Oil firms unlikely to rush into RI: Analysts

Oil firms unlikely to rush into RI: Analysts

SINGAPORE (Reuters): Burdened by the economic crisis and low prices, oil companies are unlikely to rush in to capitalize on the Indonesian government's move to throw open its oil and gas sector, analysts said yesterday..

They said a squeeze on profit, contraction of Asian demand for petroleum products and a huge country risk would deter many from sinking scarce funds into Indonesia.

"I definitely don't anticipate a rush because the industry outlook is subdued and that's why it comes down to a very basic question of what financial incentives the government would be offering," said James Brown, energy analyst with Merrill Lynch.

"There is much, much more interest in the upstream oil and gas production ... (but) there is no advantage being in the downstream especially with the collapsing fuel situation," a Singapore-based U.S. oil and petrochemical consultant said.

Mines and Energy Minister Kuntoro Mangkusubroto said on Thursday Indonesia was looking for private investment in the upstream and downstream sectors of the oil and gas industry.

"Since the government's capability to finance such development activities is very limited, private participation is heavily needed in the upstream as well as the downstream sector," Kuntoro said.

"A new oil and gas law is currently being prepared, which will eventually lead to more opportunities for the private sector to undertake investment in the downstream side of the oil and gas business," he said.

Kuntoro did not say when the new law would be ready, but an industry source said he understood it to be at "quite an advanced stage".

State oil company Pertamina currently has the monopoly on retail sales in Indonesia, with some of the world's highest throughputs of petrol and retail stations.

Analysts said foreign investor interest would also depend on how the domestic market is priced.

Fuel prices in Indonesia are heavily subsidized and the government would have to strike a deal with these companies to compensate for the difference between low retail price and costs but yet ensure competition, they said.

They cited Malaysia as a possible model where petrol prices are set by the government under a system where the government sets a ceiling but private firms can offer lower prices if they wished.

But weak demand, especially for transportation fuel such as diesel and petrol, which form the bulk of products from a refinery, have sent oil company revenues into negative territory.

"For now the economic crisis is hitting fuel demand the hardest. Companies would have a very difficult time in the first two years if they start today," the consultant said.

Analysts said Indonesia's petroleum consumption is forecast to contract by about 15 percent this year from 1997.

But they said some companies such as Caltex, a joint venture between U.S. oil giants Chevron Corp and Texaco Inc; Mobil Corp and Total SA of France, which have strong upstream oil exploration business, might be more willing to sink funds in refining and marketing business.

Similarly others such as British Petroleum, now in the petrochemicals business, could also look to diversify.

Analysts said despite the rare opportunity to enter a closed market, oil companies are not very enthused because of the huge economic and political risk involved in investing in Indonesia at the current moment.

The country has recently experienced a change in leadership with Soeharto giving up his presidency to B.J. Habibie on May 21 following riots in the capital Jakarta amid the worst recession in decades.