SBY OPPONENTS WAVE ECONOMIC NATIONALISM FLAG

S E C R E T SECTION 01 OF 05 JAKARTA 005217

SIPDIS

SIPDIS

DEPT FOR EAP/MTS AND EB/IFD/OIA
COMMERCE FOR 4430/GOLIKE
DOE FOR TOM CUTLER/PI-32 AND JANE NAKANO/PI-42

E.O. 12958: DECL: 04/26/2016
TAGS: ECON EMIN ENIV PGOV ID
SUBJECT: SBY OPPONENTS WAVE ECONOMIC NATIONALISM FLAG

REF: A. REF A: JAKARTA 3162 (PERTAMINA BOARD FINALLY
PURGED)

B. REF B: 05 JAKARTA 12416

C. REF C: JAKARTA 1185 (NO TALL TREES)

Classified By: Economic Counselor William Heidt, reasons 1.5 (b) and (d
)


1. (C) Summary: Former People's Consultative Assembly
Chairman Amien Rais and retired General Wiranto continue to
wave the flag of economic nationalism in hopes of
strengthening their likely presidential bids in 2009 and
stirring up trouble for President Yudhoyono in the meantime.
In their latest salvo, a public letter to President Susilo
Bambang Yudhoyono (SBY) released last week, Rais and Wiranto
joined several other prominent political figures in a public
broadside against SBY by attacking him for the Government of
Indonesia,s (GOI) recent deal with ExxonMobil (EM) to
develop the Cepu oil and gas field. The two also criticized
Freeport,s continued operations in Papua. The open letter
offered a mixture of incorrect facts, misrepresentations of
the truth, muddled thinking, irrational economics, and tried
and true economic nationalist grievances. Relatively quiet
for now, economic nationalism remains a potent political
force in Indonesian politics. The involvement of Wiranto
will raise concerns at the Palace. End Summary.


2. (C) Former People,s Consultative Assembly Chairman Amien
Rais joined with two other political heavyweights in signing
an open letter to SBY attacking him for his handling of the
Cepu oil and gas deal (Ref A) and the continued operations of
mining giant Freeport-McMoRan in Papua. The other two
political big wheels were former Vice President Try Sutrisno
and retired General Wiranto. (Two other prominent
signatories from the House of Representatives, Marwah Daud
Ibrahim and Alvin Lie, are allies of Wiranto and Amien,
respectively.) Try Sutrisno and Wiranto have participated
since mid-2005 in a grouping of senior statesmen (and one
stateswoman -- former President Megawati) that meets
regularly to issue statements critical of the Yudhoyono
administration (Ref B). Amien originally had shunned that
group, seeking to preserve a positive relationship with SBY,
but he has been one of the leading critics of Freeport's
operations in recent months (Ref C). Amien's statements
infuriated President Yudhoyono, according to a Palace source.


3. (C) The triumvirate called on the GOI to kick out
ExxonMobil (EM) and to allow Pertamina to develop the Cepu
field. Despite statements from the Energy Minister to the
contrary, the authors contend that Pertamina is capable of
developing the Cepu project on its own. Without providing
details, they further state that the Cepu revenue could be
used to restructure other ailing state-owned enterprises and
provide social welfare spending. They go on to argue that an
85:15 split of the Cepu revenue in Indonesia,s favor is
unjust to the Indonesian people given the excessive
reimbursement of costs allowed by the GOI to the oilfield
operators, an area where they say the GOI should get tough
with the foreigners.


