(EnergyAsia, July 6 2012, Friday) — Indonesian President Susilo Bambang Yudhoyono said he has taken note of a huge international lawsuit filed against his government for allegedly failing to honour the terms of UK-based Churchill Mining Plc’s investment in a coal project in Kalimantan province as set out under a bilateral investment treaty between the two countries.

At a Cabinet meeting specially convened last week to discuss the issue, Mr Bambang told his ministers to “prepare for the worst” as the suit has affected his standing as head of state and added to Indonesia’s reputation as a risky investment destination where the rule of law may not always apply.

While instructing his ministers to try prevent future arbitrations, the President was just as defiant in preparing to fight the upcoming arbitration filed by London-listed Churchill Mining Plc with the International Center for Settlement of Investment Disputes (ICSID) in Washington DC on June 22.

Churchill is seeking some US$2 billion in compensation after the Indonesian Supreme Court upheld the ruling by the Samarinda Administrative Court in East Kalimantan favouring the East Kutai regency’s May 2010 unilateral decision to seize its assets and revoke licences to develop coal deposits within its jurisdiction.

Having exhausted its Indonesian channels, Churchill, which owns a 75% stake in the project, decided to file an international suit against the Indonesian government. The defendants include the Indonesian President, East Kutai Regent Isran Noor, the Ministry of Foreign Affairs, the Ministry of Energy and the Investment Coordinating Board (BKPM).

Churchill Mining Plc listed on the Alternative Investment Market (AIM) of the London Stock Exchange in April 2005 to focus on developing what it calls is a world-class thermal coal deposit in Kalimantan’s East Kutai. The company said it discovered the deposits following an intensive and targeted exploration programme.

In its suit, Churchill said Indonesia failed to rectify the issues described in two previous letters to the country’s President.

“Both letters emphasised that following a significant investment in East Kutai, Churchill identified a world class thermal coal deposit in East Kalimantan. Shortly thereafter, Churchill became the subject of a sustained campaign designed to divest Churchill’s legitimate rights to develop this deposit,” it said.

President Bambang has drawn the line that his government views this as a direct contest between a multinational company with global connections against a developing country.

Foreign investors view this as further test of Indonesia’s adherence to the rule of law.

There will likely be no winners as Churchill may find it difficult to enforce a favourable ruling while Indonesia will only succeed in scaring off investors if it wins the arbitration.