.

According to the draft law, contracts of companies operating in mining areas in Indonesia must be adjusted in line with the new mining law if approved, but with a transition period.

Purnomo said the transition period would be five years, but gave no other details.

Under the draft law, mining firms will get shorter mining licences compared to the current system.

Current working contracts are valid for 30 years with an option to extend for a further 20 years, whereas the new mining agreements will only be valid for 20 years with an option to extend for an additional 20 years.

Sacha Winzenried, mining partner at PricewaterhouseCoppers, said renegotiating existing contracts would hurt the mining sector which has been struggling to attract fresh investment.

"That will have a negative impact on people's perception of the investment climate because those contracts have been signed with the government and people expect them to be honoured until the end of the term," Winzenried said.

"In the early generation of contract of works, investors have the option to go to the international arbitration. I think the government would not want to be in that position," he said.

Indonesia has had several run-ins with foreign investors in mining as well as oil and gas in the past years.

Agusman Effendi, chairman of a special committee drafting the mining law, said approval of the law could be delayed.

"Several issues in the draft mining law need to be agreed between the factions. The issues included the transition period for the existing operations of companies," Effendi said.

Several major mining companies are operating in Indonesia, include Freeport-McMoran Copper & Gold Inc (FCX.N), Rio Tinto Ltd/PLC (RIO.L)(RIO.AX) and BHP Billiton (BHP.AX).

The government said late last year that it expects investment in geothermal and mining products to reach $1.55 billion in 2008, compared to $1.35 billion in 2007. (Reporting by Muklis Ali; Editing by Sugita Katyal and Peter Blackburn) ((muklis.ali@reuters.com; Reuters Messaging: muklis.ali.reuters.com@reuters.net; +62 21 384 6364 ext 907))