4. (C) The authors conclude with a few jabs at
Freeport-McMoRan,s mine in Papua. They say Tembagapura, the
city built by Freeport &resembles a beautiful American city
imbedded in Papua, while the Banti people only 10 kilometers
away live in the Stone Age.8 They also make reference to the
consequences of the huge mine,s operations, which they claim
has caused &consequential environmental damage. A mountain
has vanished; tailings and waste disposal also resulted in
vast land destruction.8


5. (U) State Secretary Yusril Mahendra, speaking on President
Yudhoyono's behalf, has told journalists that the President
would soon reply to the Amien-Wiranto-Try letter. Amien had
hoped to meet with Yudhoyono, but this meeting was postponed
by the Palace, causing a public spat. As this dispute
simmered, Amien declared May 20 as a day for public criticism
of the government. One of Amien's closer associates in the
cabinet -- Transportation Minister Hatta Rajasa, who formerly
served as Secretary General of Amien's National Mandate Party
-- has also spoken out publicly on these issues, although
with a milder tone. In his capacity as a leading figure of
the Indonesian Association of Muslim Intellectuals
(ICMI)--legislator Marwah Daud Ibrahim, one of the letter's
signatories, currently chairs the organization's
presidium--Hatta has said publicly that Freeport's community
development efforts can be improved.


JAKARTA 00005217 002 OF 005



6. (S) Comment: The primary signatories have neither deep
expertise nor a history of concern about energy policy or the
activities of the extractive industries. Both Amien and
Wiranto ran for the presidency in 2004, and we assume they
hope to try again in 2009. They appear simply to be trying
to exploit economic nationalism, maintain a high public
profile, and place pressure on the Yudhoyono administration.
To the extent that Wiranto continues to be involved in this
criticism, it will not be taken lightly by President
Yudhoyono, who believed a Wiranto-led opposition planned to
take advantage of painful fuel price hikes in 2005 to
destabilize the government.


7. (C) Amien has a track record of endorsing Indonesia-first
economic policies, which appear discouraging of foreign
investment. Economic nationalism remains a latent yet hardy
perennial in Indonesia. Anti-foreign investor fervor seems
to be quiet for now after the March 16 deaths of four GOI
security officers in Abepura during anti-Freeport
demonstrations. (Some public speculation at the time
attempted to link Amien's vocal criticisms of Freeport to the
bloody protests.) Public expectations for immediate riches
are running high in East Java, however, due to EM,s planned
USD 2.1 billion investment as part of the Cepu deal. The
ability of these politicians to make mischief and reignite a
new cycle of anti-foreigner sentiment will increase if EM and
the GOI do not manage expectations properly and deliver on
what they promise. End comment.


7. (U) Begin Unofficial Embassy Translation:

Open Letter to President Susilo Bambang Yudhoyono, Part I

Our honorable President,

We fully realize the difficulty of our country,s condition
in dealing with numerous unresolved problems. We also
appreciate, that the government has worked hard to resolve
those problems. Many of the problems were conquered, however
many still remain and require accurate policies to prevail.

Therefore, as a form of our concern to our nation,s fate and
our beloved nation, with all due respect, we intend to convey
the following input.

Our honorable President,

Currently our national problems are far more complex compared
to forty years ago. On the other side, natural resources
which can be utilized as funding sources are becoming more
limited. We used to have abundant forest resources, today
almost all of these resources have diminished. Our oil wells
are aging and national production is declining, while
domestic demand increases drastically.

Forty years from now, the problems of our next generation
will become more complex. Potential competition and internal
conflict will increase, along with the increase in
population. Our next generation will face problems with
national integrity, democracy, economic defense and social
welfare which are far worse than what we are dealing with
right now.

Therefore, we need to utilize natural resources prudently,
wisely and optimize all available economic potential
independently and with dignity, so our next generation can
have a better future.

In the context of independence, dignity and our country,s
future, and in accordance with the National Constitution 1945
chapter 33 verses 3, we need to fully utilize earth, water,
and natural resources contained within it for the people,s
welfare, whether it is today or in the future.

Part II
Our honorable President,

Cepu block is one of Indonesia,s natural resources which we
will need to manage in order to build independence, dignity
and the future of our country. With abundant oil and gas
resources, Cepu block is a gift from God Almighty to
Indonesia to help overcome fiscal difficulty in providing
domestic crude supply, as well as reducing risk of fuel price
hike and other price increases which are very onerous to the
people.

