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Indonesia struggles to capitalize on its oil

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Last week, Indonesia's anticorruption agency said it was investigating BP Migas for allegedly underreporting oil output between 2000 and 2007, with potential losses to the state of $21 billion. Smuggling of subsidized fuel to nearby countries has long plagued the industry, which was a source of corruption and patronage for decades under former President Suharto.

"There doesn't seem to be one big factor that says 'don't explore' and 'don't develop.' But there are many little factors that keep Indonesia from being the next big oil boom," says Arian Ardie, a senior partner of Navitas Strategic Consulting in Jakarta, which advises foreign clients in the energy sector.

Analysts say foreign oil companies are deterred by revenue-sharing contracts in Indonesia that typically allocate 85 percent of income to government coffers and 15 percent to private companies, with a 70/30 split for deepwater deposits. Other emerging oil-producing countries such as East Timor offer a far more equitable split to foreign producers.

Having already exhausted most of its richest oil fields, Indonesia is looking less attractive to oil majors that put a premium on size, says John Vautrain, a Singapore-based senior vice president for Pervin & Gertz, a US oil consultancy.

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