Injecting new life into PT Pertamina-
Big changes are afoot at Indonesia’s largest oil and gas company, PT Pertamina. This state-owned enterprise that forms the backbone of Indonesia’s energy development has been experiencing near-stagnation over the past year.
While the company’s net income increased to $2.76 billion in 2012 from $2.39 billion in the previous year, its operating income decelerated to $4.76 billion from $5.35 billion during the same period. It has also been witnessing a slowdown in the upstream segment since 2009, with its production of oil and gas growing by only 2.7 per cent compounded annually. This outcome can be attributed to an interplay of a myriad of factors including reduced investments in the exploration segment in Indonesia, maturing of existing fields, and a low reserve replacement ratio. Hence, going forward, the company aims to reinvent itself as an integrated energy company by strengthening its foothold in alternative energy segments such as geothermal and renewable sources of energy, along with coal bed methane (CBM). At the same time, the company intends to persist in its focus on its oil and gas business, with a special emphasis on the latter, through the adoption of an “aggressive upstream and profitable downstream” strategy. The objective of this strategy is to increase the production and reserves of oil and gas, improve operational performance, and boost profit margins from the refinery segment.
Renewed vigour in upstream segment
The upstream segment is one of the most crucial segments of PT Pertamina: it provides an energy source for the continuation of the company’s business activities in its other operating segments. PT Pertamina operates various oil and gas fields in Indonesia (mainly in Sumatra, Java, and Kalimantan) and abroad (including Malaysia, Vietnam, Qatar, Sudan, and Libya) through its subsidiaries – PT Pertamina EP, PT Pertamina Hulu Energi (PHE), and PT Pertamina EP Cepu.
As the majority of the company’s existing fields in Indonesia are experiencing a natural depletion of resources, production increase has been marginal. Despite PT Pertamina’s continuous efforts in exploring and exploiting new hydrocarbon reserves in the country, the new discoveries have not been sufficient to offset the decline in existing fields. In fact, the discoveries of oil and condensate reserves fell to around 109 million barrels of oil (mmbo) in 2012 from over 343 mmbo in 2011.
In order to improve the domestic production scenario, the company plans to attract higher investments in the domestic hydrocarbon sector to ensure that production is optimised from the operational fields. It also intends to explore new prospective areas in the country. For instance, the company plans to utilise its technical expertise to help Kazakhstan’s gas firm, Kaz Munay Gas, to develop a liquefied natural gas (LNG) plant in return for investments in development and drilling in Indonesia’s new hydrocarbon blocks.
The company is also forming partnerships with foreign firms to jointly explore gas in regions other than Sumatra and Kalimantan – the typical targets for sources of gas. To this effect, it has set up a consortium with US-based ExxonMobil, France’s Total SA, and Thailand’s PTT Exploration and Production (PTT EP) to develop gas-rich blocks in the East Natuna Sea.
To finance its expansion plans, PT Pertamina has been issuing bonds in the global market in recent years: the first such issue was floated in 2011, which was followed by another in 2012. Receiving an overwhelming response from investors around the world, both the issues were oversubscribed. PT Pertamina was then able to invest around $15 billion exclusively in projects related to enhancing oil recovery from its existing fields in 2012.
Meanwhile, the company continues to explore ways to acquire stakes in foreign oil and gas blocks. In 2012, it signed agreements to acquire full ownership of ConocoPhillips Algeria Limited that owns three oilfields in Block 405a in Algeria and is in the midst of evaluating possibilities of expanding its upstream business in Iraq.
Enhancing efficiency of the refining segment
PT Pertamina owns six oil refinery units in Indonesia comprising a total installed capacity of 1.04 million barrels per day (mbpd). Given the declining domestic oil production in the past few years, these refineries have had to import high-priced crude oil from other countries for refining. At the same time, the company has been forced to cut down its exports of refined products and increase its imports (see Fig. 1), as the domestically produced refined products have failed to meet rising domestic demand.
Hence, in order to reduce the costs of imports and increase the profitability of its refineries, the firm plans to maximise the use of domestic crude oil in its refineries and import the required crude oil directly from oil manufacturers as well as fuel products from other countries. As most of the imported crude oil contains a high level of sulphur, which its refineries in Indonesia are unable to process, the company plans to upgrade and enhance the efficiency of all its existing refineries. The only exception is the Kasim refinery in West Papua, which has the smallest production capacity. Furthermore, in order to meet the increasing demand for refined products, PT Pertamina intends to build new refineries in the country .
Expanding clean energy footprint
In the light of declining reserves and production of oil in the country, the company is attaching increasing importance to its clean energy segment comprising natural gas, geothermal, and CBM. This is also in line with the national energy policy of Indonesia, which aims to increase the share of natural gas in the country’s energy mix from the current 21 per cent to 30 per cent by 2025 due to increased demand from the industrial segment. Further, the country is seeking to boost the proportion of renewable energy in the mix to 15 per cent by 2025. In order to achieve these goals, the company spelt out a Gas Directorate in June 2012 with the intent to turn PT Pertamina into a leading gas and renewable energy company in Indonesia.
PT Pertamina has an advantage in the natural gas segment, especially LNG, though the strategy for the future places its emphasis on importing rather than exporting LNG, as it had done in the past. The company, through its subsidiaries and joint venture (JV) entities, namely, PT Pertamina Gas, PT Nusantara Regas, PT Donggi Senoro LNG, PT Arun NGL, and PT Badak NGL, has been one of the major natural gas suppliers to Japan, South Korea, and Taiwan. However, the company’s LNG sales (in terms of volume) have been on the decline for the past few years, mainly due to the reduced supply of gas to the Arun and Bontang LNG terminals (see Fig. 2). Further, the increasing domestic demand for natural gas is now making it necessary for the company to build LNG receiving and regasification terminals.
Given the increased demand for gas in the country and additional usage of LNG as a transportation fuel, PT Pertamina will convert the Arun export LNG terminal into a receiving terminal in 2014 when its gas supply commitment to Japan and South Korea expires. Furthermore, the company plans to build a floating LNG receiving terminal with a capacity of 3 million tonnes per annum (mtpa) in Central Java by 2014, the Donggi Senoro LNG terminal in Central Sulawesi by end-2014, and eight mini LNG terminals with a total capacity of over 1 mtpa in eastern Indonesia by 2015. In order to further strengthen its dominance in the downstream gas segment, it has also taken over nine gas filling stations, mostly in Java, from Malaysia-based Petronas, and plans to build seven gas stations in and around Jakarta to support the government’s oil-to-gas conversion initiative.
Apart from the downstream business in gas, the company is also continuing to direct its efforts to increase geothermal and CBM production in the country. Until end-2012, PHE held production sharing contracts for the exploration of CBM in 14 blocks, all of which are currently in the exploration phase; they are expected to start production from 2017 onwards. In a bid to develop the CBM blocks more efficiently, the company plans to transfer operations and a part of its participating interest in four CBM blocks (Blok Air Benakat 1, Blok Air Benakat 2, Muara Enim 1, and Muara Enim 3) to mining firm PT Sugico Graha. Moreover, PHE plans to invest around $1.5 billion to develop 200 CBM exploration wells over the next five years.
In the renewable energy segment, PT Pertamina is rolling out an extensive alternative transportation fuels strategy. For a start, it has announced a policy to increase compulsory biodiesel blending from 7.5 per cent to 10 per cent in its transportation fuel. Further, the company is working with Celanese Corporation, a US-based technology company, to set up a plant to produce high quality bioethanol, and Toyota Motors Corporation to undertake research in clean, high quality transportation fuels. Finally, the company is constructing several waste-to-energy plants with a total capacity of over 250 MW. It has also signed an MoU with electronic component maker PT LEN Industry to establish a solar photovoltaic industry in Indonesia to domestically produce the solar cells for solar power plants.
Forward-thinking
Although PT Pertamina plans to increase its domestic hydrocarbon production, there is a high degree of exploration risk involved in the upstream segment. Moreover, PT Pertamina will have to exercise greater caution with regard to its acquisition of stakes in foreign companies, in the face of its recent failures to acquire a 32 per cent stake in Venezuela’s Petrodelta and a stake in Canada-based Coastal Energy. Hence, if some of its plans in the upstream segment do not meet the desired targets, the company will have to increase its dependence on oil imports whose rising prices may further jeopardise the company’s expansion plans in the refinery segment.
Nonetheless, PT Pertamina is also seeking to overcome its challenges in the oil industry by using various risk mitigation strategies including its growing focus on the renewable and new energy segment. Despite uncertain times ahead, the company will strive to maintain its position as a major integrated energy company in Indonesia, while setting its sights on becoming a leading energy giant in Asia in the near future.
