The Politics of Oil in Indonesia: Foreign Company-Host Government Relations »

This book examines the relationship between foreign companies and government within the Indonesian oil industry. It is concerned in particular to identify those factors which determine the balance between central regulation and untrammelled company activity, in order to evaluate the choices which the government has to make in the creation of its policies. Given the extent of foreign investment in the mineral extractive industries of many of the less-developed countries, such policies are necessarily of major importance. From his study of the operation of Indonesian oil contracts, Dr Khong concludes that the formal terms of an agreement may well give a misleading impression of the actual allocation of the benefits from petroleum extraction. The common perception that a basic shift in favour of host governments has occurred is shown to be, largely misplaced, whatever relative advances they may have achieved.

List of figures ix

Acknowledgments x

1 The Impact of the Foreign Company on Government Policies in Less-Developed Countries 1

The problem of perception 1

Implications for government policy 5

The environment of the less-developed country 12

The special case of the mineral industries 17

2 The Indonesian Petroleum Industry: Form and Content of Agreements 23

Indonesian attitudes to foreign investment 23

The petroleum industry as a case study 25

The general legislative framework 28

The traditional concession system 34

Work contracts as a modern concession arrangement 37

The production-sharing contract and its derivatives 41

3 Financial Provisions and Consequent Areas of Dispute 51

Financial provisions governing petroleum extraction 51

Government income through royalties and taxes 53

State participation in the extractive operation 59

Other financial problems 68

Matters of depreciation 73

Balancing host- and home-country interests 80

Tax incentives as part of a financial package 84

4 Provisions for Development and National Control 90

The extractive operation as part of overall development 90

Establishing external connections with the wider economy 92

Restricting the economic contribution of the foreign company 112

Managing the extractive operation 115

The rate of extraction and its implications 122

5 Problems of Negotiation and Contractual Change 129

Dispute settlement within an evolving process of contract relations 129

Resolving disputes through arbitration 133

Formal adjustment of the contractual relationship 135

The need to facilitate change 141

6 Organisational Structure and the Negotiating Process 159

Thestructure of the industry 159

The problem of accountability 164

Approaches to negotiation 176

7 Some Regional Considerations for South-East-Asian Oil-Producer Governments 187

The search for appropriate models 187

The potential for agreement: cooperative measures by governments 208

The potential for conflict: disputes over territorial rights 212

8 The Viability of Transnational Mineral Agreements 220

Notes 234

Select bibliography 249

Index 251