* Official accused of receiving more than $500,000 fromKernel Oil employees
* Indonesia is trying to attract investment into oil sector
* Latest high profile graft scandal in Indonesia
By Fergus Jensen and Andjarsari Paramaditha
JAKARTA, Aug 14 (Reuters) - Indonesia's anti-graft agency onWednesday arrested the head of the energy regulator to probeallegations he took more than half a million dollars from an oilfirm, piling more uncertainty on energy policy in SoutheastAsia's biggest economy.
The arrest is a new blow to Indonesia's attempts to attractmore investment from international energy companies, several ofwhich have threatened to scale back operations due touncertainty about the investment environment.
The former OPEC member's oil output is declining, and thecountry has faced criticism for unclear regulations andcomplaints about a nationalist stance on resources.
Indonesia's Corruption Eradication Agency (KPK) said SKKMigas Chairman Rudi Rubiandini had been caught taking around$400,000 in a black brief case and ownership documents for a BMWmotorcycle from the owner of Singapore-based Kernel Oil, SimonTanjaya. An additional $190,000 was found in the chairman'sresidence, KPK spokesman Johan Budi said.
KPK said it was the biggest cash seizure by the agency inits 10-year history.
Kernel Oil officials in Singapore and Indonesia declined tocomment, while Rubiandini could not be reached for comment.
The firm buys crude from Indonesia's SKKMigas and then sellsit to international markets. It also supplies oil products toIndonesia.
Finance Minister Chatib Basri told Reuters that while thegovernment was committed to zero tolerance of corruption thecase did send a "bad signal to investors."
Some oil company officials were also shocked by the news.
"This industry is already tough to deal with and itshouldn't be weighed down by this sort of scandal," said anofficial at a foreign oil firm with operations in Indonesia.
The oil and gas sector is politically crucial, accountingfor about a fifth of Indonesia's government revenue.
Indonesia was once self-sufficient in oil and gas but hasbeen struggling for years to attract investment to haltdeclining output from a peak of around 1.6 million barrels perday in 1995. Indonesia produced an average 831,000 bpd in thefirst half this year.
LATEST HIGH-PROFILE GRAFT SCANDAL
Rubiandini was appointed in January to head SKKMigas afterthe independent industry regulator BPMigas was declaredunconstitutional. Some experts say the motivation was to gaingreater control over the sector after SKKMigas was placed withinthe energy ministry.
SKKMigas denied the arrest would damage Indonesia's oiloperations. The agency has existing contracts with oil majorsincluding BP Plc, Chevron and Exxon Mobil.
"Operations will continue to run. There is no impact,"Biantoro said. "For now, with the vacuum in the top post, thereare no crucial issues that need to be decided upon."
Energy Minister Jero Wacik said Rubiandini has beentemporarily suspended as SKKMigas chairman and would be replacedby Vice Chairman Johanes Widjonarko.
The SKKMigas chairman is the latest high-profile governmentofficial to be accused of corruption in Indonesia.
KPK in December named Youth and Sports Minister Andi AlfianMallarangeng as a corruption suspect, while senior policeofficial Djoko Susilo is currently on trial for moneylaundering.
While foreign investment continues to pour into theresource-rich country, there are growing concerns that rampantcorruption and an incompetent bureaucracy could throttle growthand see that investment turned away.
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