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UPDATE 2-Indonesia court scraps energy regulator, shocks industry
November 13, 2012 / 8:25 AM / 5 years ago

UPDATE 2-Indonesia court scraps energy regulator, shocks industry

By Andjarsari Paramaditha and Fergus Jensen

JAKARTA, Nov 13 (Reuters) - Indonesia’s constitutional court shut its energy regulator and gave its authority to the government on Tuesday, threatening to jeopardise existing contracts and projects such as a $12 billion BP gas expansion.

The government said production-sharing contracts and legal certainty would remain intact as it tried to calm investors’ nerves over the latest unexpected policy move to rattle the resource sector in Southeast Asia’s largest economy.

Regulator BPMigas, which manages contracts with energy majors such as Chevron, Exxon Mobil and CNOOC , said earlier there was no certainty on production contracts and that BP’s third liquefied natural gas (LNG) train project in Papua would be halted.

BP and other energy majors declined to comment.

“What is important for us is that there must be no uncertainty. There must be no legal void...because we must guard the investment climate,” said Hatta Rajasa, the chief economic minister, after the court verdict and BPMigas comments.

“All will continue to run...They must continue to produce (and) remain legal because there is nothing that will cause them to stop,” he told an impromptu news conference.

The court said production-sharing contracts between BPMigas, as a representative of the government, and companies were “against the principal of government authority as intended by the constitution”, according to the ruling seen by Reuters.

Any hiccups in the transition of authority to the energy and mining ministry could hurt investor sentiment, industry sources said. The ministry has issued a series of new mining rules this year aimed at increasing central control and state revenues, part of a global trend towards greater exercise of national interests in resource policy.

“This is clearly a disadvantage to permit holders,” said an executive at an energy major, who declined to be identified.

SPOOKED

Growing signs of nationalist policies in Indonesia ahead of major elections due in two years have spooked foreign investors. Jakarta-based political analyst Kevin O‘Rourke calls the policies “Hatta-nomics”, for Rajasa, a possible contender to replace President Susilo Bambang Yudhoyono in 2014.

The judicial case was however not brought by the government, but by a collection of 42 individuals or groups that included Indonesia’s second largest Islamic organization Muhammadiyah, radical Islamic movement Lajnah Siyasiyah Hizbut Tahrir Indonesia and former government minister Fahmi Idris.

The individuals were not available for comment and so their exact motivations for bringing the case were not clear.

The court ruling stated the plaintiffs criticized the country’s oil and gas law as “clearly degrading the status of the state” because it gave legal room for production-sharing contracts.

Such contracts refer to international arbitration in disputes, which means that if the law of the state was defeated, Indonesian society would be defeated and degraded, according to the plaintiffs, the ruling said.

“If BPMigas is dismantled, it means BPMigas does not have legal standing. Contracts that are signed with BPMigas could be declared null and void or cancelled,” said a Jakarta-based lawyer dealing with the energy industry, who declined to be identified because of the sensitivity of the issue.

INVESTMENT AT STAKE

BP has yet to make a final investment decision on the third LNG train at its remote Tangguh project in Papua. Indonesia backed the project’s expansion in principle during a presidential visit to London earlier this month.

Rajasa said he could not comment on the BP project.

Indonesia has struggled to attract energy investment in recent years and its crude oil output is falling. By contrast, in recent years miners have poured in to the world’s top exporter of thermal coal, refined tin and nickel ore.

The government is seeking to push that investment into higher value metals processing. It also wants to preserve national resources, including gas, for domestic use to feed the growing demands of the world’s fourth largest population.

Keith Loveard, the head of risk analysis at Indonesia-focused Concord Consulting, said the latest move to scrap BPMigas would create all sorts of problems.

“The whole industry is arranged around it,” he said.

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