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.