Multinationals in Indonesia feel the heat

A deteriorating investment climate in Indonesia has caused tensions between multinational companies, especially in the energy sector, and the Indonesian government.

Having been the darling of foreign investors, some of Indonesia’s biggest and longest-term investors are getting increasingly dissatisfied with policy shifts and the climate of hostility toward multinational companies, foreign investors say.

For example, Chevron Indonesia has warned the nation’s upstream oil and gas regulatory body that problems with investment policies may lead to lower future investment by the company.

Cited by Chevron as developments that could negatively impact the investment climate were “continued criminalisation of oil and gas activities” and “a reduction in export approvals due to a Bank Indonesia regulation issued in 2011.” It also cited changes in fiscal policies stemming from a 2010 government regulation which has made it more difficult for companies to have their oil and gas exploration costs reimbursed.

Chevron has been operating in Indonesia since 1952 and is the country’s largest oil and gas producer.

Originally, in its 2013 budget, Chevron intended to disburse $3 billion in investments to produce 320,000 barrels of oil per day, based on the assumption that their contracts remain honoured by the government. But Chevron said that it reserves the right to reduce its investment in Indonesia, a move that would lead to lower production, if there were substantial negative changes to the country’s investment climate.

Those developments followed the announcement earlier in January that Richard J. Owen, ExxonMobil Indonesia’s CEO, had in effect been kicked out of his job by a government agency that regulates oil and gas production, over refusal by the US oil giant to divest itself of three natural gas blocks near Aceh that were coveted by Indonesian companies.

Like Chevron, ExxonMobil has been operating in the country for more than four decades – since 1968 when its predecessor Mobil began operating the Arun gas fields, which are owned by the Indonesian state oil company, Pertamina. The Arun fields, until their closing, contributed to the Indonesian budget with about $1 billion in revenue annually.

Since the late 1980’s, ExxonMobil hired military units of the Indonesian national army to provide security for their gas extraction and liquefaction project in Aceh. Members of these military units have been accused of perpetrating human rights abuses against local villagers, an accusation that has been repeatedly rejected by the oil company.