Court battle puts massive coal project in jeopardy

As Korean companies race to exploit Indonesia’s abundant natural resources, two companies have been locked in a court case that has become so bitter that the massive 230 million ton coal development project at the center of the dispute is in jeopardy of falling into foreign hands.

CircleOne is showing signs it might sell its development stake to an overseas company. If this occurs, it will be a significant loss for Korean industry. Korea imports all of its steam coal and the government has designated it as one of the six most important resources. Last year, Korea imported 75.6 million tons worth $7 billion.

The KBB mine is the largest overseas mine that any Korean company has won the right to develop. It is on Sumatra Island, Indonesia, and covers 18,440 hectares (45,566 acres), which is about one-third the size of Seoul.

On June 13, SK Group affiliate SK Networks and CircleOne squared off over the stalled project in Seoul Central District Court, in what was the latest chapter in the three-year court battle.

While SK demanded CircleOne pay back the $20 million investment and $13.8 million in loans, CircleOne accused SK of being in breach of their 2007 deal.

CircleOne became the second Korean company to win resource development rights from the Indonesian government when it won the rights to KBB in March 2007. Several Korean companies had been vying for the project, including SK Networks. That prompted SK to team up with CircleOne to jointly develop the mine.

Under the 2007 arrangement, SK would invest $20 million in the project for a 23.5 percent stake. It also agreed to lend CircleOne an additional $22 million to set up on-site infrastructure. However, it all unraveled in early 2009 when SK suddenly stopped supplying CircleOne with cash - refusing to lend the company the remaining $8.2 million. Then in March last year, SK filed a lawsuit, demanding that CircleOne pay back all the money it had been lent. A shovel hasn’t entered the ground since.

SK claims CircleOne violated the terms of the contract by skipping on regulatory approval. It added that CircleOne falsely claimed to have resource rights to the entire 45,566 acre area, but in actual fact other companies had been operating oil wells and still more were farming. SK said its loans were meant for only development, but CircleOne used them to raise wages.

CircleOne, however, said SK’s claims are not true. It said the contract did not outline the resource rights and regulatory approval had been sought when required. SK, CircleOne claims, conducted due diligence four months before the contract was signed and had full knowledge of the oil projects and farming already taking place within the boundaries of the mine.

Time is ticking on the two-year court battle. If the sides can’t reconcile and infrastructure is not built by April 2012, the Indonesian government could invoke a contractual “out” in its deal with CircleOne and reopen bidding to develop the mine.

International steam coal prices have been on the rise due to the earthquake in Japan, as market watchers forecast higher demand for coal as a replacement for nuclear power. Prices rose from $84 per ton in 2009 to $131.80 per ton in April.

“We need to block the development rights going over to an overseas company at all costs,” said Kim Jung-gwan, the second vice minister at the Ministry of Knowledge Economy. “We hope that the two sides reconcile.”

Some experts suggest that the Korea Resources Corporation buy CircleOne’s rights.

The court is expected to make a ruling on Thursday.

By Kim Yeong-ook, Jung Seung-hyun [seungjung@joongang.co.kr]