President Joko Widodo supported the formation of an oil and gas holding company through Government Regulation 6/2018 concerning Increasing State Capital Inclusion in the share capital of PT Pertamina (Persero). Basically, the government’s shares in PT Perusahaan Gas Negara Tbk (PGN) will be given to PT Pertamina as additional capital. This transaction aims to improve efficiency and optimize natural gas distribution infrastructure so that the price is more affordable.
I will not discuss too much in terms of how and when gas prices can be better managed under this rule. However, it will further analyze a number of prerequisites for the State-owned Enterprises (SOEs) holding in order to bring improvements to oil and gas governance.
Government Regulation 72/2016 allows the state to transfer capital participation in an SOE to another SOE, and the SOE to become a holding company in a holding provided that the state will own shares with special rights. To increase the competitiveness of SOEs in Indonesia, the government has proposed the formation of 16 holding companies, namely the mining, oil and gas industry, infrastructure, housing, financial services, food supply, shipping, pharmaceuticals and insurance.
Last year the government formed a mining holding company with the signing of Government Regulation 47/2017 concerning the addition of government capital participation in the share capital of PT Inalum, which is the holding company for the mining SOE. The government argues that the holding of state-owned mining and oil and gas companies will strengthen the position of all companies that join forces, create added value and can optimize existing mineral and oil and gas reserves.
In the oil and gas sector, the merger of PGN with Pertamina is expected to increase synergy to avoid duplication of infrastructure development. Especially in the distribution of gas from producer areas to consumer areas. We hope that the establishment of an oil and gas holding company can be carried out with a clear scheme and objectives so that oil and gas SOEs are able to play in the global market competitively and meet national energy needs.
For this reason, an oil and gas SOE holding needs to clearly determine the trade and non-trade strategy and always be consistent with that strategy. The parent company of oil and gas SOEs should also have a clear operational funding plan, if necessary, look to the capital market and avoid dependence on the state budget. The parent company of oil and gas SOEs must also have reliable resources and an efficient organizational structure, and free from political intervention.
An oil and gas SOE holding that will manage large amounts of state budget and assets must be accountable for achieving its business objectives and strategic mission. This objective must be concrete, measurable, and use international references so that the authorities, public or analysts can measure the performance of the Oil and Gas SOE. Therefore, holding finances must be transparent by issuing financial reports openly following the guidelines of the OECD and the guidelines of The Extractive Industry Transparency Initiative of the World Bank.
Management of financial reports with reference to high standards of transparency can guide the oil and gas SOE holding towards better accountability. This will help improve the performance of the oil and gas SOE holding so that it can fulfill the mandate of Article 33 of the 1945 Constitution to prosper the people and succeed in the global market.
In addition, the oil and gas SOE holding does not have to control the entire oil and gas distribution chain. If the position is strong and clean, other components of the oil and gas chain will also support it.
It should be noted that several countries have formed state-owned oil and gas companies with the view that the state must play a role in developing the oil and gas industry and controlling production and distribution operations. However, there are also cases of state-owned oil and gas companies that pose a threat to the state because they are burdened with political roles that are sometimes unclear or do not have the required managerial competence. One of them is the Petrobras money laundering case in Brazil and the massive corruption case of state-owned enterprises in Congo.
Of course that’s not what we expect in this country. However, if we really want to change the oil and gas governance that has been regulated in Law No. 22/2001, that is certainly a sign that there is no perfection in the management of the oil and gas industry and we always want to improve it. Unfortunately, it is currently a bit late because investment in this sector is decreasing, no new reserves have yet been discovered, and old reserves are starting to run out.
To meet the needs of the national economy, we can indeed import crude oil or natural gas even though it will be an additional burden on the state budget. According to geologists, it is estimated that the remaining oil and gas reserves in this country can still be found through additional investment. And for the next few years we can hope that existing natural resources can still contribute to turning the wheels of the economy.
For that, we can hope that the role of the state can be increased through SOEs. By forming an oil and gas holding company so that activities are more controlled, as well as providing opportunities for SOEs to develop and compete globally, such as StatOil in Norway, Ecopetrol in Colombia, or Petronas in Malaysia.
However, there are several challenges that must be faced considering that there may still be obstacles within PGN or Pertamina. I see that operationally, the internal conditions of SOEs still need preparation to face the formation of a holding, both from the human resources perspective and from an operational perspective.
In addition, if there is a view that the current oil and gas reserves are not as big as before, the Ministry of Energy and Mineral Resources, the Ministry of SOEs and the Ministry of Industry are feared to have different views in oil and gas management. Especially considering that Indonesia, with its current governance regulations, may no longer be an attractive destination country for exploration investment.
Therefore, coordination and leadership are needed so that the new oil and gas governance can be synchronized and harmonious. All stakeholders in both the government and the business world need to put their problems together.
At present, it is still seen that the government and industry go independently. In these conditions, the President is expected to be able to directly provide instructions so that stakeholders can carry out more effective coordination in realizing oil and gas SOEs holding that is able to have a positive impact on improving national oil and gas governance.
Ananda Idris is an Independent Oil and Gas Consultant and currently serves as a Director at Kiroyan Partners.
Source: Kontan, April 13, 2018, page 23.