A decision by Indonesia's Constitutional Court last Tuesday ruled that the role and responsibility of the regulator, BPMigas, violated Article 33 of the Indonesian constitution, which states that resources should be controlled by the government.
BPMigas, was formed in 2001 to negotiate contracts with oil and gas companies. Contracts signed under the jurisdiction of BPMigas wouldn't be affected, the court said.
"The investors will see that in Indonesia, a law can be annulled like that," Deputy Energy and Mineral Resources Minister Rudi Rubiandini was quoted as saying in a report Monday by Chinese state-owned news agency Xinhua.
"They will become cautious over their contracts, which are beneath the law itself," Rubiandini said. "People (the investors) will be afraid."
A survey by the Fraser Institute last year ranked Indonesia 111th out of 135 countries for its appeal to investors.
Rubiandini said "it's not impossible" for Indonesia's investment ranking to decline further as a result of the court's ruling.
Indonesia is Southeast Asia's largest oil producer. Foreign-owned companies, including Chevron, Exxon Mobil, Total, ConocoPhillips and BP account for about 90 percent of Indonesia's production of some 2.36 million barrels of oil per day, The Sydney Morning Herald reports.
Following the announcement, the chairman of the defunct BPMigas, Raden Priyono, warned that negotiations with foreign companies, including BP's proposed $12 billion for an expanded natural gas facility in Papua, would stall as a result of the ruling, the Herald report said.
Indonesian President Susilo Bambang Yudhoyono last Wednesday temporarily transferred the oil and gas regulatory responsibility to the Energy and Mineral Resources Ministry, and in a televised address, sought to reassure investors.
"To local and foreign investors, as well as other actors in the oil and gas sector: all agreements and work contracts remain in place," Yudhoyono said. "All work and operational activities, as part of BPMigas's partnerships with investors and the business sector, will continue as they were."
Indonesian Chamber of Commerce and Industry's Chairman for oil and gas Firlie Ganinduto said that adapting to the new regulator could affect investment, noting that when BPMigas was formed, there was a five-year period for companies to adapt to the new regulatory environment.
"Now, they must be prepared to adapt to a new regulation," Ganinduto said, Xinhua reports. "This situation will hurt Indonesia's investment climate."