We believe the government has its own reason to encourage the

JAKARTA 00005217 003 OF 005


signing of Joint Operating Agreement (JOA) between Pertamina
and ExxonMobil (EM) on March 15, 2006, in which EM is the
operator of Cepu Block. Albeit, Mr. President if you could
consider the other point of view in relation to the Cepu
Block.

First, the Cepu Block has a proven oil reserve of at least of
600 million barrels, plus recoverable gas reserve of at least
2 trillion standard cubic feet (TSCF). With oil price
assumption of USD 55/barrel and gas price of USD 3/mmbtu,
Pertamina will obtain additional assets of at least USD 40
billion if Cepu block is handed over to the company.

The additional asset will enable Pertamina to perform
financial innovation and obtain fresh banking fund as well as
non-banking funding of USD 6 ) 8 billion or even up to USD
14 billion if market condition and financial structure
permits.

The additional fund will grow if the Government consolidates
oil and gas accounts at the Department of Finance and
drastically change oil and gas revenue regime. As a result,
oil and gas revenue can flow directly to the company,s
account instead of being routed first to the Department of
Finance.

These funds can be utilized as capital funding to operate
Cepu Block and for business expansion. The surpluses and
dividend can be reinvested as SOE restructuring bond, which
will result in a substantial SOE restructuring fund.

Therefore, we can restructure SOEs with chronic financial
crisis such as Garuda, Merpati and Dirgantara Indonseia. We
will also have fund to develop synergy in the basic metals
industry, machinery and its upstream industry. For example,
amongst Krakatau Steel, Texmaco (already government
controlled),Boma Pisma PAL, INKA, DI etc.

With Cepu Block operatorship handed over to ExxonMobil, the
above potential cannot be fully utilized.

Secondly, from technology capability and human resources
aspects, Indonesia is actually capable to operate the Cepu
Block, as conveyed by the Indonesian Geologist Association
(IGA) and Indonesian Geophysics Experts Association (IGEA).

Geologically, the play of Cepu Block is the same as any other
oil and gas fields surrounding the block, such as Mudi,
Sukowati and Kedung Tuban, with objective depth/reservoir of
Kujung Hydrocarbon Formation (relatively the same carbonate,
i.e. between 4,000 to 10,000 feet. In the Sukowati and Mudi
field, where both are jointly operated by
Pertamina-Petrochina East Java and produces 16 ) 20 bodp,
all key positions are held by Indonesian experts/Pertamina.

Part III

Thirdly, with ExxonMobil as operator, the country cannot
optimize its revenue stream. &Briefly speaking, production
split of 85:15 seems to benefit the country, with a total
split of 93.25% for Indonesia8

However the real split for Indonesia, i.e. the Government,
Pertamina, and Regional Governments, depends on the amount
basic split revenue. This basic revenue will drop
dramatically if the operator,s claim on cost recovery is too
large. Moreover, until today there is no limit on the type
of deductible expenses and no maximum limitation on cost
recovery claim. Even expenses from overseas headquarters can
be cost recoverable.

For example, for the 3 drilled wells, according from IGA and
IGEA experts, the maximum cost is USD 60 ) 70 million. This
cost includes exploration activities of 3 wells, G&G survey,
seismic surveys, and land acquisition. According to Pertamina
the cost is around USD 100 million. However, expenses claimed
per September 2003 are over USD 340 million.

Therefore, there is a potential excess cost of USD 240-280
million, as opposed to if the block is operated by Pertamina.
This number will grow if the actual claim is in fact USD 459
million, which is quoted in various media reports.

The excess cost above was derived from exploration activities
only. From exploitation activities, the potential of excess
cost is USD 5/barrel if compared to Pertamina as operator.


