Indonesia moves closer to tipping point for investors

Clyde Russell

Published — Friday 16 November 2012

Last update 16 November 2012 6:19 am

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JOHANNESBURG: Perhaps the most surprising thing about the scrapping of Indonesia's oil and gas regulator is that people are surprised by the move.
While the court decision to declare BPMigas unconstitutional was certainly unexpected, it fits the pattern of how business is conducted in the Southeast Asian nation.
The ruling certainly sounded dramatic, but the real question is whether the abolition of BPMigas actually changes anything for both existing and future oil and gas projects in the region.
Certainly the government moved quickly to try and reassure investors that current contracts would be honored and that there should be no uncertainty for potential new investments.
The details of the court ruling also appear to safeguard existing agreements with oil majors including BP Plc, Chevron, Exxon Mobil and CNOCC.
It also gives the future power to regulate to the government, which has said it will set up a new body to control the industry.
The good news for Indonesia's foreign partners in energy resources is that the country wants to increase its oil and gas output and is therefore unlikely to mess too much with existing contracts or put in place a framework that will drive investors elsewhere.
The bad news is that this is another example of the somewhat chaotic nature of doing business in Indonesia, and the uncertainty that is generated by every such occurrence raises the risk profile of investing in Indonesia.
Indonesia is the region's largest oil producer and has plans to increase output by 30 percent to over 1 million barrels per day. It is also the third-ranked producer of liquefied natural gas and the world's biggest thermal coal exporter.
But Indonesia also appears to play it fast and loose when it comes to regulations and policy-making for its resource sector.
Consider that this year has seen the mining industry thrown into turmoil by a series of regulations that have damaged foreign confidence in the sector.
These include proposals for a mining export tax, the ban on exporting unprocessed metals and ores, the domestic reservation requirement for coal production and a requirement that foreign companies sell 51 percent of their stakes in mines to locals within 10 years of initial production.
These measures amount to a radical shake-up of Indonesia's mining sector, which contributes about 11 percent of gross domestic product.
It has been increasingly clear that Indonesia wants a greater share of the resource sector to benefit locals, and it wants more say over the industry.
This in itself isn't that unusual in a global context, where countries with resources are becoming more reluctant to allow foreign investors to control and exploit reserves.
What sets Indonesia apart is that there doesn't seem to be a coordinated way of going about this, with government ministers making ad hoc announcements on policies that are often watered down before implementation.
It helps to view Indonesia through the prism of its domestic politics, and right now there is jockeying ahead of the 2014 presidential poll, and nationalistic sentiment is likely to increase as the vote approaches.
One of the contenders to replace President Susilo Bambang Yudhoyono is Coordinating Minister on Economics Hatta Rajasa, who appears to be having some success in getting the various government ministries to work together to boost nationalistic economic policies.
The court case that disbanded BPMigas wasn't brought by the government, but by a collection of individuals and groups, including Islamic organizations.
Their motivation isn't clear, but it wouldn't surprise if resource nationalism was a factor.
The court decision on BPMigas has the potential to result in changes to how the production sharing contracts with foreign oil companies are structured, and until there is clarity on the issue, there will be discomfort.
Whether this will lead to delays or cancellations in projects remains to be seen, with fears that BP may be more cautious now on building a planned third train at its Tangguh LNG plant in Papua.
However, any company doing business in Indonesia should be aware that uncertainty is part and parcel of the deal.
The question becomes whether the BPMigas saga tips the uncertainty balance enough to place Indonesia in the too-hard basket for foreign investors.
My guess would be probably not, but we are getting closer to the tipping point.

— Clyde Russell is a Reuters market analyst. The views expressed are his own.

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