Experts question whether Pertamina can go it alone

Experts question whether Pertamina can go it alone

SINGAPORE (Reuters): The oil industry applauded Indonesia's move towards greater transparency in its oil sector, but questioned whether state-owned Pertamina had the expertise to go it alone in international oil markets.

"Pertamina has not opened an LC (Letter of Credit) in its entire life," one regular supplier of the state-owned oil monopoly said.

Following President Soeharto's resignation last week, Mines and Energy Minister Kuntoro Mangkusubroto promised to reform the sheltered state monopoly to make its operations more transparent.

This will include a review of how Pertamina imports and exports oil.

"We will boost efficiency. We will revoke inefficiency. We want fair business," he said last week, adding that inefficiency "must be abolished because we have to use every resource we have in the interests of the people."

Pertamina is planning to establish its own trading division and has already set up a marketing operation, Indonesian oil sources said.

Although Pertamina operates Indonesia's 1.05 million barrels per day (bpd) of refinery capacity and distribution of oil to the domestic market, it has no direct experience in the international oil markets.

And this, oil traders said, would take time to build.

They said Pertamina would need to develop expertise in trading and trading operations, shipping, risk management, and at the same time set up trading networks and relationships with banks for financing.

"The government might have to inject fresh funds to enable them to buy directly. It's up to the government if they want to," a trader said.

For the past two decades, Pertamina has left imports and exports mainly to two affiliated companies -- Perta Oil Marketing Ltd and Permindo Trading Oil Co., majority owned by consortium linked to Soeharto family interests and friends.

It is a business worth at least $200 million a month, oil traders said.

But Kuntoro said on Monday that "Pertamina will review its contracts with these companies and decide whether we still need these companies".

Pertamina processing director Samto Utomo told The Jakarta Post that the company would also establish a new trading division to handle crude oil and fuel oil imports in competition with the two affiliates.

Traders said the international market was likely to be wary in its initial direct dealings with Pertamina.

"We are not going to be selling directly to Indonesia. We'll sell to a trader who is willing to take the credit risk," a crude supplier said.

They did not expect Pertamina to severe its links with the two affiliates because the companies have a long standing relationship. But Pertamina competing with the affiliates should lead to more price competition, they said.

"I don't think it will be straight away. It would be gradual. Initially, I think they will bring in more competition," one trader at an oil major said.

To achieve the changes, traders said they expected Pertamina to tap the expertise of Japanese trading houses, or shoshas, as it comes to terms with new commercial responsibilities needed to run the multi-billion dollar business.

Japanese traders are preferred due to past dealings with Pertamina in refinery project financing, they said.

Others said Pertamina might follow the proven route of other state-owned companies and buy or sell oil through open tenders.

Traders said tenders allow more transparency and better price competition and would help to counter any worries of favoritism.

Traders said the removal of the exclusive deal through the affiliates should lead to more competitive pricing and raise Pertamina revenue, or lower its import bill.

But international traders might be cautious in initial dealings with the new look state enterprise, given the long history of cronyism and corruption in Indonesia's economy.

"Maybe now it will be less important about who you know and price will be more important," one trader said.

"Transparency is good, with more people involved, it would be more difficult to siphon off money. But it (bribes) will still be there," a trader said.