JAKARTA, Indonesia—Indonesia is trying to capture a bigger share of the vast wealth from its natural resources by seeking more favorable deals and building state-owned firms into industrial behemoths, a strategy that risks alienating foreign investors and has already spooked Freeport-McMoRan Inc. shareholders.
President Joko Widodo is attempting to seal an agreement that would give a majority stake in the mountaintop Grasberg mine in eastern Indonesia to the government. Phoenix-based Freeport agreed to give up majority control last year, and last week publicized new government hurdles that analysts said appeared aimed at knocking down the cost of a controlling stake. The company’s shares fell more than 20% from their closing price on April 23 through Tuesday.
In January, state petroleum company Pertamina took over Indonesia’s largest natural gas project when the government declined to renew a contract with France’s Total SA and Japan’s Inpex Corp. Later this year, Pertamina will take over a host of oil and gas fields from private investors when their concessions expire.
Indonesia, which is due to hold elections next year in which Mr. Widodo is seeking another term, says its aim is to strike better deals in a more transparent era, two decades after longtime dictator Suharto was overthrown.
“The government gives the same opportunity to everybody, and whoever can give better compensation, better royalty, better tax to the government, the government will pick them,” said Ignasius Jonan, Indonesia’s energy minister. “Ten years ago could any investor bid for our natural-resource concessions? You had to have connections with government officials. Now it’s free.”
Mr. Jonan said the Pertamina takeovers were granted because the company offered terms that were more favorable to the government.
Mr. Jonan said negotiations for a Freeport stake were taking place on a “commercial basis,” and that he trusted the environmental ministry in its new complaints about Freeport’s disposal methods.
Freeport’s Indonesian unit said new requirements from the ministry are “wholly inconsistent” with a government-approved management system, and that they are “not achievable and not workable.” Chief executive Richard Adkerson last week called the demands “shocking.”
Indonesia has been merging giant state companies in capital-intensive industries so that they will be able to access financing and offer better terms on extracting resources.
“The bigger they are,” Mr. Jonan said, “the more muscle they have to compete.”
State-owned companies were instrumental in building Indonesia after three centuries of colonization by the Netherlands, but development has been uneven across the 18,000 islands straddling the Pacific and Indian oceans that comprise the nation. Indonesia has the world’s fourth-largest population, some 250 million people, and is Southeast Asia’s largest economy.
Mr. Widodo also hopes to woo more foreign investment in tech industries, for example, to lift the trillion-dollar economy off its dependence on natural resources.
Yet, the current strategy could rattle foreign investors who are critical to bringing in investment and technical skill.
Eyes will soon shift to Abadi, a gas field in the Timor Sea that Inpex and Royal Dutch ShellPLC were planning to tap with an immense floating refinery until Mr. Widodo nixed the plan in 2016, saying he wanted land-based processing operations instead. Inpex said piping the gas to onshore facilities up to 600 kilometers away would add up to $7.5 billion to the cost.
The industry is watching to see whether Jakarta offers fiscal and other concessions that would make the undertaking feasible, something analysts say is unlikely in the short term with presidential elections on the horizon.
Abadi “will serve as a bellwether for resource nationalism and the fortunes of Indonesia’s upstream sector,” said Hugo Brennan, senior Asia analyst with risk consultancy Verisk Maplecroft.
Freeport’s Grasberg mine has long been a high-profile target for protest. Nationalists have objected to local resources benefiting a foreign company, and there have been intermittent clashes between separatists and authorities near the mine over the years.
The president runs little political risk of squeezing out the U.S. company, which has sunk more than $14 billion into the project. Over the life of the mine, Freeport says the government’s take in royalties and taxes is $40 billion. Freeport is one of the country’s largest taxpayers.
Freeport is seeking to retain control of the complex project’s operations and management, a concession that mining analysts say is necessary but could also expose the government to criticism.
More takeovers are coming and Freeport is seen as “the tip of the iceberg,” said Bill Sullivan, a Jakarta-based adviser to mining companies. “It’s politically popular and it’s certainly consistent with the socialist rhetoric one hears in Indonesia these days.” Mr. Widodo has instructed his state energy companies not to raise prices of subsidized fuel and electricity through 2019. He has also set price ceilings on staples like rice and sugar.
Indonesia has enforced rules limiting foreign miners to minority stakes in local companies and has unveiled new oil and gas contracts that give the state a greater share of revenue.
Last year, Exxon Mobil Corp. walked away from developing one of the world’s largest-known untapped reserves of natural gas, saying the complex project wasn’t feasible under the terms offered. Thailand’s state-run PTT Exploration and Production Public Co., or PTTEP, withdrew as well.
The new oil and gas contracts are a key reason local production didn’t increase last year despite higher oil prices, said Peter Mumford of global political risk consultancy Eurasia Group.
Write to Ben Otto at email@example.com