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If oil and gas tax is set at 44% (tax is borne by the
goverment),and claim on approved exploration expenditure is
USD 340 million, and with the assumption of production from
the three wells of above 36.7 million barrels, therefore the
real government revenue is only 54% not 93.25%. However, if
the approved exploration expenditure is USD 450 million,
therefore real government revenue is only 48%.

With the above assumptions, within 10 years of Cepu Block
operation, the government looses at least Rp 51 trillion of
revenue, not including economic losses as a result of foreign
contractors who tend to favor their own country,s suppliers,
consultants, experts and service providers.

The numbers above of course can vary, depending on
assumptions and plan of development.

Fourthly, we convey the majority view within the community
where there are systematic efforts to make ExxonMobil Cepu
Block operator, even if it was against existing laws and
regulations.

Formation of Cepu Block Negotiaion Team on March 29, 2005 for
example, which took over SOE Board of Directors, authority
as set in Law 19/2003 on State Owned Eneterprise, chapter 5
verse 1 and 1. In state and military term, the Negotiation
Team had performed a coup of power from Pertamina,s Board of
Directors.

Soon after, as ExxonMobil is still unqualified take
operatorship under the Production Sharing Contract (PSC)
scheme as quoted in Government Regulation (GR) No. 35/2004 on
Upstream Oil and Gas Activity, the GR was amended through GR
No. 34/2005 on September 10, 2005. The new GR gives exception
to certain PSC regulation as quoted in verse 103A. With this
exception, legal barrier to ExxonMobil was lifted.

The culmination of these systematic efforts was the
replacement of Pertamina,s President Director prior to US
Secretary of State visit, as Pertamina,s President Director

SIPDIS
is the one who has been against ExxonMobil operatorship.
Together with the US Secretary of State visit, the Joint
Operation Agreement which gives Cepu Block operatorship to
ExxonMobil was finally signed.

Part IV

Our honorable President,

The experiences with Freeport further convince us that we
need to prioritize mining management for our own country. The
Government of Indonesia never realized how many tons of gold,
silver and copper concentrates ) perhaps also uranium )
which are extracted by Freeport McMoran.

Loss of potential tax revenue is quite considerable here.
Moreover, certain royalty percentage received by Indonesia is
a percentage of unknown value. Whatever Freeport says, we
must believe and accept.

Freeport benefits to Papuans are also questionable.
Tembagapura resembles a beautiful American city imbedded in
Papua, while the Banti people only 10 kilometers away live in
the Stone Age. Not counting consequential environmental
damage. A mountain has vanished; tailings and waste disposal
also resulted in vast land destruction.

Our honorable President,

Bearing in mind the above conditions, please allow us to
recommend that during your leadership, the oil and gas and
mining policies should give priority to national companies to
operate mining areas.

Cepu Block can be a first step for Indonesia to be a
proprietor in its own country by allowing Pertamina as
operator. Renegotiation of mining contract with Freeport is
also a pressing agenda in order to increase government
revenue, maximize benefit to Papuans, and minimize
environmental damages.

Going forward, we suggest performing basic amendment to Law
No. 22/2001 on Oil and Gas, and emphasize on building a large
national oil and gas company which is capable to compete in
the global market, just like the case with Petronas.

Create more reconsolidated oil and gas account at the

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Department of Finance, more accountable and transparent. Oil
and gas revenue does not necessarily go to the Department of
Finance first. We also suggest amending the taxation regime
to eliminate grey areas such as deductible expenses in cost
recovery, which has been a playfield for activities that
results in the loss government revenue.

Therefore we convey the result of our discussion. For the
honorable President,s attention, we express our gratitude.

Inputs from:
Jend. TNI (retired) Try Sutrisno, Jend. TNI (retired)
Wiranto, Prof. Dr. M. Amein Rais, Dr. Marwah Daud Ibrahim,
Dr. Diradjat H. Wibowo, Alvin Lie, Marwan Batubara, Ismed
Hasan Putro, Chandra T. Wijaya
End Unofficial Translation

PASCOE