Can Pertamina save the nation one more time?

By T.N. Machmud

JAKARTA (JP): Minister of Mines and Energy Kuntoro Mangkusubroto has on more than one occasion discussed the need for Pertamina to restructure and to return to its core business. As a former member of the oil and gas fraternity I fully endorse that sentiment. A total overhaul of the way Pertamina conducts its business is long overdue.

Part of Pertamina's core business is to look for and develop oil and gas resources for the greater benefit of the people. Their constitutional mandate states so in exactly these words. Revenues from oil and gas are still the nation's largest single foreign exchange earner.

Unfortunately the price of crude oil is currently depressed, a fact which has distorted the nation's budgetary planning and done nothing to help its current predicament. However, oil prices move in cycles, and oil and gas will therefore continue to be a major revenue earner.

There is a belief that Indonesia will become a net importer of crude oil in the near future. I personally do not believe this, but the prediction may yet become self-fulfilling. If we voice this opinion loud enough and for a long enough time it may yet become a reality. What we should be doing is taking positive steps to prevent this from happening, at least in the near future, by increasing oil and gas production.

To manage its core business properly, Pertamina must increase oil and gas production, either through its own efforts or in cooperation with production sharing contractors (PSC's). Between 1966 and 1976, Pertamina tripled national crude oil production from 500,000 barrels per day (bpd) in 1966 to 1,500,000 bpd in 1976. That was a magnificent performance, but then between 1976 and 1997 Pertamina was hard pushed to keep production from dropping back down below 1,500,000 bpd. Furthermore, Pertamina's share of total national production fell from roughly 10 percent in 1967 to little over 4 percent in 1997. Production sharing contractors account for the remaining 96 percent, according to the 1997 U.S. Embassy Petroleum Report.

What went wrong? Why did an inspiring and dynamic company stagnate and become such a cumbersome entity?

Between 1966 and 1976 the company worked tirelessly to expand production, but between 1976 an 1997 their was an agenda to bureaucratize Pertamina and to turn it into a cash-cow for the government.

By demanding a refocusing on core business interests, Minister Kuntoro will force Pertamina to develop a restructuring plan which spells out exactly where the company is going and how it intends to get there. Any restructuring plan should also contain a clear strategy to avoid becoming a net oil importer. Just imagine what would happen to this country if on top of our monetary woes we had to pay for imported crude oil like we now have to pay for imported rice.

Pertamina should focus efforts on restructuring its organization in a way aimed at ensuring the company recovers its former glories and begins to expand in an optimal fashion.

For that it needs funding and proper management. It already has an ample reservoir of excellent field engineers and geologists. What they need is projects to sharpen their teeth on. Projects need capital, hence the funding requirement.

It would be prudent in this light to take a hard look at neighboring Malaysia, whose state oil company Petronas, since its inception in 1974, has developed a magnificent exploration and production capacity through Carigall, a wholly owned subsidiary.

Thanks to Carigall's unrelenting efforts, Petronas now produces roughly 30 percent of Malaysia's overall national production of 630,000 bpd.

Compare this to Pertamina's pathetic 4 percent and you will understand why I think Pertamina ought to set up a Carigall of its own to replace their current exploration and production division.

But why was Petronas so successful in such a short time? The answer is simple: clean government, total government support for their business plans, little interference from the Malaysian government in the company's day-to-day affairs, and finally, an excellent working relationship between Petronas and its production sharing contractors.

We should visit our near neighbor and not be too proud to ask for advice in the event of deciding to restructure Pertamina along the lines of Petronas. I am sure we will receive a most sympathetic response. Malaysia's distinct goal of becoming a fully developed country by the year 2020, its Malaysia 2020 vision, is also worth noting too.

As part of that overall vision, Petronas aims to earn 30 percent of its revenues from overseas operations by the year 2003. The difference is clear, there is a plan backed up by the determination and discipline to get there. We should build a similar plan of our own for Pertamina and then stay on top of it.

The second thrust of Pertamina's restructuring efforts should be to reshape its relationship with production sharing contractors. Given that production sharing contractors are responsible for 96 percent of national crude production, Pertamina's management of these companies is too heavy-handed.

Pertamina is stifling these companies. It should allow them some more latitude and grant them relief from the cumbersome rules associated with tendering procedures and the approval of personnel and projects. Production sharing contractors should be allowed to work in an environment more conducive to business. This in turn would attract further investment.

Once again there is a lot which we can learn from our neighbors across the Malacca Straits.

Investment flows are a function of perceived business potential (for example, exploration potential in the oil and gas industry), political risk and the general business environment.

There is no doubt among investors that Indonesia's exploration potential is still enormous. Who would have thought after the relatively dismal results of exploration in Irian Jaya in the 1970s and 1980s that ARCO would discover the giant Tangguh field in the province? How many more Tangguhs are there still to be found in this oil and gas rich country?

We need to keep the industry enthusiastic and optimistic about the prospects of more bumper discoveries and thereby encourage investors into a sustained exploration effort. Herein lies the challenge for Pertamina -- namely how to improve its relationship with major investors to the point where we see a revival of investments to levels last seen in the expansive days of the 1970s.

My suggestion here is to enter into dialog with production sharing contractors on a regular basis. Minister Kuntoro has reportedly just started such a dialog, which is essential if we are to find out how best to improve the business environment for our investors. If successful, it may be possible to introduce schemes which will be capable of restoring investment to former levels and setting off a whole new wave of trickle-down spin-offs which would be generated through the multiplier effect. Support services and a plethora of business ventures in oil rich regions would benefit enormously.

Political risk is another important factor, but unfortunately it is now at an all time low. Indonesia is currently viewed as a bad place for business where wild eyed mobs can set fire to your capital at will and without reproach from the government.

Thankfully the oil industry is full of risk takers who are used to challenging environments. Furthermore, the business environment and ethics of the oil industry and the upholding of contracts are all matters within our own control. We can start there and then begin to make inroads into improving the working relationship with our contracted producers, but this has to be initiated through dialog.

As a former member of the oil and gas fraternity, I welcome Minister Kuntoro's overtures towards improving and reforming the sector, but the road ahead is full of pitfalls. The oil and gas industry saved the country once in 1966. Can it once more step into the breach? Some people believe that too much damage has been done to the industry and that conditions now are too far removed from those of 1966 for the industry to make a telling response, but even if it is slow to take a effect it is still worth a try.

The writer is a former president and resident manager of ARCO Indonesia who retired from the oil industry in 1995. He is now a lecturer at the University of Indonesia and Institute Pendidikan Managemen Indonesia business schools.