Pertamina braces for direct oil trade

Pertamina braces for direct oil trade

SINGAPORE (Dow Jones): Indonesia's state oil and gas company
Pertamina is likely to face a number of hurdles as it braces
itself for direct trade in the international oil market amid
expectations that ties with its two trading affiliates -- Perta
Oil Marketing and Permindo Oil Trading Co. -- will either be
severed or substantially redefined.

Indonesia's Minister for Energy and Mines Kuntoro
Mangkusubroto said May 25 that Pertamina will review longstanding
marketing arrangements with Perta and Permindo. Singapore-based
Perta is 70 percent-owned by a foundation of ex-Indonesian
president Soeharto, while Hong Kong-based Permindo, is 65
percent-owned by PT Mindo, which is controlled by the Bimantara
Group, controlled by Soeharto's son Bambang Trihatmodjo. Bambang
has since stepped down from Bimantara's board.

The government has not yet acted on oil trading contracts
between Pertamina and its two affiliates, but pressure has
intensified on the government to cancel the contracts amid
allegations of corruption and price distortion.

Kuntoro said that the two affiliates had overcharged Pertamina
for their services.

Traders said one major consideration in any restructuring is
the extent of Pertamina's dependence on its affiliates to conduct
the operational aspects of the business.

"They are so used to the affiliates arranging all the
logistical and financial details," a trader in Singapore said.

"They can demand a prompt cargo and leave it to the affiliates
to wrack their brains how to fulfill the requirement. In future
they will find it isn't that easy to get a prompt cargo without
being squeezed," he added.

The trader said Pertamina has always regarded itself as a "big
brother" as in the past suppliers, buyers and contractors would
have to wait patiently to see officials from the company. He said
he expects a change in Pertamina's corporate culture as it is
subjected to the vagaries of the international spot market.

Unnecessary premium

"In trading, you don't expect the buyers or sellers to wait on
you," he said. "If you are there, the deal is done. You have to
be very well-informed and quick in making decisions. Otherwise,
you pass up on a good deal or you pay an unnecessary premium."

Traders said there hasn't been any new orders by the
affiliates so far to buy refined products for Pertamina, noting
that while June commitments will be met, uncertainty looms over
July cargoes.

Meanwhile, Pertamina has invited potential suppliers of crude
oil to discuss July-loading cargoes, but traders said credit
problems persist.

They referred in particular to the ruling that Pertamina can
only use Indonesian banks to issue letters of credit for their
purchases. Given the prevailing economic crisis in Indonesia,
traders won't accept letters of credit drawn on Indonesian banks,
traders said, adding that the affiliates had in effect obtained
financing on Pertamina's behalf by putting out the letters-of-
credit up front.

"One way to get around the problem is to get a foreign bank to
re-guarantee the L/C," a trader in Singapore offered. "The other
is to arrange a crude swap against Indonesian crude to limit
actual financial exposure."

Traders said some Japanese trading houses are experiencing
payment delays for Persian Gulf crudes supplied to Indonesia, and
are considering suspending sales until back-payments are
received.

Traders said Pertamina is likely to negotiate part of its
requirements directly with Saudi Aramco and National Iranian Oil
Co., bypassing both the affiliates as well as the Japanese
trading houses. But they said nothing firm has been decided yet.

Amid administrative and financial uncertainty, Indonesia is
expected to drastically reduce its July crude export allocations
in order to maximize the use of domestic grades, traders said.

Indonesia is Asia's largest exporter of crude oil, and is the
only Asian country in the Organization of Petroleum Exporting
Countries. It produces about 1.35 million barrels a day of crude
oil, about half of which is exported primarily to Japan, South
Korea, China and the U.S. But it also imports about 200,000 b/d
of crude from the Persian Gulf, West Africa, China, Australia and
Malaysia.

As for refined products, Indonesia exports 3-4 million barrels
of low sulfur waxy residual a month. It imports 3.5-4.5 million
barrels a month of gasoil, 1.0-1.5 million barrels a month of jet
kerosene, and 200,000-450,000 metric tons a month of fuel oil.