Another Blow to International Investment In Indonesia

In one of those episodes that sends chills through international investors, Indonesia’s attorney general is charging that Chevron Pacific Indonesia, a subsidiary of the US-based Chevron Corp. took US$23.4 million from the state-owned BP Migas without performing on a project to clean up contaminated soil. Six Chevron employees have been arrested and charged.

The case was opened in September 2011 after a “complainant from the public” charged that the bioremediation project, on the island of Riau, was riddled with problems, that two subcontractors hired by Chevron had no experience in bioremediation and that the project had never gone forward.

The affair is puzzling. Apparently the entire oil and gas industry has backed Chevron and there is considerable evidence that the oil company, Indonesia’s biggest crude producer, followed all prescribed procedures. The Indonesian Petroleum Association, which represents roughly 90 percent of the country’s oil and gas industry, issued a statement this week defending Chevron Pacific, saying the probe could damage the country’s standing with international investors and that the investigation should be suspended.

The attorney general has refused to drop the case and is proceeding, however.

The 52-member association described the probe as “intentionally made,” and that it hasn’t been carried out according to legal procedures. It called the prospect of criminalizing the contract “a bad precedent carrying wide implications on the future of the oil and gas industry in Indonesia.”

International investors have run into increasing headwinds in Indonesia, mostly from rising economic nationalism as the government has moved the rules, particularly in natural resource extraction, to favor domestic companies.

Chevron has been operating in the country since 1924 and has amassed a solid record of social partnership, sponsoring schools, working with communities in disaster relief, developing small businesses, building infrastructure and providing health services. Special investment programs have cost the company US$135 million, according to the company’s website.

Chevron spokesmen in Indonesia and Singapore were unreachable. However, in previous statements, the oil giant has said the standard production sharing contract under which Chevron operates dictates that regulation of projects eligible for cost recovery fall with BPMigas and government auditors, not the attorney general, and that no state funds had been used in the execution of the project. BPMigas has also repeated that the state has lost nothing.*

CPI’s vice president for government policy and public affairs, Yanto Sianipar, was quoted in Jakarta earlier as saying the six employees had conducted their duties in line with Indonesian law. The case, he said, is worrying not only to Chevron but also to other companies doing business in Indonesia.

A source in Jakarta told Asia Sentinel that the unnamed complainant may be connected to one of the two major political parties, either Golkar or the Democrats headed by President Susilo Bambang Yudhoyono. However, it’s difficult to figure out what the motive would be. The project has been underway since 2003.

According to M. Adi Toegarisman, a spokesman for the attorney general, the probe revolves around a complaint that the two companies appointed by Chevron to carry out the project didn’t have expertise in bioremediation, causing investigators to suspect that the project was bogus. This was despite the fact that, since 2003, Chevron has reclaimed the costs for work completed, not as a lump sum prior to the initiation of the project, and has continued to show evidence of progress.

Both Chevron and BP Migas say the project has proceeded without incident and that it has reclaimed 3 million cubic meters of soil which already has been used to reforest 60 hectares of land in Riau. An inspection of the site by the Jakarta-based magazine Tempo confirmed the progress.

“We are pioneers in bioremediation techniques,” Yanto told the Jakarta-based Tempo Magazine.

*Sentence construction corrected 10-27-12