Indonesia's government has put on hold all dealings with energy firms while it sets up a replacement for industry regulator BPMigas, which was scrapped in the latest of a series of nationalistic policy moves that have shaken investor confidence.

BPMigas has existing contracts with oil majors including BP Plc, Chevron, Exxon Mobil and CNOCC and the fate of these agreements was thrown into doubt after the regulator was declared unconstitutional on Tuesday by a court ruling.

The ruling, however, stipulated that existing production sharing contracts must be honoured to avoid chaos, and the government on Wednesday sought to further allay investor fears by saying that it would soon set up a unit to oversee the industry while parliament works out a regulatory framework.

President Susilo Bambang Yudhoyono also assured investors about the validity of the agreements.

"Because it takes time to do this, dealings with industry are temporarily being stopped," Rubi Rubiandini, deputy energy and mining minister, told Reuters.

The ruling is likely to further dent Indonesia's credibility with foreign investors, especially as it comes after a series of regulations for the mining sector aimed at increasing the state's share of the resource sector.

Indonesia is Southeast Asia's largest oil producer and hopes to increase output to over 1 million barrels per day, though ageing fields have led to declining output in recent years. It is also the third-ranked producer of liquefied natural gas and the world's biggest thermal coal exporter.

"There's a lot of concern. We've got many deals on at the moment where the people involved are very concerned," said Ashely Wright, an energy lawyer at Norton Rose, adding it was unclear how contracts in the name of BPMigas could continue.

"I think Indonesia will come up with some kind of work-around solution for this, but there will be some lasting effect, and the trustworthiness of Indonesia as an investment location is again threatened," he said. "There will be a log-jam."

POLITICS AND PERTAMINA

Industry experts say the suit against BPMigas was driven in part by economic nationalism, which is on the rise ahead of a presidential election in 2014 when Yudhoyono will step down.

Production-sharing agreements, which give foreign firms a stake in a country's natural resources, are especially unpopular with nationalists across the globe.

Indonesia's energy sector has struggled to attract investment in recent years, leading to regular criticism of BPMigas from both the industry and politicians.

"In the eyes of many Indonesians, BPMigas is perceived as a wasteful super-government body that enriches corrupt officials. Therefore, it makes an easy target for politicians wanting to increase their popularity," said Keith Loveard of risk consultancy Concord Consulting.

BPMigas told media it believed the ruling had put in jeopardy about 60 contracts worth about $70 billion.

Analysts said state energy firm Pertamina, which used to oversee contracts, could be the biggest beneficiary of the ruling, which stipulated that any producing-sharing contracts should be drafted between business entities rather than the state and companies.

"There is ample reason to believe that the far more important factor is aggressive lobbying by interests partial to Pertamina. The state oil company will be better positioned to benefit without BPMigas," said Kevin O'Rourke, an independent risk analyst, adding this increased the potential for cronyism.

He said any of the possible scenarios for regulation of the industry would be unlikely to produce better efficiency, transparency, investment or production.

The judicial case against BPMigas was brought to court by a group that included Indonesia's second largest Islamic organization, Muhammadiyah, the radical Islamic movement Lajnah Siyasiyah Hizbut Tahrir Indonesia and former government minister Fahmi Idris.

Analysts said some of the claimants, and the constitutional court's presiding judge, had political ambitions, ahead of the election.

(Source: Reuters)