Pertamina is battling to protect U.S. assets
Thursday, March 14 2002 - 05:08 AM WIB
Karaha Bodas Co. has filed garnishment and discovery requests in Texas, New York and Delaware against U.S. banks believed to hold Pertamina funds and U.S. energy companies that do business with Pertamina. Karaha, which is registered in the Cayman Islands, is controlled by American investors.
The legal moves follow a ruling by a U.S. judge in December upholding a 2000 decision by a Swiss arbitration panel awarding the funds to Karaha, which sought compensation after Indonesia suspended the company's geothermal power-generation project in West Java in 1997.
The Karaha affair is the latest in a series of heated legal battles over Indonesian power projects. Many of these ventures began during Indonesia's boom years in the early to mid-1990s, only to be suspended in 1997 in the midst of Asia's financial crisis.
Some of the affected ventures involved foreign power concerns that had linked up with members of former president Suharto's family, Suharto associates, or other politically influential individuals to do business in Indonesia. After Mr. Suharto was driven from office in 1998, the projects were shelved amid allegations of padded contracts and graft by the new Indonesian government and counterclaims by investors seeking compensation.
For Pertamina, a lot hinges on the Karaha case. A loss could lay the state oil company open to similar claims from other suspended geothermal-power projects. For foreign oil companies operating in Indonesia, the prospect of being punished financially if Pertamina loses a legal confrontation will add another layer of uncertainty to an already cloudy investment climate.
Noah Rubins, a lawyer for Karaha at Jones, Day, Reavis & Pogue in Washington, said Karaha will use U.S. garnishment statutes to seek to freeze so-called trustee accounts believed to be controlled by Pertamina, as well as those in Pertamina's name or those of which Pertamina is a beneficiary. Mr. Rubins added that Karaha will also target funds derived from Pertamina's Indonesian production-sharing contracts with U.S. oil and gas companies. Foreign oil companies produce much of Indonesia's oil and gas under such contracts. Karaha is claiming the rights to the amount these companies owe Pertamina under the contracts, according to a Karaha spokesman.
Pertamina is going to court in the U.S. and Indonesia to try to overturn the award. The company has appealed in a New Orleans court against a Houston judge's ruling upholding the arbitration award. Separately, a senior Pertamina official said the company also will ask a Jakarta court to intervene to "settle" its dispute with Karaha.
Matthew Slater, a lawyer for Pertamina at Cleary, Gottlieb, Steen & Hamilton in Washington, accused Karaha of pursuing "a harassing litigation strategy." He said the company has served "quite burdensome requests to roughly 30 parties," and that it has "attempted to restrain assets in the possession of those parties."
Mr. Slater wouldn't disclose the identity of the 30 parties, but large U.S. energy companies that do business with Pertamina include Chevron Texaco Corp., Exxon Mobil Corp. and Unocal Corp.
Banks are also likely to be affected by Karaha's legal moves. Payments for Indonesian natural-gas exports are often made to trustee accounts in U.S. banks. These funds are then divided between Indonesia and joint-venture partners such as Exxon Mobil or Unocal.
"We're taking this very seriously," said an executive at an American energy firm in Jakarta who declined to be identified. "We will fight very vigorously over rights over our funds."
In 1994, Karaha signed an agreement with Pertamina and Indonesia's state electric company Perusahaan Listrik Negara, or PLN, to build geothermal-power plants in West Java. Although Pertamina is an oil company, it was part of the deal because, at the time, it was responsible for Indonesia's geothermal resources.
Like most other foreign investors that entered Indonesia's power sector in the 1990s, Karaha recruited an influential local partner. Karaha is 10%-owned by PT Sumarah Daya Sakti, a concern founded by Tantyo Sudharmono, a son of former Indonesian vice president Sudharmono, according to Wilson Nababan, who heads Cisi Raya Utama, a credit-information service in Jakarta. Another 10% belongs to Tomen Corp of Japan. The remaining 80% is divided between U.S. companies Caithness Energy, which is privately held, and U.S. company FPL Group.
Mohamad Bawazeer, a director of Sumarah, denied that Mr. Tantyo is associated with either Sumarah or Karaha. But he admitted that Sumarah used to operate out of offices belonging to Mr. Tantyo's Manggala Group.
The 1997 Asian financial crisis derailed a spate of ambitious Indonesian infrastructure projects ranging from roads to telecommunications to power. Under pressure from the International Monetary Fund, Indonesia suspended 16 of 27 independent power projects, including Karaha's. The company, which claims that it had already sunk $100 million into the project, sued Indonesia, PLN and Pertamina.
In December 2000, an arbitration panel in Switzerland ruled against PLN and Pertamina and awarded Karaha $261 million as compensation for its costs and the loss of future profits. In December, the Houston judge upheld the Swiss award under a convention that allows arbitration awards to be recognized and enforced in any country that is party to the convention.
This isn't the first legal battle over a power project that Indonesia has lost. In 1999, Calenergy, a unit of Midamerican Energy Holdings Co., was awarded $572 million by an arbitration panel. Calenergy was able to get around the tricky problem of forcing Indonesia to pay by claiming $290 million in risk insurance from the Overseas Private Investment Corp. The federal agency, which supports U.S. projects abroad, in turn, has persuaded the Indonesian government to promise to pay it back.
Karaha's lawyers say that they never considered claiming risk insurance. Mr. Bawazeer of Sumarah Daya Sakti -- Karaha's local partner -- said Karaha didn't have any to begin with.
Should Karaha be successful in its attempts to seize Pertamina assets in the U.S. it could force Pertamina change the way it deals with foreign contractors, said a Western energy company executive in Jakarta. But the affair could further tarnish the image of foreign power producers in Indonesia, many of which have negotiated new deals with the government.
"This creates a very severe us vs. them mentality," said the Western executive, referring to Indonesian resentment toward the power concerns.(*)