Indonesian Court Shuts Down Oil and Gas Regulator

Indonesia’s Constitutional Court Tuesday ordered the country’s oil and gas regulator BPMigas to shut down, throwing international energy investors into confusion and raising concerns that the verdict could curb revenue from crude oil and gas exports and hamper future international investment.

The suit was brought by 42 organizations and individuals to review the 2001 law that brought the regulator into effect. The plaintiffs included Muhammadiyah, one of Indonesia’s largest Muslim groups, and business organizations.

Under the terms of the 2001 law, BP Migas’s job was to grant rights on production-sharing contracts to oil and gas producers to explore for oil and gas. Most of those contracts are with multinational producers.

“What this is about I think is a desire by the economic nationalists – and there are a lot of them -- to get all the oil and gas back under the control of Pertamina (the state-owned energy company) and to force the foreign companies to enter into deals with Pertamina,” said a Jakarta-based western consultant.

The court declared that the existence of the regulatory agency degrades state control over natural resources and was therefore unconstitutional since BP Migas didn’t directly manage oil and gas, instead handing it over to state-owned companies or private companies through cooperation contracts. That mechanism, the court held, limits access for the state to maximize the benefits of natural resource management for people’s welfare.

Because major oil and gas producers in Indonesia are largely controlled by foreign investors, including Chevron Pacific Indonesia, Total EP Indonesie, ConocoPhillips and BP, the decision is regarded as a blow to their operations.

The decision is the latest in a growing series of actions by the government or the courts that appear designed to limit the participation of foreign companies in Indonesia’s economy. The hostility to foreign control of Indonesian natural resources has largely been aimed at mining companies, through regulations such as a ban in April on unprocessed metal-ore shipments, with an exemption for producers that process output inside Indonesia. New trading curbs similar to rules on tin dating from 2002 will apply to exports of 14 metals, including iron ore, manganese, gold, silver and copper. Exports will be limited to refined exports only, forcing more value added production with in Indonesia.

Other actions have been taken against rattan furniture producers.

The eventual target is thought to be to ultimately drive companies like the US-based mining giant Freeport McMoRan, which operates the world’s biggest copper and gold mine in the Sudirman Mountain Range in Papua, out of ownership altogether, and to hire them back as fee-based contractors.

Nor is it just aimed at companies involved in natural resources. Also in April, the government announced that a government-linked company, the Indonesian Ports Corporation, would take on the monumental job of building a US$1.9 billion new port at Tanjung Priok in North Jakarta. It is arguably the biggest infrastructure project in Indonesia’s history and one of the biggest port projects in the world.

The government had previously cancelled a tender for the container terminal, which outraged international private-public consortia that had devoted considerable funds into preparing the bids only to see them thrown out.

As with the BP Migas decision, there seems to be a growing sense in the country that Indonesia ought to own its own resources and negotiate fees to multinationals to operate them, which in turn should be a warning to investors.

Buoyed by foreign direct investment, which rose by 30 percent in the first three months of 2012 as foreign multinationals have swarmed into the country, it appears that economic nationalism is reaching new heights.

Raden Priyono, chairman of now-defunct BPMigas, told a media conference in South Jakarta that the ruling would affect investments in the oil and gas sector, risking as much as Rp1 trillion ($103 million) per day in state revenue from oil and gas.

“If the Constitutional Court declared us unconstitutional, so too are the contracts that we signed. That is just logical because I’m no expert on law,” he added.

Although the court in its summary of the decision said that existing contracts with oil and gas companies will be honored, Priyono told the press conference that ongoing negotiations with foreign investors, including a proposed $12 billion investment by British resource giant BP for the expansion of a liquefied natural gas facility in Papua, were halted due to the court ruling.

“Starting tomorrow, we will not hold any more talks,” Priyono said.

Priyono disagreed with a statement by the court that BP Migas was acting in the interests of foreign investors rather than domestic interests. “They said BPMigas is in favor of foreign companies, but they are already here long before we were established. BPMigas is merely protecting the investment climate with fairness,” he said.

“I cannot give any comments,” Budiman Moerdijat, government and regulatory affairs manager for BP, said in a text message to The Jakarta Globe. Erwin Maryoto, vice president of public and government affairs at ExxonMobil Indonesia, said: “We are aware of the situation, we are monitoring the development and have no other comment to make at this time.”

Hadi Prasetyo, head of public relations, security and formalities division at BPMigas, said employees at the department will continue to be at work despite the order to disband.

“We will continue working, the wheel must keep going. We hope to see an immediate decision from the Ministry of Energy and Mineral Resources,” he said.