'PGN will continue to dominate gas industry for next 20 years'

Natural gas transmission and distribution company PT Perusahaan Gas Negara made a strong debut on the Jakarta Stock Exchange (JSX) on Dec. 15, 2003. From a relatively unknown state firm, it is now a publicly-listed company. PGN president WMP Simandjuntak talked to The Jakarta Post's Fitri Wulandari and Majalah Energi about the company's business plans and the future of natural gas in Indonesia.

Question: To become a publicly-listed company is not easy. Could you tell us how the company made the necessary preparations?

Answer: The most important requirement for a company that wishes to be listed on the stock exchange is that it must be a healthy company that is capable of generating profits. The company must continue growing as investors will not want to put their money in a company that does not continue growing. In our view, this company (PGN) will continue growing as there are many transmission and distribution projects still ongoing.

We had been preparing for a listing since January 2002.

Inside the company, we had to first change the corporate mindset. We told our employees that in the globalization era, if our company wants to grow bigger and better it will have to be a public company. We have to be open. Our vision is to become a mainstay energy distribution company for the domestic and international markets.

Next, we restructured our organization and finances. For example, we set up a subsidiary for the Grissik-Duri transmission project and then sold it to private investors.

Another important project that supported our initial public offering was the completion of the Grisik-South Sumatra transmission project in August 2003. Natural gas from Grissik (in South Sumatra) entered Singapore on Sept. 4.

In order to gauge the interest of the market (in PGN shares), we also launched a US$150 million eurobond in September 2003.

What are your plans for 2004 and in the future?

First, as a consequence of being a publicly listed company, we have to adhere to the principles of good corporate governance like being transparent to shareholders and the Capital Market Supervisory Board (Bapepam). We have established an investor relations unit as we want those who buy our shares to be long- term investors.

In terms of projects, we are continuing transmission and distribution pipeline projects. As we explained to our domestic and international investors, the proceeds from (last year's) bond issue and the initial public offering (IPO) will be used to help finance our transmission pipeline project from South Sumatra to West Java. The project is being developed in two phases. The first is from South Sumatra to Cimanggis via Cilegon, West Java. This stage has been financed by a special yen loan amounting to $415 million.

The second stage is from Grissik to Pagar Dewa (both in South Sumatra), and then to the Muara Karang and Muara Tawar power plants in West Java. This will need $510 million, will be provided by the proceeds of the bond issue and the IPO. These proceeds will also be used to help finance a transmission pipeline project in Medan, North Sumatra.

In 2004, we will start making preparations for the construction of pipelines of 1,650 kilometers in length, which have to be completed in 2006.

So, 2004 will be a busy year for us in prepare for these projects so that they can be started in 2005 and finished in the first half of 2006.

At the moment, we want to concentrate on West Java because it is the area with the largest industrial concentration and the highest peak electricity load.

Performance in 2004?

In 2004, we are targeting our business to grow by 17 percent in terms of revenue, after-tax profit and sales of natural gas. Revenue for 2003 was Rp 3.16 trillion, profit after tax Rp 504.8 billion, and we sold 258 million cubic feet of gas per day (MMSCFD).

But after 2006, we expect the business to grow by between 25 percent and 27 percent because the natural gas supply from South Sumatra to West Java will have a significant impact on our revenues and profits after tax.

The volume of natural gas will also increase. From 2006 to 2009, the volume of natural gas distribution will gradually rise from 600 MMSCFD to 900 MMSCFD. Between 400 MMSCFD and 450 MMSCFD will be supplied to state power firm PT PLN and the remainder to industrial customers.

East Java province has been experiencing natural gas shortages. What are your plans for this market?

For East Java, we have to complete the distribution pipeline network first and then increase natural gas supplies. We are now completing a sale and purchase agreement to buy natural gas from a number of producers who own marginal gas fields.

At the moment, we have completed deals with Lapindo Brantas to buy up to 80 MMSCFD. We expect to finalize a preliminary contract with Santos on Jan. 16 to buy 100 MMSCFD and with Kodeco for between 20 MMSCFD and 30 MMSCFD.

We hope that the natural gas from Santos will come on stream in East Java by 2005 so that the natural gas supply can be increased to up to 150 MMSCFD from the current 90 MMSCFD for industrial customers.

The transmission pipelines from East Kalimantan to East Java will not become operative until 2008 as they will require a huge investment. Around $1.1 billion will be needed to construct the East Kalimantan-East Java pipeline and another $600 million for the East Java-West Java pipeline. So, we need a total of $1.7 billion.

Although, the project is not due to be completed until 2010, we are starting to put the financial arrangements in place at the moment. In February, we're going to hold a workshop on the project so that we can attract financing from our partners.

Does the company have any plans to get involved in the upstream sector (exploration and extraction)?

We are going to get involved in the upstream sector but only as a minority shareholder. This is because we are restricted by the new oil and gas law.

We have talked with the owners of natural gas fields so that we can buy at least 10 percent of their shares. Our objective in doing business in the upstream sector is to secure our supplies and gain an advantage in negotiating gas prices.

How do you see the prospects for the natural gas transmission and distribution business?

The prospects are very good but it takes huge financing and the risks are also extremely high. Only those with strong financing and that have experience in transmission and distribution will be successful in this business. Those who don't have experience should think twice before getting involved.

PGN, however, has been around for a long time.

So, PGN will continue to dominate the business?

We have explained to investors that although the new legislation has opened opportunities for new players, since the industry contains a natural monopoly element PGN will continue to dominate the market for the next 15 to 20 years.

That doesn't mean there won't be new players, but they won't have a significant impact on PGN's market. As an illustration, we distribute 250 MMSCFD while in the market there is demand for 1.2 billion cubic feet per day (BSCFD) from industry and 1.2 BSCFD from the transportation sector. That's five times our current capacity.

In the next 15 to 20 years, the prospects are very good. PGN will not be able to do everything alone. It needs other players. But it takes time to adjust to the particular characteristics of the natural gas distribution market.