Local players not able to enter downstream oil, gas sectors

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.