Bill Guerin, Jakarta – Despite predictions that Indonesian state oil and gas company Pertamina faces a bleak and uncertain future after the government lifted its decades-long oil and gas monopoly, Pertamina president Baihaki Hakim this week announced his blueprint for the future.
Changes made by the enactment of Law No 22/2001 on oil and gas have, of necessity, generated a new paradigm for the future that will see the company focus its energies on gas distribution and trading, and on the management of oil refineries and gas-processing plants.
Baihaki told the House of Representatives Commission VIII for the mining, oil and gas industry that, in its upstream business, Pertamina would develop its production wells in West Java and South Sumatra, develop geothermal fields and participate in joint venture blocks.
Baihaki has predicted a tripling of Pertamina's pre-tax profits in the coming five years, from Rp9.7 trillion (US$1.06 billion) to Rp24 trillion ($2.68 billion).
Pertamina will also revamp its refineries. Some $1.4 billion will go on this upstream business and $680 million will go toward improving its distribution network, buying tankers, building fuel-oil depots, establish liquefied petroleum gas (LPG) terminals and upgrading fuel-oil terminals in the downstream sectors.
As a consequence of the law that terminated Pertamina's regulatory role, Pertamina was cut down to size and lost, or is in the process of losing, legal ownership of all the country's oil and gas wells.
Though it remains the sole authorized supplier of oil in Indonesia until 2005, parliament has stripped the company of its monopoly over key areas of the oil and gas sector. In line with the Oil and Gas Law, Pertamina will become a limited liability company, a move that is expected to help boost its competitiveness when the oil and gas sector is liberalized. Turning Pertamina into a limited-liability company also removes the contradictions inherent in Pertamina's role as the government regulator while being a state-owned company.
The law has also ended Pertamina's monopoly in the upstream oil and natural-gas industry – exploration, mining and refining.
Pertamina must also unload its non-core assets worth some Rp4 trillion after it formally becomes a limited-liability company. Though Pertamina wanted to retain the non-core assets by setting up subsidiaries, the government wants it to stick to the oil and gas sector to allow it to compete with foreign players once the sector is fully open to free competition.
The new paradigm will see Pertamina focus on profit-oriented ventures that will sharply boost pre-tax profits, and transform it into an efficient and professional business.
Rehabilitating Suharto's biggest money machine into such a desirable entity has not, and will not, come easy. Parasitic brokers and other middlemen, non-transparent bidding procedures and sheer robbery by Suharto and his cronies, most notably Bob Hasan, helped make Pertamina Indonesia's biggest cash cow for decades.
PricewaterhouseCoopers identified billions of dollars in inefficiencies and potential losses in 1999. In February 2000 then president Abdurrahman Wahid appointed Baihaki and tasked him with cleaning up the mess.
In the gas sector, Pertamina is dedicating a separate operation to handling LNG produced by the parent company. This will compete against another state-owned enterprise, PT Perusahaan Gas Negara (PGN), in trading LNG overseas and in distribution to the domestic market.
Pertamina's continued leading role in marketing LNG rankles with the other contractors in the industry. Indonesia has two LNG plants, one in Arun, Aceh, where a military offensive began this week, and Bontang, East Kalimantan. A consortium led by US firm ExxonMobil Corp owns the Arun plant, and the Bontang one is owned by a consortium headed by French firm TotalFinaElf and America's Unocal Corp.
The third is the Tangguh LNG plant, being developed by a consortium led by Anglo-US firm BP PLC, in Bintuni Bay in far-off Papua.
A $2 billion network of pipes and onshore processors will convert Bintuni's gas reserves – among the largest in Asia – into LNG to service markets in Japan, South Korea and China.
Pertamina wants a slice of the action and has already offered the forthcoming Tangguh LNG to Japanese buyers. Baihaki said Pertamina's move was in line with the government's commitment to the development of the Tangguh plant. "Development of the Tangguh LNG plant is a national political commitment," he said.
Pertamina also plans to build its own LNG plant in Donggi, Sulawesi, clearly sparking a conflict of interest.
Baihaki said BP Migas had authorized Pertamina, which handled the marketing of Indonesian LNG prior to the 2001 Oil and Gas Law, to continue marketing the LNG to Japan at the request of the Japanese buyers. "The Japanese buyers are loyal and conservative. They do not want to buy LNG from anyone except Pertamina," Baihaki said.
Pertamina plans to raise its upstream output, including oil, gas and geothermal steam, by about 84 percent over the next five years.
Pertamina's latest report says oil output is expected to rise 28 percent to 180,000 barrels per day in 2007 from 140,000bpd this year, gas output is projected to increase 69 percent to 1,500 million cubic feet per day from 900mmcfd and geothermal steam to increase by 428 percent to 370 megawatt-hours per day from 70MWh/d.
Pertamina will invest about $3.57 billion in developing its upstream sector over the next five years. The additional output would more than double Pertamina's net profit, increasing it to Rp21.9 trillion from about Rp10 trillion this year.
