Why is Pertamina Losing?

KOMPAS/RIZA FATHONI

The officers filled the avtur to the tank truck which would distribute the Baker material to the aircraft at the Domine Eduard Osok (DEO) Aircraft Filling Depot (DEO) Sorong, West Papua after the inauguration, onThursday (21/11/2019).

The virtual universe is busy with discussion regarding losses suffered by state oil and gas company Pertamina, worth Rp 11.13 trillion in the first half of 2020.

Pertamina\'s losses are used as a political commodity to attack Pertamina\'s chief commissioner, Basuki Tjahaja Purnama (Ahok). Ahok is said not to be agile in carrying out the task of controlling Pertamina\'s performance. The task of Pertamina\'s commissioners is to evaluate the performance of Pertamina\'s directors and business proposals. However, in the current situation of Covid-19, the performance of Pertamina\'s directors and commissioners cannot be considered a failure. No matter how tough the performance of the directors and commissioners in processing the upstream-downstream business, they are helpless in the face of Covid-19. The most appropriate strategy is to survive so as not to lose too deep.

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Covid-19 makes the world seem to stop moving. Countries are under lockdown and implementing quarantine policies to minimize risks. In Indonesia, before the new normal, the government had implemented a large-scale social restriction policy (PSBB). Business activities have also stopped for a moment, mobility of goods and services among countries has stopped, while land, air and sea transportation has stopped working. Production of big companies is not running. This has an effect on decreasing the level of global oil consumption and demand.

Meanwhile, on the supply side, oil-producing countries continue to pump production. Saudi Arabia, for example, in April produced 12 million barrels of oil per day (bpd). During March-April 2020, the average supply from oil-producing countries that were thrown into the market reached 20 million bpd. This caused the oil price to be deeply under pressure. The global oil giants that have benefited from high oil prices suffered losses, including Pertamina. Pertamina\'s Rp 11.13 trillion losses were very small compared to the losses of the global oil giants.

In the first semester of 2020, according to Forbes, the US oil and gas giant, Exxon Mobil, lost US$1.3 billion (equivalent to Rp 19 trillion), British Petroleum/BP (UK) lost US$6.7 billion (equivalent to Rp 98.1 trillion), Total E&P (France) lost US$8.4 billion (equivalent to Rp 123 trillion), and Shell (the Netherlands) suffered the largest losses reaching US$18.4 billion (equivalent to Rp 270 trillion).

Only the Saudi Arabian oil and gas company, Saudi Aramco, posted a profit of US$6.6 billion (equivalent to Rp 96.6 trillion). This is because Saudi Aramco has successfully diversified its business by acquiring 70 percent of the shares of SABIC, a local petrochemical company. Petrochemical itself is one of the downstream products of the oil and gas industry, which is the raw material for various other products. So, Pertamina\'s losses are not due to poor performance of the directors or commissioners, but because of the abnormal condition due to Covid-19.

Triple shocks

The decline in Pertamina\'s profit was triggered more by shocks stemming from three things, namely the fall in global oil prices, a decrease in domestic consumption due to Covid-19, and exchange rate fluctuations. In the upstream, Pertamina has the task of exploring oil fields, like other oil companies, such as Exxon Mobil Cepu. Until 2020, Pertamina\'s oil production will reach 400,000 barrels per day (bpd). The fall in global oil prices certainly has a very significant impact on Pertamina\'s upstream business.

Kompas/A Handoko

ExxonMobil Cepu Limited Central Processing Facility (CPF) at Banyu Urip Field, Gayam District, Bojonegoro Regency, East Java, on Friday (18/8/2016).

The public in the country hopes that with the decline in global oil prices, Pertamina should be able to bring down fuel prices because Indonesia is a net importer. Indonesia imports 700,000 barrels of oil per day (BOPD). With the decline in global oil prices, Pertamina should be able to buy a lot of oil in the global market so that it can save a lot of money and the price of fuel oil such as Pertamax or Pertalite at Pertamina gas stations could go down.

