Can Pertamina save the nation one more time?<\/p>\n
By T.N. Machmud<\/p>\n
JAKARTA (JP): Minister of Mines and Energy Kuntoro
\nMangkusubroto has on more than one occasion discussed the need
\nfor Pertamina to restructure and to return to its core business.
\nAs a former member of the oil and gas fraternity I fully endorse
\nthat sentiment. A total overhaul of the way Pertamina conducts
\nits business is long overdue.<\/p>\n
Part of Pertamina's core business is to look for and develop
\noil and gas resources for the greater benefit of the people.
\nTheir constitutional mandate states so in exactly these words.
\nRevenues from oil and gas are still the nation's largest single
\nforeign exchange earner.<\/p>\n
Unfortunately the price of crude oil is currently depressed, a
\nfact which has distorted the nation's budgetary planning and done
\nnothing to help its current predicament. However, oil prices move
\nin cycles, and oil and gas will therefore continue to be a major
\nrevenue earner.<\/p>\n
There is a belief that Indonesia will become a net importer of
\ncrude oil in the near future. I personally do not believe this,
\nbut the prediction may yet become self-fulfilling. If we voice
\nthis opinion loud enough and for a long enough time it may yet
\nbecome a reality. What we should be doing is taking positive
\nsteps to prevent this from happening, at least in the near
\nfuture, by increasing oil and gas production.<\/p>\n
To manage its core business properly, Pertamina must increase
\noil and gas production, either through its own efforts or in
\ncooperation with production sharing contractors (PSC's). Between
\n1966 and 1976, Pertamina tripled national crude oil production
\nfrom 500,000 barrels per day (bpd) in 1966 to 1,500,000 bpd in
\n1976. That was a magnificent performance, but then between 1976
\nand 1997 Pertamina was hard pushed to keep production from
\ndropping back down below 1,500,000 bpd. Furthermore, Pertamina's
\nshare of total national production fell from roughly 10 percent
\nin 1967 to little over 4 percent in 1997. Production sharing
\ncontractors account for the remaining 96 percent, according to
\nthe 1997 U.S. Embassy Petroleum Report.<\/p>\n
What went wrong? Why did an inspiring and dynamic company
\nstagnate and become such a cumbersome entity?<\/p>\n
Between 1966 and 1976 the company worked tirelessly to expand
\nproduction, but between 1976 an 1997 their was an agenda to
\nbureaucratize Pertamina and to turn it into a cash-cow for the
\ngovernment.<\/p>\n
By demanding a refocusing on core business interests, Minister
\nKuntoro will force Pertamina to develop a restructuring plan
\nwhich spells out exactly where the company is going and how it
\nintends to get there. Any restructuring plan should also contain
\na clear strategy to avoid becoming a net oil importer. Just
\nimagine what would happen to this country if on top of our
\nmonetary woes we had to pay for imported crude oil like we now
\nhave to pay for imported rice.<\/p>\n
Pertamina should focus efforts on restructuring its
\norganization in a way aimed at ensuring the company recovers its
\nformer glories and begins to expand in an optimal fashion.<\/p>\n
For that it needs funding and proper management. It already
\nhas an ample reservoir of excellent field engineers and
\ngeologists. What they need is projects to sharpen their teeth on.
