Foreign Relations of the United States, 1958–1960, Indonesia, Volume XVII

199. Memorandum From the Assistant Secretary of State for Far Eastern Affairs (Robertson) to Acting Secretary of State Dillon⁰

Washington, May 15, 1959.

SUBJECT

• Indonesia: Developments Affecting Foreign Oil Companies

1. The Draft Petroleum Law

After a long period of delay the Indonesian cabinet recently presented to Parliament a draft petroleum law which includes features considered to be inimical to the operations of the three major foreign oil companies in Indonesia: CALTEX Pacific Oil Company, Standard-Vacuum Oil Company, and Royal Dutch/Shell. Some of the basic features, such as primary dependence on governmental and mixed companies for the development of oil resources, stem from philosophies now prevailing in Indonesia, and objection to those aspects of the legislation will undoubtedly be unavailing. There has, however, been some feeling among the oil companies that certain features of the bill should be the subject of protest. These features are:

(1) The duration of concessions, which will be shorter (30 years plus extension) for private companies than for mixed companies (40 years plus extension).

(2) The non-deductibility of royalties from taxable income.

(3) The requirement that 20 percent of refining, storage and transportation capacity be made available for government use at request.

(4) The transitional provision for current concessions which requires current holders to conform to the new law within two years with the possibility of a year’s extension. This feature, incorporated in Article 41, is regarded as a violation of the principle of sanctity of contracts. STANVAC in particular is disturbed by this provision.

(5) The requirement that foreign companies must incorporate under the laws or Indonesia rather than simply register to do business in Indonesia and the requirement that the majority of the Board of Directors of the oil companies be Indonesians.

Approaches to the Indonesian Government

The question of official representation, either by the United States alone or jointly with the United Kingdom and France has been raised. Contrary to the comment attributed to Mr. Wilkinson in London’s 5868 (Tab A)¹ both CALTEX and STANVAC have indicated to the Embassy that they strongly oppose the idea of a joint governmental approach on the grounds that it would arouse Indonesian antagonism and do more harm than good (Tab B). Ambassador Jones has likewise indicated his opposition to the idea of a joint approach. He has recommended that he approach the Prime Minister and Acting Foreign Minister by himself but not on a formal basis. He also suggested the possibility that the British Ambassador might do likewise.

Both STANVAC and Shell were requested by the GOI to submit their views on the proposed legislation and both did so (Tab C). CALTEX was not asked to submit its views but after some consideration of the subject decided to do so without being requested. CALTEX believes that strong protests against the legislation would tend to force the present Parliament to take action now, whereas in the absence of pressure, Parliamentary action might be deferred until after the adoption of the 1945 Constitution.

In view of the sensitivities of the Indonesians regarding any indication of foreign intervention, and in view of the possibility that the passage of the petroleum bill may be considerably delayed by internal political factors, we believe that any United States approach regarding the petroleum legislation should be made informally by the Embassy in Djakarta and not in conjunction with the approach of any other Government.

2. Cancellation of Existing Mining Rights

The bill providing for the cancellation of inactive mining rights, which was passed by Parliament on February 4, provides an escape clause by which the Minister of Industries is given the discretion to make exceptions to the law. Although the oil companies view this law as being detrimental to their best interests, it is believed that formal official representation against the law would be counterproductive because of Indonesian sensitivities. We feel that the best approach would be for the oil companies to seek exceptions as needed, but if official representation is found to be appropriate, it should be handled informally.

Tab D provides an indication of the importance of the oil companies to the Indonesian economy.

0. Source: Department of State, Central Files, 856D.2553/6–1559. Confidential. Drafted by Olmsted on May 14 and cleared with SPA, SPA/E, FE, and FSD.
1. Telegram 5868, May 7, reported that the Embassy in London was recently informed by a representative of the Foreign Office that the Foreign Office was still considering whether the United Kingdom should proceed alone with representations to the Indonesian Government about the draft petroleum bill. The representative also stated that Wilkinson of Shell Oil had seen Dillon and explained Shell’s attitude toward the pending law and the fact that both STANVAC and CALTEX also favored joint protests. (Ibid., 856D.2553/5–758) See Supplement. No tabs were attached to the source text.