Also read: The Economics of Vaccine

However, Pertamina cannot reduce the price of fuel. In April, Pertamina planned to buy 10 million barrels of crude oil and 9.3 million barrels of gasoline. However, this is difficult to do because the PSBB policy to anticipate Covid-19 puts pressure on consumption. The demand for gasoline, diesel oil and aviation fuel from Pertamina has decreased so that the downstream side is also affected. The risk is that Pertamina must find a strategy to survive so that the balance sheet is not negative.

Pertamina is also bound by the obligation to buy crude oil from the Oil and Gas Cooperation Contract Contractors (KKKS) to maintain the trade balance deficit. Pertamina continues to prioritize the absorption of domestic crude oil which is obtained either from the government share (government intake) at a high price. In April, for example, when global oil prices fell to US$22, Pertamina had to buy oil from KKKS at US$24 per barrel.

It was recorded that until the end of February 2020, the total domestic oil absorbed and processed by Pertamina was 669 million barrels per day or around 92 percent of the national crude oil production. If Pertamina buys a lot of imported oil from the global market it is useless because the level of consumption is decreasing and the oil tanks are limited. All if this makes it difficult for Pertamina to reduce fuel prices amid the pandemic.

Also read: Import Substitution Problem

In the downstream business the condition is the same. The decline in domestic demand and consumption due to the PSBB policy causes Pertamina\'s sales to also decline. This can be seen from the decline in demand for national fuel consumption, which until June 2020 was only around 117,000 kiloliters per day or a decrease of 13 percent. In fact, in the same period in 2019, national consumption reached 135,000 kiloliters per day. Even at the time of the PSBB, in several big cities there was a decline in demand of 50-60 percent.

A decrease in demand causes sales to be suppressed so that income from sales activities falls compared to the normal period. Pertamina\'s sales fell 19.84 percent to US$20.48 billion. In fact, in the same period in 2019, Pertamina still enjoyed profits from sales of US$25.55 billion.

The problem is that the retail price of Pertamina\'s oil and gas products uses the rupiah currency, while the recording of financial reports uses US dollars.

In terms of exchange rate fluctuations, Pertamina certainly suffered a tremendous blow. The problem is that the retail price of Pertamina\'s oil and gas products uses the rupiah currency, while the recording of financial reports uses US dollars. Apart from that, the government has not paid the Rp 96 trillion compensation debt and Rp 13 trillion subsidy to Pertamina. This contributes around 60 percent to Pertamina\'s foreign exchange loss. (Read: Pertamina Financial Report, 2020).

The triple shocks brought by Covid-19 can explain why Pertamina has suffered the losses.

The momentum for reform

Covid-19 is a momentum for improvement for Pertamina to carry out internal reforms. In June 2020, State Enterprises Minister Erick Thohir, through the General Meeting of Shareholders, reappointed Nicke Widyawati as the captain (managing director/president director) of Pertamina.

Pertamina is the backbone of the state to secure national energy. If Pertamina\'s performance falls, national energy security will also fall. Pertamina controls the upstream oil and gas business up to the downstream. In the upstream, Pertamina has the task of producing oil and gas, while in the downstream it is in charge of processing crude oil into gasoline, diesel oil and distributing fuel throughout the country. So, the responsibility of being the president of Pertamina is heavy.

The president director of Pertamina is obliged to think seriously about how to secure national oil production. The fact is that currently Pertamina\'s oil and gas production is down. In fact, President Joko “Jokowi” Widodo has granted management rights to a potential oil and gas block, Mahakam Block (East Kalimantan), from Total E&P to Pertamina in 2015. The trade balance deficit due to fuel imports is also a triggering factor. The failure to build and rejuvenate refineries, such as the Cilacap and Balongan refineries, is also the reason why the trade balance deficit widens.

KOMPAS/ABDULLAH FIKRI ASHRI

Workers check crude oil production tanks at the PT Pertamina EP Asset 3 Jatibarang Field Collecting Station, Indramayu, West Java, on Tuesday (5/11/2019).