\nProjects need capital, hence the funding requirement.<\/p>\n
It would be prudent in this light to take a hard look at
\nneighboring Malaysia, whose state oil company Petronas, since its
\ninception in 1974, has developed a magnificent exploration and
\nproduction capacity through Carigall, a wholly owned subsidiary.<\/p>\n
Thanks to Carigall's unrelenting efforts, Petronas now
\nproduces roughly 30 percent of Malaysia's overall national
\nproduction of 630,000 bpd.<\/p>\n
Compare this to Pertamina's pathetic 4 percent and you will
\nunderstand why I think Pertamina ought to set up a Carigall of
\nits own to replace their current exploration and production
\ndivision.<\/p>\n
But why was Petronas so successful in such a short time? The
\nanswer is simple: clean government, total government support for
\ntheir business plans, little interference from the Malaysian
\ngovernment in the company's day-to-day affairs, and finally, an
\nexcellent working relationship between Petronas and its
\nproduction sharing contractors.<\/p>\n
We should visit our near neighbor and not be too proud to ask
\nfor advice in the event of deciding to restructure Pertamina
\nalong the lines of Petronas. I am sure we will receive a most
\nsympathetic response. Malaysia's distinct goal of becoming a
\nfully developed country by the year 2020, its Malaysia 2020
\nvision, is also worth noting too.<\/p>\n
As part of that overall vision, Petronas aims to earn 30
\npercent of its revenues from overseas operations by the year
\n2003. The difference is clear, there is a plan backed up by the
\ndetermination and discipline to get there. We should build a
\nsimilar plan of our own for Pertamina and then stay on top of it.<\/p>\n
The second thrust of Pertamina's restructuring efforts should
\nbe to reshape its relationship with production sharing
\ncontractors. Given that production sharing contractors are
\nresponsible for 96 percent of national crude production,
\nPertamina's management of these companies is too heavy-handed.<\/p>\n
Pertamina is stifling these companies. It should allow them
\nsome more latitude and grant them relief from the cumbersome
\nrules associated with tendering procedures and the approval of
\npersonnel and projects. Production sharing contractors should be
\nallowed to work in an environment more conducive to business.
\nThis in turn would attract further investment.<\/p>\n
Once again there is a lot which we can learn from our
\nneighbors across the Malacca Straits.<\/p>\n
Investment flows are a function of perceived business
\npotential (for example, exploration potential in the oil and gas
\nindustry), political risk and the general business environment.<\/p>\n
There is no doubt among investors that Indonesia's exploration
\npotential is still enormous. Who would have thought after the
\nrelatively dismal results of exploration in Irian Jaya in the
\n1970s and 1980s that ARCO would discover the giant Tangguh field
\nin the province? How many more Tangguhs are there still to be
\nfound in this oil and gas rich country?<\/p>\n
We need to keep the industry enthusiastic and optimistic about
\nthe prospects of more bumper discoveries and thereby encourage
\ninvestors into a sustained exploration effort. Herein lies the
\nchallenge for Pertamina -- namely how to improve its relationship
\nwith major investors to the point where we see a revival of
\ninvestments to levels last seen in the expansive days of the
\n1970s.<\/p>\n
My suggestion here is to enter into dialog with production
\nsharing contractors on a regular basis. Minister Kuntoro has
\nreportedly just started such a dialog, which is essential if we
\nare to find out how best to improve the business environment for
\nour investors. If successful, it may be possible to introduce
\nschemes which will be capable of restoring investment to former
\nlevels and setting off a whole new wave of trickle-down spin-offs
\nwhich would be generated through the multiplier effect. Support
\nservices and a plethora of business ventures in oil rich regions
\nwould benefit enormously.<\/p>\n
Political risk is another important factor, but unfortunately
\nit is now at an all time low. Indonesia is currently viewed as a
\nbad place for business where wild eyed mobs can set fire to your
\ncapital at will and without reproach from the government.<\/p>\n
Thankfully the oil industry is full of risk takers who are
\nused to challenging environments. Furthermore, the business
\nenvironment and ethics of the oil industry and the upholding of
\ncontracts are all matters within our own control. We can start
\nthere and then begin to make inroads into improving the working
\nrelationship with our contracted producers, but this has to be
\ninitiated through dialog.<\/p>\n
As a former member of the oil and gas fraternity, I welcome
\nMinister Kuntoro's overtures towards improving and reforming the
\nsector, but the road ahead is full of pitfalls. The oil and gas
\nindustry saved the country once in 1966. Can it once more step
\ninto the breach? Some people believe that too much damage has
\nbeen done to the industry and that conditions now are too far
\nremoved from those of 1966 for the industry to make a telling
\nresponse, but even if it is slow to take a effect it is still
\nworth a try.<\/p>\n
The writer is a former president and resident manager of ARCO
\nIndonesia who retired from the oil industry in 1995. He is now a
\nlecturer at the University of Indonesia and Institute Pendidikan
\nManagemen Indonesia business schools.<\/p>",
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