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.