[A-List] BP watch: Indonesia

[Keaney Michael]

Rio and BP plans to sell Indonesian coal stake at risk
By Tom McCawley in Jarkarta and Matthew Jones in London
Financial Times: March 27 2002

Plans by Rio Tinto, the Anglo-Australian miner, and BP, the energy company, to sell a majority stake in their Indonesian coal joint venture are under threat in the face of local legal problems.

The two companies last week said they were hopeful of selling a 51 per cent stake in Kaltim Prima Coal, the joint venture, following a long-running dispute with Indonesian authorities over the price.

But they warned the divestment, valued at $419m, was at "serious risk" if the East Kalimantan government did not drop legal action against it, which includes an order made by a Jakarta court last Thursday freezing KPC shares. This effectively blocks the divestment offer, which was due to be made on March 31.

Under Indonesian law, KPC must sell a majority stake to local partners by the 10th year of its operation, which began in 1992. The East Kalimantan government last year accused KPC of trying to slow this process and filed for damages of an undisclosed amount.

The joint venture earlier this month agreed a valuation of $822m for KPC - higher than the central government's initial estimate of $559m, but lower than the $889m KPC had been seeking.

An observer close to KPC said he believed the East Kalimantan government was continuing to pursue the legal action in an attempt to secure exclusive rights to buy the stake, rather than competing against other potential Indonesian buyers.

Lex Graefe, president director of Rio Tinto's Indonesia operations, said the decision by the court to freeze the shares struck at "the fundamentals of the divestment process, which is to offer shares to Indonesians."

The court that made the ruling is known for its controversial commercial decisions. The same court last year acquitted several high-profile figures involved in corporate scandals.

A.M. Suwarna, East Kalimantan governor, showed little sign of backing down on the legal action. Mr Suwarna, who accuses KPC of "deceit," and "betrayal," said the province would not drop its action until KPC made a formal offer on the divestment price.

Analysts said the dispute threatened to undermine investor confidence in Indonesia but that the financial impact on Rio Tinto and BP was likely to be limited. Paul Galloway, mining analyst at UBS Warburg, said each company risked losing $40m of net earnings a year from the joint venture if the 51 per cent stake in KPC was confiscated altogether.

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3GYSQ0AZC&live=true&tagid=FTD3ANIJFEC&subheading=mining

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi