Executive column: Energy giant Pertamina cannot lose, says CEO
The Jakarta Post
Jakarta, posted: Mon, June 1, 2015 | 09:47 am
Dwi Soetjipto - JP/Don
State-owned oil and gas company Pertamina is determined to continue its aggressive measures ' including looking into managing numerous blocks currently managed by private firms, even though the blocks' expiry dates draw near ' with the backdrop of an increasingly challenging industry following falling prices that requires oil and gas companies to be more efficient in doing business.
Internal reforms that will cut unnecessary processes to save some money are currently being implemented under the new board of directors.
Pertamina president director Dwi Soetjipto spoke recently to The Jakarta Post's Rendi A. Witular and Raras Cahyafitri about the country's energy problems and said that Pertamina was simply too big to fail and could only opt for becoming a world class firm at all costs. Below are excerpts from the interview.
Question: The government has given orders that Pertamina will be become the operator of the valuable Mahakam block. How will you ensure that political interests will not benefit from the company's business, particularly when it holds tenders for various activities in the block?
Answer: Transparency is key. We hope that we will be able to establish a better corporate climate with the new management. The era of sacrificing corporate interest for political intervention has ended. Everyone can take part as long as they plan to give their best to the company.
I see several important issues that we have to address. First, we all have to share the same mind-set that Pertamina is an energy company. When talking about Pertamina, we tend to talk only about oil and gas, which will be depleting. Energy in general will not be depleted. Thus we have to think of what kind of energy we need to develop for the next 10 years and start working on it now.
Second, people always think that the oil and gas conversion is the government's business. It is Pertamina's business. As an energy company, we have to think of better kinds of energy to deliver to consumers. If oil is more expensive than gas, Pertamina should proactively encourage the use of gas. This is why Pertamina is actively developing the gas network. If the gas network is good, there will no more debates on LPG [liquefied petroleum gas] and people only need to turn on the gas tap.
Internally, Pertamina has to develop its research and development division and its engineering capacity. Externally, we have to talk about how to make Pertamina a trusted company, since currently people tend to see the negative sides of Pertamina, such as the company's inefficiency.
People will only trust Pertamina if they consider Pertamina as an efficient firm. Therefore, we look at everything that is inefficient and cut it out. For example, in the past, we purchased everything through Petral [subsidiary Pertamina Energy Trading Limited]. We have cut that out. Moreover, it is a common secret that losses are everywhere. And these are things that we have to fight. In the future, perhaps we will talk about leasing contracts of vessels. If it is necessary, we are considering whether to maintain the shipping unit as a unit or make it an independent entity.
We are also looking at which subsidiaries might go public. We have an insurance firm, medical firm and Patra Jasa [a property firm]. If we want them to be managed in a modern way, going to the public is an option.
We are also looking into some costly items. For example, Pertamina's refineries are old and the newest was built 20 years ago. We have analyzed them and found out that 93 percent of refineries' costs structures are costs of crude. The choices are maximum production or efficiency. We are now talking about efficiency. Therefore, we are now directing crude oil to the nearest location of refineries. Transportation cost will definitely determine the crude price. For the longer term, we need to upgrade the refineries.
If we look at other countries, like Singapore and Malaysia, demand in those countries is below their refineries capacities.
In Indonesia, we have to choose the most feasible avenues to move forward. When the upgrading of our refineries is finished in 2025, the demand will be higher. Therefore, we need to develop new refineries instead of simply upgrading the existing refineries which would not be sufficient.
Building new refineries and at the same time upgrading the existing ones might lead to massive investments. In upgrading four refineries, we invest at least US$20 billion. In developing one new refinery, the investment is around $12 billion. And if we invest today, the production is in the next 7 to 8 years.
Therefore, we are considering whether it is possible to take shares in other countries and have the products are directed to Indonesia. We have plans for mergers and acquisitions of refineries.
There are many things to do, including how to have integrated professional human capital. We aim to make this company as efficient as possible, including its human resources. We have many employees and we need to make these people more resourceful in the market.
Pertamina cannot lose at all costs. We cannot lose. This is what we are trying to build.
Under the government's draft for a new oil and gas law, the Upstream Oil and Gas Regulatory Task Force (SKKMigas) will be a specially assigned state-owned enterprise while Pertamina will establish a direct contract with the government. What's your opinion?
There are many examples in other countries. If we are looking the best practice, many might refer to Malaysia's Petronas. It is also the closest example to us. People often ask why Pertamina is left behind compared to Petronas, although in the past Petronas has learnt from Pertamina.
Why doesn't Indonesia try to look to Malaysia, which has been successful by giving Petronas regulatory authority? This makes everything simpler.
Different models have their respective pluses and minuses, but the question is why are we not learning from other's successes?
Critics said if the country returns the regulatory function to Pertamina, we would be back to the New Order era. What do you think?
The situation is different now. Pertamina is a state-owned enterprise. If the company is not efficient, the state can correct it. If the management performs poorly, the state can replace them.
We are now in an era of transparency. Therefore, good corporate governance can be measured and shown.
The President has clearly emphasized the importance of efficiency, synergy and established holdings.
There are a number of state-owned enterprises and thoughts have emerged to establish a holding firm for it. There are risks when the companies are under holdings. For example, Pertamina becomes a holding firm while upstream, refineries and shipping businesses and other operational business lines are operated by subsidiaries. These might be better because there will be a synergy among oil and gas firms in energy sector.
Does that mean Pertamina plans to acquire Perusahaan Gas Negara [PGN]?
I'm not talking about acquisition but a synergy, not only in performance matters but also the impact to the people. What we have to think about is how state-owned enterprises establish the highest quality of services to the people. Between PGN and Pertagas, for example, if they can synergize and compete in the market, it would be okay. However, if there is an almighty private player, they may need to build synergy.
Regarding Petral, is there any administrative cost for the dismissal?
Yes indeed, but only a small amount. There are several costs such as taxes; however, Pertamina can deal with them. We have no problem with this. After assessments the burden is not that big. What's more, after the revaluation of Petral's assets, it will be an additional boost because the assets' value will be increasing and that is a good thing for Pertamina.
We will continue to be efficient and keep trying to build something correctly. It's a message that we are totally committed to. This is the time to reform.
How much pressure you have felt so far compared to when you were in Semen Indonesia?
It is definitely bigger, probably because it is related to the revenue. Big revenue means there are a lot of interests. However, this is what management is all about. If I have colleagues with integrity, I don't have to work hard. The amount pressure depends on how we handle it.