Mon, 11 Aug 2003

Local players not able to enter downstream oil, gas sectors

Fitri Wulandari, The Jakarta Post, Jakarta

The country's oil and gas downstream sector will be opened to private investors beginning in 2006, but it is likely to be dominated by multinational companies due to the huge capital needed to enter the sector, according to Minister of Energy and Mineral Resources Purnomo Yusgiantoro.

The minister also noted that the reluctance of local businesses to enter the downstream sector was because of the high-risk nature of the business.

"We have to admit that only a few national companies have the capability to do business in the downstream sector," Purnomo said last week during a meeting with a government negotiation team at World Trade Organization (WTO) forum.

"If they are not multinational companies, it will be difficult to enter the oil and gas downstream business," he asserted.

The team has been seeking input from various parties to make final preparations for the country's position at the upcoming September WTO talks in Cancun, Mexico.

According to oil and gas Law No. 22/2001, which liberalizes the country's oil and gas sector, state-owned oil and gas firm Pertamina's monopoly rights in the management of fuel distribution across the nation (downstream sector) will only be allowed until November 2005.

This means that private investors, both local and foreign, can enter the downstream sector, consisting of four main areas: processing, transportation, storage and marketing.

The Downstream Oil and Gas Authority Body (BPH Migas) will act as the regulator.

In the upstream sector, which consists of exploitation and exploration activities, only a few local companies are involved.

Arifin Panigoro, the founder of local oil and gas giant PT Medco Energy International, which is active in the upstream sector, said that his company would probably not enter the downstream business in the near future.

"We are interested in entering the business ... but not in the immediate future. It is too risky and it requires a lot of capital back up. Besides, Medco's business is in exploration," Arifin said.

Entering the downstream business, whether it be processing or distribution, needs as much capital as in the upstream sector but it typically produces lower returns, particularly considering the low purchasing power of most Indonesian consumers, he said.

According to Arifin, investing in the downstream sector would mean an initial outlay of between US$1 billion to $1.5 billion, similar to upstream sector.

"Can you imagine how much one must spend to build for example ... an oil processing refinery? ... The investment is very high," Arifin said.

If a business wanted to get into the downstream business, it is better to start in a retailing operation such as fuel station, he suggested.

Purnomo added that, at present, only Pertamina would be ready to compete in the downstream market because it was the only local company that had all the infrastructure needed to start the business.

"Pertamina has the required infrastructure ... the company does not need more investment for such a venture," he said.