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Fate of Indonesia State Oil Company Pertamina (SOCP) Is No Better Than Third Rate ASEAN Companies

by

Ronnie Higuchi Rusli




The shock wave of world oil price is a tragedy to Pertamina who still beinmg assume a prime company to a few government buerocratics. What was considered still glowing in oil business now has no future and have a bif impact to its its workers still. SOCP or Pertamina was originally conceived on the premise that the company will be dominant force in the ASEAN oil and trading, oil transportation, refining, domestic distribution as well as exploration in one collosal form

Pertamina in the past served this mission admirably, as evidenced, for example, by its heroic provision of products sharing now copy 100% by Malaysia Petronas sucessfully. Sadly, this heroism — along with some corruption, lost of production, lost of domestic market has put the company on the knife’s edge of no different that other foreighn contractor, and the Indonesian government, did no make any diffrentiation as does Petronas by the Malaysian government.

In the Suharto era, state enterprises such as SOCP were spoiled by the government and often used as cash cows. Efficiency was not their primary objective. Serving top government officials were regarded by the management of such firms as the keys to success.

That philosophy of corporate management met the realities of an increasingly competitive market following the Suharto regime’s collapse. Executive perks for state-owned firms’ quickly curtailed and reformed, and SOCP has no previlege in oil business and treated no more than like foreign product sharing contractor. All the power were disbanned and tranfered to BP Migas as the sole authority in oil regulatory sector

As a result, many other state-owned firms SOC also faltered prematurely Like in many third class ASEAN companies have been dying; others have shuttered, It is a sign of the times that many of the roles left by similar companies are now fulfilled by foreign firms, rather than domestic ones. It’s possible that Pertamina may meet such a grievous fate, too. As a state enterprise, it is charged with operating in the government’s interest, which often runs contrary to the company’s own.

First, the state-owned energy company is bound by a public service obligation to serve poor and remote areas. This is expensive, due to high transportation costs and low economies of scale. Pertamina must build domestic refineries, requiring high capital expenditures. Last, money from oil sales do not flow directly back to the company’s accounts, but are instead diverted to the state treasury. This diminishes Pertamina’s ability to finance productive activities.

Pertamina’s first and second assignments are fine because they encourage equity in access to energy across the country, as well as industrialization. The fairness of shouldering those activities’ burden is contingent on government subsidies.

Pertamina’s Domestic Market Obligations should strengthened its competitiveness in the domestic oil market distribution, however the political favoritism to other private entity weaken SOCP. Indeed, the 2004 law on downstream energy clearly states that oil and gas companies are obligated to serve areas that are remote or where no market exists.

Amid Indonesia’s regime of high fuel subsidy spending, most downstream private companies operate only in “rich” areas, such as Jakarta and other large cities. Here, Pertamina’s competitive advantage is unintentionally saved by the low prices of subsidized fuel for mid-sized and rural areas.

However, when fuel subsidy cuts deliver subsidized prices close to market levels, Pertamina loses its competitive advantage and private companies may enter other promising areas — leaving the poor ones for Pertamina.

SOCP as energy company’s has lost its competitive advantage, so does its market share. This is a slippery slope that, if permitted to slide towards its natural conclusion, could send Pertamina tumbling toward the fate like other bankruped SOE. If Pertamina faces dark days ahead, would it — should it — be allowed to fail? The firm may very well be a priceless asset to Indonesia, since oil is of strategic importance to our nation’s security.

Fuel shortages, no sizable oil reserve finding by Pertamina, high cost of import have left Pertamina behind other lucrative oil distrubtion company like Shell. This have the potential to paralyze Indonesia economy in particular with the declining of world oil price which eventually would a destabilize country social fabric. The national security risks of ceding this sector to foreign companies, which represent the interests of their home countries and shareholders, is clear.

The government should take action to fix the competitive imbalance that Pertamina’s public service mission imposes. All players in the oil industry should not be treated equally and previlege should be given to Pertamina like other strategic company. But as a state enterprise and a bulwark of the nation’s energy resources, Pertamina should be given extra privileges without being spoiled, such as; obligating all firms in downstream oil to build domestic refineries, not just Pertamina, thereby potentially broadening access to employment.

The government should do mostly implementing the 2004 law on downstream oil firms consistently. For instance, if an foreign oil distribution company wants to enter a “rich” area, access should be granted on condition of service to one or two remote areas. Cash flow mechanisms among Pertamina, its customers, and the government should provide flexibility to snare emerging opportunities.

This could also potentially provide savings on currency exchange, since companies will import more intermediate oil products, rather than finished ones such as gasoline and diesel fuel. Pertamina’s should be consult in regard to market distribution area destiny as is perhaps equally a function of market forces as it is management’s ability to harness to lead internal change that harnesses those forces for the company’s benefit.


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