UPDATE 1-Indonesia eyes new cabinet posts for natural resources

*Red tape, permitting holds back key resource projects

*President eyes new coordinating minister for resources

*New structure could include splitting energy and mining post

*Trade and industry ministries could be merged

*Yudhoyono due to set cabinet before his Oct. 20 swearing in

By Muklis Ali

JAKARTA, Sept 28 (Reuters) - Indonesian President Susilo Bambang Yudhoyono, who begins a second, five-year term next month, may create new ministerial posts to spur development of the natural resources sector, sources told Reuters.

Indonesia has some of the world's largest deposits of natural gas, nickel, copper, tin and coal, while it is the world's biggest palm oil producer and second-biggest rubber producer.

But a combination of red tape, legal uncertainty, graft and heightened nationalism has deterred many foreign investors and held back development of energy and mineral resources, depriving Southeast Asia's biggest economy of important sources of revenue.

"One idea is to establish a new coordinating minister for resources to accelerate permits and licensing to develop natural resources," said a government source, who declined to be identified by name.

The new arrangement to help fast-track development could also lead to a separation of the energy and mining portfolios, which are currently under one minister. The co-ordinating minister would oversee these, as well as the agriculture, forestry, and environment ministries, the source said.

Disputes between ministries have often held up development of natural resource projects.

A second source said that under the law the president would have to scrap other portfolios in order to establish new portfolios. One possibility was that the president could decide to merge the trade and industry ministries into one portfolio.

The current trade minister, Mari Pangestu, has a high international profile and generally favours pro-market policies, while the industry minister is Fahmi Idris.

The two have appeared at odds over some protectionist policies during the economic crisis, including when Idris called on civil servants to buy only locally produced shoes.

LITTLE MINING INVESTMENT

Yudhoyono's government passed a new mining law last year, after years of delays. The drawn-out process and delays in setting new regulations has resulted in little new investment, while in the energy sector the country has also become a net importer of crude oil as its older oil fields age.

Yudhoyono is due to announce his cabinet before he is sworn in for a second term on Oct. 20, and has stressed that he is still deciding on his new cabinet.

During his first term, when his Democrat Party had only a tiny share of the seats in parliament, Yudhoyono gave key cabinet posts to politicians from his coalition partners in an attempt to win their support in parliament.

However, that strategy often misfired, making it difficult for the president to push his reforms through.

Now that Yudhoyono's Democrat Party has the biggest share of the seats in parliament, he is expected to choose more technocrats for his new cabinet.

"There are several ministries related to resources that have in the past found it very difficult to reach decisions. The new co-ordinating minister is expected to handle these problems," said the source.

One key area of uncertainty and friction is between the mining, forestry and environment ministries, where legislation at central and at local government levels may be conflicting, with the result that investors are uncertain over who is issuing permits.

The Indonesian unit of Newmont Mining Corp (NEM.N: Quote, Profile, Research) said in July mining could be hit if the forestry ministry did not renew a permit allowing it to clear land for waste disposal at its Batu Hijau copper and gold mine in Sumbawa island. Newmont, which had submitted its request in 2004, finally got a permit this month.

Media reports have put forward a number of possible candidates for energy minister. These include Evita Legowo, current director general of oil and gas at the energy ministry, Gita Wirjawan, a former banker with JP Morgan who now runs an investment firm specialising in the energy sector, and Kuntoro Mangkusubroto, a former energy minister who won praise for his running of Aceh's post-tsunami reconstruction.

The current energy and mining minister, Purnomo Yusgiantoro, could be a possible candidate for the new co-ordinating post if that structure was adopted, a government source said.

Indonesia has the world's 10th largest natural gas reserves and 25th biggest oil reserves, while it ranks in the top ten for copper, gold, nickel and tin, but a poor investment climate has deterred new foreign interest The cabinet currently has three coordinating ministers, one overseeing social welfare, another for economics, and a third for security, legal and political affairs.