‘Old songs’ and Pertamina’s pipe dreams

Amahl S. Azwar, The Jakarta Post, Jakarta | Headlines | Mon, May 13 2013, 9:30 AM

Under the 54-year-old Galaila Karen Agustiawan’s tenure, state-owned energy corporation PT Pertamina sees its future among the world’s top oil and gas companies in the coming decades.

The latest report of the American financial services company Standard & Poor’s (S&P) says the Jakarta-based firm still faces old challenges — namely the company’s “public service obligation [PSO] to distribute gasoline in the domestic market at government-designated and below-market prices”.

“The company benefits from generous production-sharing contracts and gas preferential access to newly released exploration blocks and expiring cooperation contracts. However, Pertamina’s PSO tempers this benefit,” the agency said in its report.

S&P was referring to the obligation of Pertamina to distribute the 88-octane gasoline, Premium, at the subsidized price of Rp 4,500 (US 49 cents) per liter, some of the world’s cheapest gasoline.

Pertamina often suffers losses thanks to over-consumption. Many motorists prefer to purchase subsidized fuel instead of non-subsidized fuels such as Pertamax 92 (a local brand of 92-octane gasoline) that sell for about Rp 10,000 per liter.

Last year, the total subsidized consumption hit 45.3 gigaliters, an increase of almost 9 percent from 2011, which was around 41.7 gigaliters.

The situation has burdened Pertamina with $166.9 million in losses not to mention the margin between the production cost and crude oil prices as well as aging refineries.

In Q1, national subsidized consumption was over 7 gigaliters for Premium, a mere 2 percent less than the quota for the quarter.

The consumption of subsidized diesel (also sold at Rp 4,500 per liter) reached 3.7 gigaliters, 5.2 percent above the quota.

S&P also highlighted the scale and operating effectiveness of Pertamina’s downstream business, specifically its refineries, which it says “also constrain the profitability of the company’s PSO business”.

“The below-average complexity of Pertamina’s refineries compared with regional peers’ influences the product mix of the refineries and reduces margins for the downstream business,” the report said.

With that, S&P said it expected Pertamina’s financial performance to weaken in the next two to three years because of their “estimate of the company’s capital expenditure plans of $8 billion-$9 billion annually in 2013-2014. This
expenditure will be predominantly debt-funded”.

Commenting on this, Pertamina investment-planning and risk management director Afdal Bahaudin, also the firm’s former finance director, told The Jakarta Post the “old songs” remained the challenge of the second-largest crude oil producer in the country.

“Even for us to increase the price of non-subsidized liquefied petroleum gas [LPG] to cut losses is very difficult,” he said.

Pertamina planned to raise the price of the non-subsidized 12-kilogram LPG canisters but subsequently suspended it after objections from senior ministers.

President director Karen believes the firm would have reaped higher net profits than the Rp 25.89 trillion it booked last year without the losses from the LPG business as well as the sale of subsidized fuels.

As of Dec. 31 last year, the government owes Pertamina Rp 31.35 trillion to pay for the losses on subsidized fuel.

The government has yet to pay back Pertamina Rp 22.31 trillion for the 2010 to 2012 period, as fuel consumption exceeded the quota.

In addition, the government also owes Pertamina Rp 6.35 trillion for fuel for the police and the military.

The kerosene to gas conversion program for low-income families since 2008 has also left Pertamina with a Rp 2.68 trillion loss, which the government has yet to pay back.



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