Indonesia could be tricky for BHP

A battle could be brewing for BHP Billiton (BHP-N, BLT-L) on a small island in Indonesia, where the company could soon find itself in the sights of environmental groups.

BHP has agreed to a 50/50 partnership with the Indonesian stateowned company Antam for two nickel projects in the country — the most contentious of which lies on Gag Island.

Gag Island is situated just off of West Papua — where Freeport-McMoRan Copper & Gold’s (FCX-N)massive Grasberg mine sits — and is known as an environmental jewel for both its forests and the coral-based marine ecosystem that lies just off its coasts. BHP has already felt the push of environmental organizations seeking to protect the area. Development of the site was suspended in 1999 after environmental groups convinced the government to classify the region as a protected forest.

And while the area has been nominated as a UNESCO world heritage site, the full designation has not been forthcoming.

UNESCO says it can’t grant the designation unless the national government gives it the highest form of protection and lists it as a national park.

But rather than tighten protection, in 2004 the government changed regulations to allow BHP and Antam to mine there. At the time, there were allegations that the changes came following considerable pressure from the Australian government.

While BHP has been tight-lipped about the deal — it has issued no press releases about it — its chief executive Marius Kloppers referred to a US$2-billion-plus investment in an “eastern Indonesian facility” during an investor’s presentation in June.

The company has acknowledged the deal with Antam, but says the agreement is conditional upon board approval. Expected in July, that approval has still not materialized.

If it is approved, the project would see refineries built, as well as nickel mines — something that would fit with Antam’s stated intention to become more involved in downstream mineral processing.

BHP’s interest in Indonesia extends beyond just nickel; the company is in the process of building a coal mine in East Kalimantan — the Indonesian portion of the island of Borneo — with production slated for the end of the year.