Foreigners beware

COMMERCIAL oil production began in Indonesia in the 1880s. Firms have been drilling for oil and gas there ever since, despite the occasional coup and financial crisis. Still, the country is finding new ways to make life hard for them.

On November 13th Indonesia’s Constitutional Court said that parts of the country’s 2001 oil-and-gas law were unconstitutional, and the court dissolved BPMigas, the state regulator. The constitution says that Indonesia’s natural resources “shall be under the powers of the State and shall be used to the greatest benefit of the people”. The judges took this to mean that a government agency such as BPMigas does not have the authority to oversee reserves and sign production-sharing contracts, especially with foreign firms.

Those firms are worried. The government says that all current contracts will be honoured; and it has quickly transferred regulatory powers temporarily to the energy ministry. Yet even if contracts are honoured, oil giants such as Exxon Mobil, Chevron and CNOOC are wondering what will happen when they come up for renewal. The court recommended that all operations run by foreigners should be handed over to PT Pertamina, the creaky state energy giant, after contracts expire. Indeed Pertamina may again assume the role of regulator, with all the conflicts of interest that implies, unless the government can create a new body sufficiently different from BPMigas to satisfy the court. (Pertamina lost its role as regulator in 2001.)

The immediate effects are unclear. Negotiations with BP, a British oil firm, about a $12 billion expansion of its liquefied natural gas (LNG) facility in Indonesia’s Papua region, have been halted. BP says it is not worried yet. It is working through an approval process that will not end until 2014 for a plant that will come on stream in 2018. Delays are usual in such a scheme.

Pessimists fear that the ruling is part of a recent surge of economic nationalism. In March the government ruled that foreign miners must sell at least 51% of their Indonesian operations to locals after operating for ten years. Previously they were obliged to sell only 20%, albeit after five years.

If history is any guide, mistreating foreign investors will backfire. Crude-oil production has fallen from 1.4m barrels a day in 2000 to 918,000 last year; Indonesia’s oilfields are old and running dry. Production of gas has risen only from 63 billion cubic metres to 76 billion over the same period, well short of its potential. Political uncertainty spooks investors.

Indonesia’s remaining hydrocarbons are becoming harder to extract; they are in remote spots that require plenty of expensive new infrastructure and technology. Pertamina lacks the capital and expertise to do the job. In Mexico, where a constitutional clause like Indonesia’s has long been interpreted to exclude foreign investors from the oil-and-gas industry, investment has lagged and offshore reserves have remained largely untapped.

Some Indonesians may not care. The tighter the state’s control over natural resources, the more opportunities will arise for rent-seeking. The country holds an election in 2014. Political parties are keen to fill their war chests. Whether any of this will be for “the greatest benefit of the people” remains to be seen.