Pertamina has big oil ambition

Indonesian state oil firm to double production over next five years

THE global economy may be faltering, but Indonesia’s state oil company PT Pertamina has a grand ambition of doubling its oil production from its current 160,000 barrels per day (bpd) to at least 320,000 bpd over the next five years.

With fuel heavily subsidised in Indonesia, coupled with the huge distribution cost of transporting oil to the 100-plus islands in Indonesia, it is no surprise that Pertamina’s margins remain low, despite the booming oil and gas sector.

Fuel prices in Indonesia are fixed by the government and don’t float according to market conditions. This leads to cheap costs of fuel of 5,000 rupiah per litre (about US$0.41) and a staggering subsidy bill in excess of US$10bil.

Last year Pertamina’s unaudited net profit increased 28.42% to 24.4 trillion rupiah (US$1.99bil) on the back of a 11.55% increase in unaudited revenue to 393.6 trillion rupiah (US$32.18bil). Net margins are low at 6.2%. While the company expects to realise more operational efficiencies this year, improvement in financials is largely expected to be marginal.

Pertamina’s president and chief executive officer Ari Soemarno says the company may post a profit of between 26 trillion rupiah (US$2.1bil) and 27 trillion rupiah compared with 24 trillion rupiah in 2007.

Ari Soemarno plans to transform Pertamina into a world-class oil firm

He says the only way to increase Pertamina’s margins is to increase production of oil.

“As oil is subsidised in Indonesia, the situation is such that it makes no difference to us. As far as the government is concerned, it is about moving from the left pocket to the right pocket. We may sell our oil to the government based on market price, but we also pay our earnings to the government as dividends,” says Ari.

Last year, half of Pertamina’s earnings were paid as dividends to the government.

Pertamina is Indonesia’s national oil and gas company which is involved both in the upstream and downstream segment of the industry. A huge part of its revenue is derived from the low margin downstream business.

In 2007, Pertamina spent US$900mil on exploration purposes. It needs at least US$1bil a year for exploration investments.

“We need money for exploration. If there is no exploration, how can we increase production? I will be seeing the government soon. Every year we meet the government on this issue,” says Ari.

Indonesia is presently a net importer of oil with a daily consumption of 1.2 million to 1.3 million bpd. About 75% of its requirements is produced locally, while the remainder is imported.

Oil in Indonesia can be dubbed as “easy oil”, as it is extracted mainly from onshore fields and minor offshore fields.

“Yes, it’s still viable for us to extract oil despite oil prices coming down. The production cost of oil in Indonesia is about US$15 per barrel. But with the era of easy oil coming to an end, we are now increasing our exploration inside and outside of Indonesia.”

“Our existing fields still have the potential for more oil extraction. We are not adequately invested to maximise the oil extraction from our present fields,” says Ari.

Nonetheless, Pertamina has started doing exploration work in deep waters. Ari is optimistic that deepwater exploration in Indonesia will continue, as its depth stands at 2000m, which Ari says isn’t extremely deep compared to other deepwater fields.

“For now, I foresee oil staying at the US$50 level. A good level for oil prices should be at the US$65 to US$75 level,” he says.

Where oil prices go will depend on the meltdown in developed countries.

“It depends how deep this recession is. I hope we’re close to the bottom. If things get better, demand for oil will rise, and prices will eventually appreciate,” he says.

Operational improvements

On the operational front, Pertamina has been paying close attention to increasing efficiencies and cutting the fat.

Since undergoing a transformation in July 2006, further efficiencies have been achieved. For instance, Pertamina has reduced its 2006 and 2007 distribution costs by 7%. It has also saved 200 billion rupiah (US$16.39mil) in its shipping division while its refinery division has identified 2.5 trillion rupiah (US$240mil) in savings.

Ari’s plan is to transform Pertamina into a world-class national oil company that is able to compete at home and abroad.

“This is a fundamental transformation programme that makes us very different from the past. We are now a revenue-based, profit-oriented company that offers better service,” he says.

Meanwhile, Pertamina is delaying the expansion of its two biggest refineries in Cilacap and Balikpapan, to renegotiate development costs after prices of commodities such as steel, aluminium and cement declined.

Pertamina had planned to build 60,000 barrel-a-day residue fluid catalytic units, or secondary processing units, for about US$1.8bil at each of the plants.

“We’re ready to postpone by a few months to wait for lower prices for engineering and production,’’ he said.

Pertamina’s overseas foray is at its infancy. A project that recently bore fruit is a production-sharing contract (PSC) it signed with Petronas and PetroVietnam to jointly explore and develop hydrocarbon resources in Block SK305 offshore Sarawak.

Under the terms of the PSC, the three parties formed a joint-venture company, PCPP Joint Operating Company (PCPP), to operate the block. Petronas Carigali Sdn Bhd, the wholly-owned exploration and production subsidiary of Petronas, has 40% equity in PCPP, while Pertamina and PetroVietnam Investment & Development Company (PIDC), which is a unit of PetroVietnam, have a 30% stake each.

Block SK305 is located in water depth of 150m in the Balingian division offshore Sarawak. Covering about 15,164 sq km, the block was previously operated by Shell until 1999.

Ari says collectively, the three parties have spent a total of US$100mil since 2003. Oil production is expected to begin in the first or second quarter of 2009.

“For a start, it will probably produce a few thousand barrels per day,” says Ari.

The three parties also have joint-cooperation in the petroleum exploration and production activities between Petronas, PetroVietnam and Pertamina in Malaysia, Vietnam and Indonesia.

In Libya, Pertamina is in the midst of doing seismic evaluations, while in Iraq, it is still assessing the situation as well as the viability of exploring oil.

In 2007, Pertamina teamed up with German-based company Wintershall, a subsidiary of German chemical giant BASF, in securing an exploration right on an onshore oil block in Qatar.

Pertamina holds a 25% interest in the block, with Wintershall controlling the remaining 75%, making the company the operator of the block.

In Sudan, the China National Petroleum Corp and Pertamina have signed a deal to explore offshore Block 13 and share future oil production under a 20-year concession.