BP's coal interest: Kaltim Prima

Down to Earth No 52 February 2002

BP currently joint owns and manages Indonesia's biggest coal mine. It has 50% of the shares in PT Kaltim Prima Coal (KPC), a massive open cast mine near Sangatta, East Kutai district, East Kalimantan province. The Anglo-Australian mining giant, Rio Tinto, owns the other 50%. KPC is currently embroiled in a power struggle with the local authorities as, under the initial agreement, this foreign-owned company must sell off 51% of its shares to Indonesian parties [1]. Tension has been rising since regional autonomy legislation came into force in January 2001. It is the provincial government rather than East Kutai district authorities which is flexing its muscles. East Kalimantan is determined to get its hands on KPC's lucrative operations. If the deal goes through, it will be the first time that a regional administration is involved in running a large-scale mining business in Indonesia. KPC claims the local authority's aggressive attitude is making foreign investors wary about future involvement in Indonesia.

In October 2001, the East Kalimantan provincial government started legal action against KPC, its shareholders, some of its directors and legal advisers in South Jakarta district court for failure to divest its shares [2]. The local authority is seeking US$772 million damages, $4m legal costs and seizure of company assets. Rio Tinto has threatened to pull out of PT KPC completely if the court rules in favour of the East Kalimantan government [3]. This is not the local government's first move against KPC. Earlier last year, the provincial council set up a special team to oversee the divestment process of the giant coal mining company and to investigate the alleged manipulation of export data [4]. This sent a report to the Attorney General's office and the National Police headquarters in July 2001 alleging corruption [5]. According to KPC, commercial production began in 1992, while local government claimed the company was exporting coal by 1987.

Central and local government and KPC have been engaged in a two-year dispute over the proportion of shares to be divested. KPC was originally required to divest 30 per cent of its shares gradually, but no deals were struck. The state-owned mining company PT Timah showed some interest, but pulled out in 1999 as the price was too high. Under a new agreement KPC had to sell 51% of its shares to Indonesian owners by 2002. The East Kalimantan authorities are keen to acquire a majority shareholding, but KPC does not want to lose control to a single investor.

It is not hard to see why. This is one of the world's largest coal mining companies with an output of around 15 million tonnes per year and reserves estimated to last for another 20 years [6]. The KPC concession contains around half the 4.41 trillion tonnes total proven coal reserves in East Kalimantan [7]. The coal is high quality and, despite strikes in 2000 and 2001, labour costs are relatively low. Government revenues of over US$300,000 a day (derived from 13.5 per cent royalty on coal sales and 35 per cent income tax [8]) on a daily output of over 50,000 metric tonnes of high quality coal give some idea of what the mine is worth. From January 2001, most of these revenues (80%) go to the local government instead of to Jakarta. Under current rules for revenue sharing, the provincial government only gets one quarter of the local government's share; the rest goes to district level. The coal is marketed as Prima or Pinang coal. Most is exported, but its destination is not clear. According to one source, the company exports all its product to destinations in Japan and Scandinavia [9]. Another states that KPC supplies coal to PT Freeport Indonesia in West Papua [10]. Yet another claims most of KPC's production is for export, mainly to power plants and steel mills in Taiwan, South Korea and Japan under long-term contracts [11]. Around 21% of sales are said to be to Europe and the USA [12]. KPC has its own deep water port on the East Kalimantan coast. The mine employs over 6,400 workers - 2,600 employees and the rest via subcontractors [13]. Rio Tinto alone is said to have invested US$450 million in the site [14].

Negotiations reached deadlock in mid-2001 over the valuation of the shares. Investment analysts Salomon Smith Barney, appointed by KPC, valued the company at over US$800 million, whereas the local government estimates the total value at US$600million [15]. KPC insists that only the company and central government have the right to determine share prices and will not negotiate with local officials, but Jakarta has been reluctant to take a stand. The provincial authorities tried to force KPC's hand by threatening to demand that Jakarta terminates the company's contract unless it reduces the share valuation [16]. The deadline for agreement on share price has been extended until March 31st 2002 [17]. Meanwhile, the Ministry of Energy and Mineral Resources has offered to pay an independent agency US$500,000 to appraise the value the stake [18]. Bahana Securities has yet to start the work, although the March deadline is fast approaching [19]. The East Kalimantan government does not want an independent valuation [20].

