Wed, 30 Aug 2006
Pertamina starts to feel pinch of 'free market'

Benget Simbolon Tnb., The Jakarta Post, Jakarta

State-owned oil and gas company Pertamina has begun to feel the pinch of increasingly steeper competition in the oil and gas sector following the issuance of a 2001 government regulation that stripped the company of its monopoly,

A subsequent government regulation, issued in 2003 and changing Pertamina into a pure business entity, has added to the pressure on the company to transform itself into a more efficient energy firm.

For Pertamina, which earned a reputation in the past for corruption, collusion and nepotism, changing its direction into a business entity oriented toward turning a profit is proving to be a difficult task.

Even now, many senior government officials and politicians still regard Pertamina and other state firms as cash cows there for the milking.

Speaking to journalists in Jakarta recently, Pertamina president director Ari Soemarno said he hoped to transform Pertamina into a world-class and efficient company within five years in order to be able to survive the new free market era.

"We're optimistic that we can realize this in five years," he said.

Under a government regulation issued in 1971, Pertamina was the country's single oil and gas regulator and operator, holding exclusive rights in the exploration, production and distribution of oil and gas.

But now, with the new regulations, other players have been allowed to enter the oil and gas sector here on what is supposed to be a level playing field.

Although Pertamina still holds the exclusive right to sell subsidized fuels, Shell, Europe's second largest oil company, and Petronas of Malaysia have been allowed to enter the fuel retail market to sell non-subsidized fuels, such as high-octane gasoline.

Shell operates three stations in Greater Jakarta and has plans to build two more stations. Petronas has built one station in the southern part of the capital and it also plans to expand its retail business.

Soemarno said recently that over the next five years Pertamina needed an investment of US$1 billion to improve its retail stations and storage facilities across the country.

The company has set a target of building 700 gasoline stations this year and 1,000 stations next year, in cooperation with local companies.

It has offered private companies the opportunity to take part in opening new gas stations under a franchise business arrangement.

"So far this year, 2,426 investors have applied to develop gasoline stations. Some 630 of them have been approved," Soemarno said.

He said construction of the gasoline stations would begin after the investors met all of Pertamina's requirements, including the payment of franchise fees.

The company also plans to invest $22 million to build 55 gasoline stations on its own next year. The construction of one station will cost about Rp 3 billion (US$330,000), depending on the price of the land.

In addition, the state oil firm plans to revamp six of its gas stations in Jakarta so they can serve as models for other Pertamina stations across the archipelago.

It also plans over the next four years to build 500,000 kiloliters of fuel storage to cope with expected increases in the country's fuel demand.

Hanung Budya, Pertamina's deputy director of trading and marketing, said in Bali recently the company would also need an additional storage capacity of 300,000 kiloliters in the next four years.

"We will build fuel facilities in East Java and West Java," he said.

The company currently depends on leasing tankers to provide additional stocks if demand increases in certain distribution areas.

But despite its ambitious plans, there are concerns the company will be unable to meet its targets on schedule. Problems ranging from a shortage of funds, the unchanged mind-set among government officials toward Pertamina and aging workers still stand in the way of transforming the company.

"We're facing a shortage of funds to finance our transformation projects. Actually, that money could come from our big profits, but we only retain a small amount of our earnings every year," Soemarno said.

During an informal discussion with a number of Pertamina officials, they complained that government officials, particularly politicians, still considered the company a cash cow that could be tapped every time they needed funds.

In addition, the company's human resources are not yet competitive enough to face the more open competition. With 45 percent of its workers aged between 41 and 50, and 41 percent above 50 years old, the company's management doubts it can improve its productivity and efficiency.

"But we cannot just accept the situation as such. The competition out there is getting steeper, and we have to transform ourselves in order to benefit from the new conditions," Soemarno said.



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