Indonesia counts on Unocal as oil exploration spending falters: Report

US oil company Unocal Corp. will spend as much as $3 billion exploring and developing oil and gas fields in Indonesia over the next seven years. Problem is, most other oil companies don't plan to increase investments in the country, Bloomberg reported Saturday.

While Unocal bets spending in Indonesia, which has the largest oil reserves in Southeast Asia, will pay off, Exxon Mobil Corp. and PT Caltex Pacific Indonesia have seen operations disrupted by protests and strikes. Other investors are concerned about instability and changes in investment and labor laws.

``Socially and politically, Indonesia has calmed down quite a bit but the country still needs to regain investor confidence by getting its laws in place and making them investor-friendly,'' said Li Lian Ong, a regional economist at Macquarie Bank Ltd. in Hong Kong. ``The laws can be there in name but if people don't have faith they will run their course, it's pretty negative for drawing new investments.''

Losing investments in the oil and gas industry will hinder the country's efforts to plug its 43 trillion rupiah ($4.8 billion) budget deficit and find jobs for its 42 million unemployed, which is more people without work than the total population of Spain.

Spending & Laws

Unocal found as much as 1.3 billion barrels of oil equivalent after drilling more than 100 wells from 1998 to 2001 in the sea off East Kalimantan, prompting the company's decision last month to increase its spending.

Meantime, Caltex, a unit of ChevronTexaco Corp. and Indonesia's biggest oil producer, is leaving its total investment in the country unchanged at about $1 billion a year for the next few years.

The government was counting on oil and gas to bring in 66 trillion rupiah for Indonesia this year. That accounts for about one-fifth of Indonesia's budget revenue, making the industry the biggest money-earner for the government.

Exploration spending in Indonesia by companies such as Exxon, BP Plc and Total Fina Elf SA was 40 percent less than forecast at $890 million last year, state-owned oil company Pertamina said.

In the first quarter of this year, total foreign direct investment fell 88 percent from a year ago.

As Indonesia draws up laws aimed at passing more revenue and autonomy to its provinces, investors are concerned the changes may increase costs.

The oil and gas law passed in November agreed to return 15 percent of Indonesia's revenue from oil and 30 percent from gas to the provinces in which the oil and gas was produced. Previously, all proceeds went to Jakarta.

``The concerns relate to taxes and what other imposts there will be from the central and regional governments,'' said Susan O'Rourke, a lawyer with Ashurst Morris Crisp in Singapore, whose clients include oil and gas companies investing in Indonesia.

``The central government's interest is in maintaining revenue while the regional governments want bigger say and bigger share in the money.''

Elsewhere, other companies are running into legal problems. Karaha Bodas Co., owned by Florida's FPL Group Inc., Caithness Energy LLC and other U.S. investors, have gone to courts in countries from Hong Kong to the U.S. to enforce payment of a Swiss arbitration award from Indonesia's state-owned oil company Pertamina. That was after Indonesia canceled Karaha's geothermal power project in 1998. So far, Pertamina has refused to pay.

``This is undermining what little confidence investors have in Indonesia,'' said Chris Dugan, a lawyer at Jones, Day, Reavis & Pogue, which represents Karaha. ``Why should they want to invest in Indonesia when they have absolutely no assurance that if there's a problem, they'll ever pay.''

Business Costs

With the rise in unemployment, local residents have protested and disrupted output at some oil producers as investment projects failed to benefit them. About one-fifth of Indonesia's 220 million people live below the poverty line, or on less than 450,000 rupiah ($52) a month, the National Bureau of Statistics said.

Locals were stealing oil companies' equipment, causing Caltex to lose about $1 million a month from the theft, the company's managing director Bob Galbraith said last year.

Investors have also been discouraged by events in provinces trying to break away from Jakarta.

Exxon halted natural gas production at its field for four months last year when its workers were attacked by rebel separatists in northern Aceh province, disrupting supplies of liquefied natural gas to Japan and Korea.

Still, any future investments flowing into Indonesia will probably be in the oil and gas industry, analysts and investors said.

Indonesia's proximity to China, the fastest-growing energy market in Northeast Asia, is a lure for investors to tap more of the resources in Indonesia.

``Oil and gas is a commodity which investors are able to take out and sell for an international currency and that's where the attraction is for investors,'' O'Rourke said.

Earlier this year, PetroChina Co. and CNOOC Ltd., two of China's largest oil companies, agreed to buy Indonesian oil and gas fields to boost their reserves outside China.

``Indonesia's still an oil-rich country,'' said Song Seng Wun, a regional economist at G.K. Goh Research Pte. in Singapore.

``The oil companies recognize the high risks equals high returns.'' (*)