Although East Kalimantan is a rich province, US$450 million is a lot of money to raise for the 51% share. The local government has apparently chosen a private investor to finance the acquisition: the Jakarta-based company, PT Intan Bumi Inti Pradana [21], but this may - in turn - be raising money from other companies. David Salim, nephew of Salim Group founder Liem Sioe Liong, owner of the bankrupt bank BCA, is said to be involved in the deal [22]. Other reports have mentioned PT Melati Setya Bhakti, a company owned by the provincial administration [23,24], and Tomy Winata of the Artha Graha group [25]. George Soros' company, Batavia Investment [26] (co-owned with Surabaya businessman Harry Tanoesodibjo) was said to be backed by a financial syndicate including Bank of America Global Equity Investment, Zurich Insurance and the Ziff family [27] although, under the terms of the divestment agreement, no foreign investors are allowed to buy into the company [28]. Questions are already being asked about why the administration preferred a private company to bank financing and why the deal was not put out to open tender [29,30] . The East Kalimantan authorities have not released any information about the financing or who is behind the company. According to one report, the local government would get 10 per cent of the stake for free. Two sons of top East Kalimantan administration officials are believed to work at PT Intan [31].

A series of strikes and compensation disputes with local landowners cut KPC's output in 2000 and 2001. Compensation claims are still outstanding for 7273.5 hectares of land in and around the mine site [32]. KPC agreed to pay around Rp 10 billion (US$1 million) to end a land dispute with villagers from Bengalon [33] in February 2001, but refused to meet the demands of 600 other farmers for Rp 3.3 billion to cover more than 3,000 ha of their land taken for mining activity [34]. The company insisted that it had paid adequate compensation and blamed manipulation involving insiders. Farmers from Kabojaya village near Sangatta have protested to the East Kutai district over pollution from KPC. The villagers say that waste from the mine made it impossible to grow crops. They also could no longer use the water from the Sungai Murung river for daily activities like cooking, bath or washing. The people demanded compensation of around Rp 1 billion, but KPC have offered an irrigation facility worth Rp 700 million instead [35]. KPC have hired an Indonesian subsidiary of the European company Group 4 to provide security for its operations since August 2000 [36]. This has also been the cause of protests as local people feared losing their jobs to outsiders [37].

KPC has tried to get on the right side of the local authorities by committing US$1.5 million a year to community development projects in East Kutai district [38]. This has funded Sangatta high school, a micro credit scheme, a health programme and agricultural projects.

The authorities are reluctant to impose controls on KPC's operations and do all they can to prevent stoppages because of KPC's impact on the local economy. Thousands of workers living in or around the town of Sangatta depend directly or indirectly on the mine for jobs. Most of the local population comprises settlers from other parts of Kalimantan, Sulawesi and Java.


The contract of work for PT KPC was signed on July 30, 1982 for a period of 30 years. This originally covered 790,900 hectares in Sangatta, East Kutai District, East Kalimantan. Construction began in 1989 at a cost of $570 million and full commercial production commenced in 1992 [39].

JP = Jakarta Post, K = Kompas, BI = Bisnis Indonesia, AFR = Australian Financial Review; SP = Suara Pembaruan; FEER = Far Eastern Economic Review.

  1. JP 7/Apr/01
  2. JP 17/Oct/01
  3. Petromindo 17/Oct/01 via Joyo news service 23/Jan/02
  4. Petromindo 19/May/01
  5. Petromindo 11/Jul/01
  6. AFR 15/Jun/01
  7. Petromindo 16/Aug/01
  8. AFR 30/Jun/00
  9. Indonesian Minerals Exploration & Mining Directory 1999/2000
  10. JP 6/Jul/00
  11. Reuters 24/Nov/01
  12. Dow Jones 10/Jul/00
  13. Ketenagakerjaan Perusahaan Pertambangan Batubara, 2000 Direktorat Batubara, Jakarta via Joyo news service 23/Jan/02
  14. Petromindo 29/Aug/01
  15. Petromindo 25/Jul/01
  16. Petromindo 6/Sept/01
  17. JP 8/Dec/01
  18. via Joyo news service 23/Jan/02
  19. Petromindo 17/Jul/01
  20. JP 16/May/01
  21. Petromindo 3/Sept/01 & FEER 15/Nov/01
  22. Tempo 5/Jun/01
  23. SP 12/Jan/01
  24. BI cited in Petromindo 29/Aug/01
  25. Tempo 5/Jun/01
  26. Kaltim Post (undated) via JATAM Jan 2002
  27. 14/Ap/01
  28. JP 3/Sept/01
  29. JP 5/Dec/01
  30. Petromindo 11/Ap/01
  31. Petromindo 5/May/01
  32. Petromindo 12/Feb/01
  33. Petromindo 3/May/01
  34. Petromindo 9/May/01
  35. Petromindo 17/Jul/01
  36. Petromindo 2/Aug/01
  37. Petromindo 30/Jun/01
  38. Indonesian Minerals Exploration & Mining Directory 1999/2000 Edition.
  39. Asian Journal of Mining. Gold Group Operations Pty. pp 152-154