Tim Johnston – If the shipping lanes of South-East Asia have their dangers, doing business on land can be just as fraught. Western oil and mining companies have discovered to their cost that the locals are not always welcoming. BP is the latest multinational to test the area's resolve.

The oil giant has just announced the winners of a tender to construct a $1.4 billion (A$870 million) natural gas liquefaction plant to serve the Tangguh liquid natural gas (LNG) project in Indonesia's restive eastern province of Papua. The project is due to come on stream in 2007.

Corruption in Indonesia, unrest in Papua itself and an increasingly fragmented gas market make Tangguh a higher-risk project than most. Indonesia is noted for its corruption and ranks 96 out of 102 countries in Transparency International's Global Corruption Index. Most investors pay the price.

PT Freeport Indonesia, part of the Freeport McMoRan mining group, admitted paying $5.6 million to the Indonesian military last year for protection of its Grasberg copper and gold mine, which is also in Papua province. The Indonesian military receives only 30 per cent of its funding from central government and makes up the shortfall by having its fingers in almost every pie in Indonesia, from hospitals to illegal logging.

Until now, paying protection money to the security services has been all part of doing business in Indonesia. BP has vowed that it will not follow this path. The company has taken a very public stance against corruption and says that it will not pay any bribes or pay the military or police to carry out their duties.

Instead, it is backing a community-based security policy, which involves everyone from the local Papuan communities in the vicinity of the plant, to the local authorities and the regional and national security forces. By creating a web of mutual reliance and protection, BP hopes to create an atmosphere in which an attack on the project or an attempt at extortion would be seen as an attack on the community and nation as a whole.

Some believe that although the community-based approach is likely to be effective in minimising threats from Papuan separatists, BP's attempt to deny the military a slice of the Tangguh project is bravery bordering on foolishness. BP disagrees, arguing that paying the army for security has been part of the problem rather than part of the solution.

Arian Ardie, a senior consultant to BP Indonesia, says the policy of surrounding businesses with a ring of steel has been at the root of the security problems. He says: "If you look at Papua – the basis of conflict there and the security incidents there – many have happened because of an actual security presence that companies have brought in, and that is what we have to avoid. What we don't want is where the military takes a role in protecting us from the community: we are part of the community. We have contingency plans but those contingency plans cannot rely on ever-increasing use of force or the threat of violence. That will not lead us to a more secure and stable work environment."

Ardie says that there has already been considerable consultation with the military – known locally as Tentara Nasional Indonesia, or TNI – as well as with local and national government, and the response has been favourable. He says: "The community-based security programme is not a novel concept. It is very much in line with the overall security policy of TNI and the police. The problem is that in terms of implementation, that has not always been the case."

BP is taking a brave stance in a country where the military has a well-earned reputation for stepping outside its allotted role and where, five years after the fall of the disgraced dictator, President Suharto, the civil government still seems unwilling to challenge the power of the army. Sidney Jones, a respected observer of Indonesian politics, believes that BP is following the morally correct route, but cautions that it will not be easy. Jones, who heads the office of the International Crisis Group in Indonesia, says: "I think they are doing the right thing, and the right thing is not to hire TNI as security, but there will clearly be a lot of manoeuvring with TNI, particularly when the money starts to flow."

Three Freeport employees, including two Americans, were murdered last year in an ambush near the Grasberg mine. No one has been brought to justice for the crime, but the police have accused the army special forces of being behind the killings. Some observers allege that the attack was part of an attempt by the military to extort more money from Freeport. The military has denied the accusations.

Ardie says that if BP is the victim of repeated extortion attempts that cannot be solved through official channels, the company could invoke the ultimate sanction of shutting down the project. He says: "By [paying protection money] we have a much greater risk to our reputation, and that loss in reputation [would be] much bigger than the specific assets we have on the ground."

One observer says that whether or not BP is prepared to carry out its threat is less important than whether the Indonesian authorities believe it is prepared to carry it out. Gavin Thompson, a senior energy analyst with Wood Mackenzie Consultants, says he believes that BP would follow through on its threat. "It is undoubtedly realistic," he says. "We have ingrained in their company policy that they won't give bribes. It is a question of whether they would walk away immediately or go back to the table."