Pertamina's legal fight to protect Indonesia's interests
Wednesday, April 24 2002 - 03:29 AM WIB
Pertamina, Indonesia?s oil and gas producer, is fighting in U.S. and Indonesian courts to prevent a Cayman Islands-registered company, Karaha Bodas Co. (KBC), from seizing $261 million in Indonesian assets to pay a flawed award.
KBC, which is controlled by Florida-based FPL Group and Caithness Energy of New York, agreed in 1994 to build a geothermal electric power project on the island of Java in Indonesia. The agreements were with Pertamina and the national electric company, Perushaan Listrik Negara. That project was only in the development state and before construction commenced when the 1997 Asian financial crisis put severe strains on Indonesia?s economy and budget. In 1998 the government suspended the project and many others as part of an economic plan developed with the International Monetary Fund.
KBC tried to convince Congress to intervene with the IMF. When that approach failed, KBC filed an arbitration, and in 2000 an international arbitration tribunal awarded KBC $261 million from Pertamina for its costs and the loss of future profits related to the Java project. That award is seriously flawed as a matter of procedure and substance and Pertamina initiated proceedings in Jakarta to set it aside.
KBC is now using U.S. courts to try to seize Indonesian assets in the United States to satisfy its American investors. Bank of America and Bank of New York accounts containing funds belonging to the Indonesian government have been frozen, threatening to damage Indonesia?s economy and its ability to make payments on its international debts.
The Facts
KBC?s actions are hurting the economy and people of Indonesia
The bank accounts that have been frozen as a result of KBC?s actions are escrow accounts that primarily contain LNG revenues belonging to the Government of Indonesia. They are critical to the ongoing financing of the Indonesian budget. Revenues from Indonesian oil and gas sales are deposited into these accounts by buyers, transferred to the Central Bank of Indonesia, and then withdrawn in Jakarta to finance Indonesian government spending.
As long as these accounts remain frozen, Indonesia?s ability to meet its international debt obligations and budget targets worked out with the IMF will be jeopardized. Thus, KBC?s attempts to seize Indonesian assets for its investors threaten to limit Indonesia?s access to international credit, undermine the confidence of foreign investors, disrupt the Indonesian budget, stall the fragile economic recovery, and hurt the people of Indonesia.
Furthermore, KBC?s efforts have hurt not only Indonesia, but also potentially U.S. companies doing business in Indonesia if KBC attempts to interfere with the U.S. companies and the flow of funds to or from them. The provinces where U.S. operations are centered are not receiving their revenue sharing payments now frozen in the escrow accounts. It remains uncertain how these U.S. companies will be affected, and how Indonesian oil and gas production might ultimately be affected.
KBC wants payment for work not done
By KBC?s own admission, it invested $100 million in the Java geothermal power project, so far has not been confirmed yet by independent auditor which according to the rule of thumbs in geothermal, oil and gas exploration the average cost of each well would be US$4 million, or $32 million for the total of 8 well instead of $100 million. However, the company is also trying to force Pertamina to pay profits it speculates that the project would have made in the future. Any speculation about future profits is highly uncertain given economic developments in Indonesia and the rest of Asia in the late 1990s. Whether KBC could have financed its project remains uncertain. Furthermore, the speculative calculation of future profits includes not just power that could have been sold from the 55-megawatt facility but it also includes profits from a 210-megawatt facility that KBC might have built sometime in the future.
The speculative award granted to KBC is not only unfair; it was issued in disregard of Indonesian law, the law the contracts required the arbitrator apply to decide the case.
The arbitration process violated KBC?s contract with Pertamina
KBC?s contract to build the power facility specified that any disputes would be arbitrated under Indonesian law and pursuant to Indonesian arbitration procedure. The arbitration process that took place in Switzerland violated this agreement.
The distinction is important because Indonesian law forbids the kind of speculative compensation awarded to KBC, and recognizes force majeure cancellation of contracts due to unforeseen circumstances.
Cancellation of the KBC project was force majeure, not breach of contract
The power project was cancelled because events beyond Pertamina?s control made its continuation impossible.
In 1997, a severe financial crisis hit Indonesia and much of the rest of Asia. The crisis directly affected infrastructure projects then underway in the country: the national budget was seriously strained, limiting the government?s ability to finance projects, and a sharp depreciation of the rupiah meant that projects priced in foreign currencies (like the KBC project) suddenly became far more expensive in local terms.
The Indonesian government worked with the IMF to develop a plan to stabilize its finances and revive the economy. This plan called for the cancellation of many infrastructure projects, including KBC?s.
The Indonesian government?s decision to suspend the KBC project as part of a crisis economic program developed with the IMF clearly created a situation of force majeure ? it was impossible for Pertamina to fulfill its contract with KBC. The cancellation of the project was caused by the force majeure conditions and not because of Pertamina intention of breaching of any contract.
U.S. federal court agrees that the frozen assets belong to Indonesia, not Pertamina
The United States District Court in New York ruled on April 5 that 95 percent of the Indonesian funds frozen as a result of this dispute clearly belong to the Indonesian government, not Pertamina and, therefore, were unavoidable to KBC. Even the Swiss arbitrators recognized that KBC could not sue the government and rejected the claim against the Government of Indonesia. Nevertheless, KBC continues to try to seize assets belonging to the Indonesian people.
Attaching foreign government funds to settle a lawsuit is a violation of international law and the U.S. Foreign Service Immunities Act. KBC is expecting to appeal the New York court?s ruling. Indonesia has urged the court to release the frozen assets.
An injunction restraining Pertamina from taking its case to court in Indonesia violates international law
Under international law, Pertamina has the right to bring the dispute with KBC to an Indonesian court, without any obligation waiting for the result of current proceeding in the US Court.
Exercising its legal rights, Pertamina filed a request in early March asking the Jakarta court to issue an injunction ordering KBC to stop its efforts to seize Indonesian assets, pending to the final decision of Jakarta court, as one of the court authorized by international law to annul the tribunal award, and not the USA court. KBC responded by asking the U.S. court in Houston to order Pertamina to withdraw its request to the Jakarta court. The Houston court ruled in favor of KBC.
The Houston court?s order denies Pertamina of its right to have a flawed award set aside and defend itself under Indonesian law. This is a direct violation of the Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 ? the so-called New York Convention. Thus, the Houston court has put the United States in violation of an international treaty.
The Houston court ruling will be appealed.
KBC refuses to negotiate a fair settlement of this issue
Pertamina has offered to negotiate a fair settlement of the dispute and to resume the geothermal power project. However, KBC has rejected that offer, and continues to insist on being paid for work it did not complete and highly doubtful speculation about future profits.
By focusing only giving its investors as much money as possible, KBC is hurting U.S. companies that do business in Indonesia, undermining respect for international law, and threatening Indonesia?s economic recovery. KBC should begin negotiations with Pertamina to find a fair, equitable and amicable solution to this dispute.