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Amid resource boom, investors target land in remote Papua area

Wall Street Journal - July 28, 2008

Tom Wright, Jakarta – The global resource boom is threatening one of the world's last tropical-forest frontiers: the Merauke region of Indonesia's remote Papua province.

Indonesian companies are lining up to develop pulp-and-paper mills in Merauke; investors from South Korea want to expand palm-oil plantations; and Indonesian officials have tried to persuade International Paper Co to invest in the region.

Merauke lies on the southern shore of Papua province, a California-size land of virgin forests and pristine rivers, with a population of 2.5 million. Because Papua is so remote, its ecology has been largely spared the kind of destruction wrought on forests in the past 25 years by pulp mills and palm-oil plantations on other Indonesian islands.

The governor of Papua pledged in December at the United Nations climate-change meeting in Bali to protect the province's forests in return for carbon-credit financing from global investors. But these projects are likely to take years to come to fruition; meanwhile paper, palm-oil and other agricultural investors are already staking out Merauke.

Indonesia is under intense international pressure to protect its forests. Last year, Wetlands International, an environmental group, published data showing that fires set to clear forests for agriculture make Indonesia the world's third-largest emitter of carbon dioxide behind the US and China, despite its much smaller economy.

Still, record commodity prices and lack of available land elsewhere are driving investors to regions such as Papua. Environmentalists fear the area's forests will be destroyed much like those on Sumatra and Borneo islands, where rare elephants, tigers and orangutan are threatened with extinction.

Medco Group, an Indonesian oil and gas company, has recently begun construction of a wood-chip mill in a remote part of Merauke and plans to start building a 500,000-metric-ton-a-year pulp-and-paper factory in 2012. The plant would be Indonesia's first large new mill since the 1997-98 Asian financial crisis and the first in Papua.

Modern Group, a local distributor of Fuji photographic equipment, is hoping to acquire land for a pulp mill in Merauke despite having no track record in paper making, a person familiar with the matter said. Modern Group declined to comment.

International Paper, of Memphis, Tenn., confirmed it has been in talks with Indonesia's forestry ministry about establishing a large plantation somewhere in the country. Hadi Pasaribu, director general of production forest management at Indonesia's forestry ministry, said the government had offered International Paper two areas: one in Merauke and the other on the Indonesian side of Borneo. The company was considering a 1.5 million-ton-a-year mill with a possible investment of more than $3 billion, Mr. Pasaribu said.

Thomas Gestrich, president of International Paper's Asian operations, said the discussions were only "exploratory." The company is looking to develop sustainable forestry operations in a number of countries, including Indonesia, he said.

Environmental organizations such as the World Wide Fund for Nature, based in Switzerland, and Washington-based Conservation International are hoping to work closely with investors like Medco to ensure they don't destroy forests.

That is a departure from the 1990s, when two Indonesian-owned pulp-and-paper companies – Asia Pulp & Paper Co. and Asia Pacific Resources International Holdings Ltd. – established huge mills on Sumatra island without any input from environmentalists. The WWF estimates the two companies have felled an area of natural forest equal to two million hectares in one area of Sumatra alone over the past 20 years.

"Development, of course, is needed in Papua," said Nazir Foead, head of the WWF's Indonesian species program. "But we're concerned this could be a repeat of the deforestation in Sumatra and Borneo."

Both Asia Pulp & Paper and Asia Pacific Resources say they are committed to setting up sustainable plantations. Both are jockeying to get large concessions of untouched forests in Papua to feed their mills. So far, the companies have managed to win only small parcels of land in the province.

Meanwhile, other investors seek to expand their palm-oil operations in the region, including the Korindo Group, a joint venture between South Korean and Indonesian investors.

Medco appears to have the biggest plans for Merauke. The company this year persuaded the local government to grant it a 350,000-hectare concession area near the Bian River.

Medco, headed by entrepreneur Arifin Panigoro, is planning to diversify its business from oil and gas through spending $750 million on its pulp-and-paper mill development. It has also set aside $350 million for a plan to develop agricultural and biofuel projects in Papua.

The company estimates that $3 billion is needed to develop infrastructure, including roads and ports, and is hoping to attract foreign partners.

Medco contends its mill will be environmentally friendly. The company won't buy any wood from third parties, reducing incentives for illegal logging, said Widjajanto, Medco's corporate secretary. It also plans for the mill to eventually run 100% on wood from its own acacia plantations.

In the seven years it will take to establish those plantations, Medco said it will only cut trees in the natural forest selectively and will also set aside 100,000 hectares for conservation in its concession – a swampy area of eucalyptus trees that is on an important migratory route for birds.

Jatna Supriatna, who heads Conservation International's local office, said development in Merauke is preferable to northern areas of Papua where forests are more diverse. But he said environmental groups will be keeping a close eye on developments.

"We want to make sure that Medco will comply with good corporate governance," he said.