Indonesia’s Constitutional Court has thrown its resource investment environment into further turmoil by declaring that the country's own oil and gas licensing agency and regulator is unconstitutional.
The regulator, BPMigas, was disbanded as of yesterday and the national government hurriedly announced that the Energy and Mineral Resources department would take over its role in administering 302 production sharing contracts.
The chairman of the now-defunct agency, Raden Priyono, said ongoing negotiations with foreign companies, including a proposed $12 billion investment by resource giant British Petroleum (BP) for an expanded natural gas facility in Papua, would now stall.
Contracts for licenses worth $70 billion which companies had signed with BPMigas were also now in doubt, he said, though other commentators played this down.
BPMigas was set up by the newly democratic Indonesia in 2001 as an independent statutory authority to replace the regulation and licensing function of state-owned oil producer, Pertamina, which had become hopelessly corrupted under the Suharto regime.
BPMigas has no link to the oil company BP.
But despite being a government agency, BPMigas has run afoul of growing nationalist sentiment, with the belief afoot that it was awarding too many lucrative contracts to foreign companies and cheating the Indonesian people out of income. The court case was brought by 42 community and Islamic groups.
Contracts governing 29 oil and gas projects are up for renewal between 2013 and 2017, and pressure is building on the Indonesian government to nationalise them all.
Indonesia produces 2.36 million barrels of oil per day and foreign owned companies including Chevron, Exxon Mobil, Total, ConocoPhillips and BP account for about 90 per cent of the country's production.
Companies have refused to comment as they digest the implications.
The Constitutional Court's binding judgement declared the agency unconstitutional because it is in violation of Article 33 of the 1945 Constitution, which guarantees that land, waters and natural resources should be "under the power of the state".
The court said that because BPMigas did not actually operate oil and gas wells, and therefore the constitutional requirement was "degraded".
Chief justice Mahfud MD - who reportedly has political ambitions to be the next Indonesian president - led the judgement.
Dien Syamsuddin, the chairman of Muhammadiyah, one of the world's largest Islamic organisations and one of the plaintiffs in the case, said the judgement "represents a people's victory".
But Phil Shah, a consultant to the oil and gas industry, said the move was "a disturbance". While BPMigas had, at times, been a "scourge" for foreign investors, the judgment was "another obstacle in the path overall".
"It's an unfortunate event, and certainly disappointing, but it's one of many."
Recent laws in other parts of the resource industry have forced foreign miners to pay new taxes on exports, to hastily formulate plans to process and smelt minerals in Indonesia, and to sell down their stakes in productive mines to 49 per cent to local businesses.