Can Pertamina save the nation one more time?

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.