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. JAKARTA 00005217 004 OF 005 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 JAKARTA 00005217 005 OF 005 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