President Jokowi has repeatedly spoken to the public that the construction of refineries is important to reduce oil and gas imports, which has hit our trade balance.

Nicke answered the challenge a little. Assisted by Chief Commissioner Basuki Tjahaja Purnama, Nicke has successfully continued the construction of the Tuban (East Java) refinery with Russian partner Rosneft Oil Company to produce 14 million liters of gasoline per day and 16 million liters of diesel oil production per day. Nicke has also decided to continue rejuvenating the Cilacap refinery to produce 18,600 barrels of fuel per day and reducing Pertamax imports by 600,000 barrels per month.

In addition to choosing the president director, shareholders have reorganized the board of directors (BOD) to only six members of the BOD, starting from the President Director, Business Support Director, Finance Director, Human Resources Director, as well as Logistics Director and Strategy Director.

Structurally, Pertamina is an unhealthy company and has a long bureaucratic chain. So far, Pertamina has 11 members of the BOD, ranging from the President Director, Operations Director, Processing Director, Human Resources Director, Logistics, Supply Chain and Infrastructure Director, Asset Managing Director, Marketing Director, Upstream Director, to Investment Planning Director. It is like a football team.

If the SVP is in the upstream, he is in charge of managing the upstream business.

Under the BOD, there is still a long bureaucratic chain. Each BOD has four senior vice presidents (SVP). SVPs also have 2-4 vice presidents and operational managers. SVP duties are in accordance with their respective fields. If the SVP is in the upstream, he is in charge of managing the upstream business. Pertamina internal officials with quite long careers have a maximum career up to the SVP. If calculated from the total 8,000 Pertamina employees (2019), structural officials reach 500-700 officials or 7 percent of Pertamina\'s total employees with global salary standards.

This makes the bureaucratic chain very long at Pertamina. Completing an upstream and downstream project must go through a long bureaucracy. This causes decisions to be very slow, while the country requires large oil and gas production. The long bureaucratic chain usually makes it difficult for Pertamina to expand its business. With the reorganization of the board of directors, Pertamina is expected to be able to carry out a work culture transformation to be more productive, able to carry out investment responsibilities in the upstream-downstream oil and gas sector, and to be able to compete with companies in its class, such as Petronas (Malaysia).

Therefore, the president director of Pertamina must be really skillful in carrying out comprehensive internal reforms of Pertamina. These reforms need to be supported by the brave chief commissioner. Basuki Tjahaja Purnama as the government\'s representative at Pertamina needs to support the work of the board of directors to carry out internal reforms. The commissioners need to make the work of Pertamina\'s directors more comfortable in processing the upstream-downstream business. Commissioners need to be aware that internal people can flirt with the mafia. In this way, Pertamina starts to pioneer professional corporate governance.

For the long term, Pertamina needs to complete the renovation of the Balongan Refinery, Dumai Refinery, Cilacap Refinery and Tuban Refinery so that it can process crude oil into fuel and reduce imports.

Refinery renovation requires large funds. For the development of the Tuban Refinery (East Java) alone, Rp 225 trillion is needed to produce 300,000 barrels per day to be processed into fuel such as gasoline, diesel oil, aviation fuel (4 million liters of aviation fuel per day), and petrochemical (4.2 5 million tons per year). The construction of refineries does require foreign business partners who have sufficient funds and qualified technology.

If Pertamina has built refineries, it is necessary to think about where the crude oil will come from because national oil production continues to decline. This requires new oil reserves and Pertamina can expand to acquire foreign oil fields in order to meet the needs for the capacity of refineries to be built. President Jokowi needs to grant management rights for potential oil blocks such as the Rokan Block -- whose contract expires from Chevron Pacific Indonesia -- to Pertamina to secure energy supplies.

ARSIP PRIBADI

Ferdy Hasiman

It is also time for Pertamina to diversify its business by becoming a petrochemical player in the country.

Ferdy Hasiman, Researcher at Alpha Research Database, Indonesia