The company is set to spend some $2.08 billion next year to expand the scope of its operations and thus firmly establish itself as a producer, refiner, and retailer of fossil fuels.
The discovery of substantial new resources at Matindok-Donggi in Sulawesi, and in South Sumatra and East Java, helped fuel Pertamina president Baihaki's prediction that the value of the company's assets will more than double in the next five years, from $15 billion to $37 billion, as a result of the expansion under way.
However, figures from the Ministry of Energy and Mineral Resources show a steady decline in Indonesia's oil production (both crude oil and condensate) from 1.6 million bpd in 1995 to 1.34 million bpd in 2001 and about 1.2 million bpd at this year's levels. Some 250,000 bpd is imported from Saudi Arabia to meet the needs of refineries for higher-quality crude.
Facing a decline in oil reserves, Pertamina is expanding its production base to sites outside Indonesia. The plan to start oil explorations in the Block 3 western desert area of Iraq this year has, of course, been jettisoned since the US-led takeover of Baghdad, but Pertamina still plans to explore new oil reserves abroad with the state oil companies of Vietnam and Malaysia.
Pertamina's regulatory role in the upstream sector has been taken over by the Upstream Oil and Gas Implementing Body (BP Migas). In the downstream sector, a separate body called the Downstream Regulatory Agency will assume Pertamina's role.
Non-oil-related businesses, such as hotel chain Patra Jasa and airline Pelita Air, are to be hived off, though there is stout resistance to this within the company itself.
Proceeds from the sale of the non-core assets should be used to upgrade Pertamina's core operation, says the government, notwithstanding that divestment of these will create substantial unemployment.
A key non-core asset is PT Tugu Pratama, Pertamina's insurance subsidiary. This enterprise was the medium for a markup of 5 percent on every insurance policy bought from foreign insurers. Suharto friend and crony Mohamad "Bob" Hasan, now in jail on unrelated corruption charges, headed up this veritable cash cow, which covered operations under Pertamina's production-sharing contracts. Under Baihaki the 5 percent surcharge was eliminated and premiums reduced by an average of 54 percent, saving a total of $20 million in the first year alone.
The management of four major oil refineries – Cilacap (Central Java), Balikpapan (East Kalimantan), and Musi and Dumai (Sumatra) – will go to a new subsidiary, which will also be designated as a BUMN, or state-owned enterprise.
The Cilacap refinery is the main supplier of oil for the island of Java, the most densely populated island in the country, and with the Balikpapan refinery, which supplies sparsely populated Eastern Indonesia, accounts for 60 percent of Pertamina's oil production.
Pertamina contributes less than 15 percent of Indonesia's total crude. The rest comes from production-sharing contractors including US firms PT Caltex Pacific Indonesia, Unocal and ExxonMobil. The biggest producer is Caltex, with an oil output of about 700,000bpd.
The new legislation returned 85 percent of these production-sharing contracts back to the government. Pertamina's insistence that these Western companies use approved subcontractors had previously added as much as 20-30 percent to the cost of oil and gas projects.
Investment in the country's oil and gas sector is essential for it to avoid becoming a net oil importer by 2010 as many have predicted.
Arifin Panigoro, oil tycoon, empire builder and ex-leader of the Golkar party, is always in the frame when political issues come to a head. Though owner of the oil-sector based Medco Group, he was appointed a member of the energy commission at the House of Representatives (DPR).
Just as the political debate over Pertamina and the proposed new Oil and Gas Law was picking up steam, Panigoro said: "We're currently looking for someone who will be suitable to carry out restructuring at Pertamina." Panigoro argued consistently that Baihaki was not the right man for the job.
Panigoro's bias and extreme vested interest stem from September 1982, when his group Meta Epsi won a tender for a Pertamina project to install gas pipes that led into Panigoro, working with a foreign partner, Fluor, securing the contract to build the Pertamina refinery in Cilacap.
Baihaki, within weeks of being appointed, blew the whistle on 159 suspicious contracts between Pertamina and other Indonesian companies, at least 22 of which could result in legal action. Five of those involved Suharto's eldest daughter Siti Hardiyanti "Tutut" Rukmana and former minister of mines and energy Ginandjar Kartasasmita.
A special committee set up by parliament to investigate corruption involving Pertamina revealed in its report last month that a number of former ministers, cronies and members of former president Suharto's family were involved. These include Tutut and Ginandjar as well as former state minister of technology B J Habibie, who later became president, former minister of mines and energy Soebroto, and Suharto's sons Bambang Trihatmodjo and Hutomo "Tommy" Mandala Putra.
With Baihaki at the helm, Pertamina has certainly improved its image by leaps and bounds. The restructuring of Pertamina's operations, and creating a completely new corporate culture, is aimed at preparing Pertamina to compete with foreign companies in the free-trade era.
But the international community is watching to see whether or not the vested interests in the oil-and-gas industry and political heavyweights will combine to drag the new Pertamina back to its image as "untouchable".
With enemies like Panigoro, a close aide to the president herself, still at large, the odds are that Baihaki's security of tenure is far from certain.