Pertamina should pay compensation to Karaha: Experts

Moch. N. Kurniawan, The Jakarta Post, Jakarta

State-owned oil and gas firm Pertamina should honor an international arbitration body order that it pay US$261 million in compensation to independent power producer Karaha Bodas Co. LLC. for the suspension of its power project in 1998, legal experts said on Tuesday.

Amir Syamsuddin of Amir Syamsuddin & Partners said refusal to obey the ruling would further erode confidence in the country and discourage badly-needed foreign investments.

"Although the ruling is hard to accept, it's a consequence that must be borne by Pertamina who lost the case. Pertamina can't escape from it.

"If Pertamina refuses to pay, it will only damage the country's image," Amir told The Jakarta Post.

Karaha signed a contract in 1994 with Pertamina and state- owned electricity company PLN to develop a $1 billion power project in Karaha and Telaga Bodas, West Java.

But the government decided to suspend the 400-megawatt power plant, together with several other power projects, in the wake of the 1998 regional financial crisis.

Karaha, which had invested around $100 million in the project, then filed a lawsuit against Pertamina, PLN and the government with a Switzerland-based arbitration body in 1998.

In December 2000, Karaha won an award from the arbitration tribunal, which issued a ruling ordering Pertamina and state electricity company PLN to pay $261 million to Karaha, plus interest of 4 percent per year, starting January 2001.

Last December, Karaha won confirmation from the U.S. Federal Court in Houston, which upheld the initial ruling.

It has also started a campaign to seize Pertamina assets around the world.

Compared to the financially-troubled PLN, Pertamina is in a much stronger financial position controlling various kinds of quality assets.

But Pertamina filed an appeal with the Central Jakarta District Court earlier this month over the verdict of the international arbitration panel.

Amir criticized the move by Pertamina, saying it had no legal basis.

Pertamina argued the arbitration ruling should be confirmed at home as the location of the case. Pertamina also said that the suspension was made by the government due to the unexpected economic crisis.

In addition to the appeal process, Pertamina had also offered Karaha the option of resuming the project. The latter, however, refused the offer.

The policy to resume the development of the power project is part of the government's plans to avoid a future power crisis.

According to one estimate, the Karaha project would be able to provide electricity to 2.6 million households.

Another expert on arbitration rulings, who declined to be named, supported Amir's opinion.

But he noted that Karaha must also confirm the arbitration ruling in the Indonesian courts although it had won confirmation in the U.S.

"The confirmation must be sought in Indonesia because Pertamina is a business entity here and the case occurred here," he said.