World Bank defends proposal to spinoff several refineries

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.