Tension Grows for Multinationals Operating in Indonesia

Having been the darling of foreign investors and business pundits for the past couple of years, Indonesia is now finding that some of its biggest and longest-term investors, especially in the energy sector, are growing fed up with policy shifts and the climate of hostility toward multinational companies.

With the mining and energy minister having said recently that ExxonMobil's local CEO would be turfed out of the country over a stalled asset sale, executives say they are confused and worried over the future here and are concerned about speaking out for fear they will be forced to follow him out.

The growing intimidation of multinationals operating in the country prompted Chevron Indonesia Thursday to warn the nation's interim upstream oil and gas regulator that the deteriorating investment climate could lead to lower future investment by the company, which has been operating in Indonesia since 1952 and is the country's largest oil and gas producer.

The country's Supreme Court also announced on Thursday details of a November ruling that would benefit local governments and mid-sized miners operating in Indonesia, annulling four articles of an Energy and Mineral Resources Ministry regulation issued last year, stifling the government's efforts to tighten raw materials exports and reorganize the mining industry.

Those developments followed the announcement earlier this week that Richard J. Owen, ExxonMobile's CEO, had in effect been kicked out of his job by a government agency that regulates oil and gas production, over refusal by the US oil giant to divest itself of three natural gas blocks near Aceh that were coveted by Indonesian companies.

SKMigas, the temporary oil and gas regulator that replaced the long-standing regulator that was abolished in October by a Constitutional Court ruling, has the power to monitor energy company management personnel. The new agency refused to renew Owen's tenure.

Like Chevron, ExxonMobile has been operating in the country for more than four decades - since 1968 when its predecessor Mobil began operating the Arun gas fields, which are owned by the Indonesian state oil company, Pertamina. The Arun fields, until their closing in March, contributed to the Indonesian budget with about $1 billion in revenue annually.

Economic nationalism has been growing for about a year as top government leaders have cottoned to the idea that, with strong domestic growth insulating the country from global economic trouble, they can take back ownership of natural resources and simply hire the multinationals to dig them out.

Chevron's hardball statement is unusually blunt in its language, a move that may not play well with the increasingly assertive government officials. Most resource companies say that the lesson they draw from the Owen case is to keep their mouths shut and see if the current climate improves. But with elections looming in 2014 and nationalism a potent ‑ if not ideologically deep - issue, it seems unlikely that investors and the government will be seeing eye to eye anytime soon, especially in the natural resource sector.

Looking at growing interventionist actions by various ministries and their impact on investment, even bullish analysts are growing wary of the direction the government is taking. "The government increasingly seems to be treating private sector companies, both foreign and domestic, as tools of government policy to be directed and controlled rather than as independent engines of economic growth," wrote long-time Indonesia resident and business consultant James Castle in the current issue of Tempo magazine.

"This one-sided interventionist approach risks alienating the very investors the government wishes to attract—high quality, transparent companies that are compliance-oriented and conscious of their public image."

The ruling on mining by the Supreme Court stripped the ministry of its authority to approve partnerships for smelting projects and to appoint mining concession holders to build smelting facilities by annulling the three other articles. Through its ruling, the court effectively handed authority back to local governments in accordance with the 2009 law, which mining industry officials fear means local jurisdictions will favor indigenous operators to the detriment of the multinationals operating in the country.

Shelby Ihsan, the chairman of the Indonesia Nickel Association, which brought the case to the court, said he welcomed the details of the ruling and demanded the repeal of a wide range of other regulations dealing with grants of approval by the central government.

Chevron Indonesia made the threat to cut investment over a case in which the Attorney General is accusing the multinational of causing state losses of about Rp100 billion ($10.3 million) in relation to a bioremediation project in Duri, in Riau province. Four Chevron employees have been declared suspects.

The attorney general claims Chevron received US$23.4 million in recovery costs by the now-defunct state upstream oil and gas regulator BPMigas for the bioremediation project despite the fact that BPMigas says no state losses have been incurred. The Attorney General, however, also claims that the two companies Chevron appointed to conduct the soil cleanup were unqualified to do so.

The Chevron letters state that the company reserves the right to reduce its investment in Indonesia, a move that would lead to lower production, if there were substantial negative changes to the country's investment climate. In this year's plan of work and budget, Chevron had intended to disburse US$3 billion in investments to produce 320,000 barrels of oil per day, based on the assumption that their contracts remain honored by the government.

Cited as developments that could have a negative impact on the investment climate were the continued criminalization of oil and gas activities and a reduction in export approvals due to a Bank Indonesia regulation issued in 2011.

Chevron also cited changes in fiscal policies stemming from government regulations which have made it more difficult for companies to receive reimbursement for exploration costs, as well as the revision of the Oil and Gas Law, and major delays to expenditure approvals during the transition from BPMigas to SKMigas following the Constitutional Court's decision.

Yanto said the company routinely sent the regulatory authority letters whenever there were issues deemed to potentially affect operations, investment or contracts, adding that respect for contracts and legal certainty were important in allowing the oil and gas industry and the state to develop and produce energy.

Chevron Indonesia's oil and gas holdings consist of the Rokan, Siak, Rapak, Ganal, East Kalimantan, Makassar Strait, West Papua I, and West Papua II blocks.

(With reporting from the Jakarta Globe)