World Bank defends proposal to spinoff several refineries

Johannes Simbolon, The Jakarta Post, Jakarta

The World Bank has defended its proposal for the spinoff of several refineries now operated by state oil and gas company Pertamina, saying the proposal was aimed at creating a competitive environment in the country's downstream sector.

Unless the government takes over some refineries and transfers them to other companies, it would be very difficult to cut down Pertamina's decades-long domination of the country's downstream sector.

As a result, new investors would be reluctant to enter the sector and, thanks to the absence of competitors, Pertamina would not be compelled to improve its efficiency, David M. Hawes, energy and transport sectors coordinator at the bank's representative office in Indonesia, recently told The Jakarta Post in an interview.

The bank submitted the proposal to the government in May this year but controversies over the proposal linger to the present day as the government has yet to decide whether to accept or reject the proposal.

Pertamina, backed by some politicians, suspected that in making the proposal, the bank had been used by certain parties that wished to weaken Pertamina's position in the country's downstream sector.

Under the proposal, which the bank said was made at the request of the Ministry of Finance, the government should set up two state-owned refinery companies, PT Java Petroleum and PT Sumatra Petroleum, to take over six of nine refineries now operated by Pertamina in Java and Sumatra.

The Cilacap refinery in Central Java, which is the country's largest, with a processing capacity of 348,000 barrels of oil per day (bpd), should be transferred to Java Petroleum, while the Dumai and Sungai Pakning refineries in Riau should be given to Sumatra Petroleum, according to the proposal.

Pertamina could still keep three refineries, respectively located in Balongan, West Java; Balikpapan, East Kalimantan and Musi, South Sumatra, with a combined capacity of 520,000 bpd, or more than 50 percent of the country's total capacity of 1.057 million bpd, Hawes said.

"It is still larger than the total refining capacity in Malaysia or the Philippines and almost double the size of the largest refiner in Thailand," Hawes said.

According to data provided by the bank, In Malaysia, state owned company Petronas controlled 44.8 percent of the country's refinery capacity with a total capacity of 230,000 bpd by the end of 2001, while in the Philippines, state-owned company Petron controlled 42.9 percent of the country's refinery capacity, with a total capacity of 180,000 bpd.

Hawes noted that Pertamina was also in the process of taking an equity stake in the part-completed TPPI petrochemical plant in Tuban, East Java, through a complex structured financing scheme that would give it an exclusive off-take agreement for the plant's refinery products, including HOMC, kerosene and diesel.

Should the deal materalize, it would further strengthen Pertamina's refinery operation, Hawes said.

Hawes noted that of the nine refineries in the country, only two, including the Balongan refinery, belonged to Pertamina, while the others were owned by the state. As such, the government was entitled to take them back.

Pertamina's president Baihaki Hakim rapped the bank for the proposal, saying he suspected the proposal was aimed at weakening its competitiveness in the country's fuel market when the government liberalized the sector in 2005.

Baihaki said he believed certain parties, both locals and foreigners, were using the bank to divide Pertamina up into many small companies so that Pertamina's competitors could buy up their assets and control the country's fuel market.

"We reject the proposal," Baihaki said.

Hawes denied that the bank had been used by certain parties in making such a proposal and there was no statement in its proposal recommending the goverment to sell off the refineries to private investors.

He said the proposal was purely aimed at creating "fair, healthy and transparent competitive market mechanisms" in the country's downstream sector, as called for by the 2001 Oil and Gas Law.