Pertamina will lose dominance in next two years

What will happen to Pertamina after the introduction of the new oil and gas law remains uncertain, although the state oil and gas company says it is ready to compete in a free market.

Uncertainty also still shrouds the fate of existing production sharing contracts (PSC), signed by Pertamina with either local or foreign oil and gas companies prior to the new law being approved.

Many analysts are pessimistic that Pertamina will be able to comply with the new legislation within two years, given the complexity of its operations. In addition to such handicaps, Pertamina might also have a psychological barrier in changing its status from being a regulator of the industry into a common company.

But Pertamina' president Baihaki Hakim said that the change in status would give the state-owned company more flexibility in doing its job.

At present, the regulatory and supervisory roles and exclusive rights it has enjoyed for years have often become more of a burden than a privilege.

In the early 1970s, Pertamina had become one of the largest business conglomerates in Asia, with widely diversified operations not only in oil and gas sector but also in other business activities.

But the company failed to control its massive operations. Corruption and business inefficiency almost caused the company to go under. In 1976, the government bailed out the company and redirected its operations into the oil and business sector.

The business has shown much progress since then but most of the opportunities arising from its surging business were enjoyed only by the family and associates of former president Soeharto.

According to an audit by PricewaterhouseCoppers, Pertamina lost billions of dollars due to corruption and inefficiency.

As part of the government's anticorruption drive in 1998, Pertamina canceled and then retendered at least 150 contracts connected with the Soeharto family and its associates.

Baihaki said that the company's performance continued improving. The gross profit is estimated to reach Rp 12 trillion this year, up from Rp 10 trillion in 2000. The total assets reach over Rp 100 trillion (about US$9.5 billion).

The future of Pertamina will be determined by its ability to comply with the new law and to adjust its operation according to the market demand.

Under the new law, Pertamina, which has enjoyed privileges and exclusive rights in the country's oil and gas sector for over 30 years, is required to change its status into a common business entity within two years of the introduction of the new law.

To be able to continue its activities in the oil and gas sector, Pertamina should also first form a holding company with a number of business subsidiaries, oil and gas expert Ariono Abdulkadir has said.

In a recent seminar on the implication of the new oil and gas law on the country's oil and gas industry, Ariono said Pertamina was classified as a company which could enter both upstream and downstream sectors.

As a business entity is allowed only to obtain one operating area (one oil and gas bloc), Pertamina should form a number of subsidiaries at least to take over the company's existing oil and gas concessions.

The same requirement should also be fulfilled by Pertamina if it wants to continue its operation in the downstream sector. Although a company operating in downstream activities is allowed to obtain more than one permit, for Pertamina it would be more effective it forms a number of different subsidiaries to handle its vast downstream operations.

In addition, the new law also requires Pertamina to sign cooperation contracts (previously known as production sharing contracts) with the Implementation Agency, which will manage and control Pertamina's upstream activities, to enable it to continue the operation of its concession areas.

But as stipulated in Article 24 of the new oil and gas law, Pertamina no longer needs to acquire new licenses to operate its downstream activities such as processing, transportation, storage and trading.

Ariono, who is the chairman of the Foundation of the Indonesian Institute for Energy Economics (IIEE Foundation), said that Pertamina should also adjust all of its operations, asset management and human resources before it is transformed into a common business entity as required by the new law.

Until the establishment of the Implementation Agency (a year after the new law is introduced), Pertamina will still be responsible for administering and supervising the PSCs. After that, this task will be taken over by the new agency.

Pertamina will also continue to provide the domestic fuel supply for a period of two years or until a company which will take over such activities is in operation.

The Implementation Agency will take over all the PSCs signed by Pertamina, but all existing contracts will not be affected by the new oil and gas law, until they expire.

Ariono said that Pertamina's privileges and responsibilities in activities outside PSC management would also remain in effect until a company which would handle such activities is formed.

"Negotiations between Pertamina and other parties in exploration and production activities will be taken over by the Ministry of Energy and Mineral Resources," he added.

State owned companies -- other than Pertamina -- that operate in the oil and gas sector, no longer need to apply for a new permit to continue their activities.

But a year after the introduction of the new legislation, such companies as state-owned gas company Perusahaan Gas Negara (PGN) should form a new business entity to carry out its activities.

Despite the loss of its exclusive rights in the next two years, Pertamina plans to double its crude oil production to 160,000 barrels per day, and privatize part if its operations by 2006.

At present Pertamina produces about 85,000 bpd or about 15 percent of the country's total crude oil production which reached about 1.2 million bpd as of September, this year.

About 85 percent of the nation's total crude oil output is produced by Pertamina's production sharing contractors (PSC)s. The largest PSC is Caltex Pacific Indonesia with a total production of 615,000 bpd (in September), followed by YPF Maxus with 126,000 bpd and Exspan (Nusantara) Sumatera with 79,850 bpd. -- Hendarsyah Tarmizi