Pertamina

Type: State-Owned Company
Address: Jalan Medan Merdeka Timur Number 1 A, Jakarta 101110, Indonesia
Telephone: (21) 381-51114
Fax: (21) 384-3882
Web: http://www.pertamina.com
Sales: $19.4 billion (2001)
Employees: 24,000
Incorporated: 1945 as Perusahaan Tambang Minyak Negara Republik Indonesia
NAIC: 211111 Crude Petroleum and Natural Gas Extraction; 324110 Petroleum Refineries

Pertamina operates as a state-owned company that controls the oil and natural gas industry in Indonesia. The company's activities include exploration, refining, production, transportation, and marketing. Indonesia's turbulent economy and its political and civil unrest over the past several years have forced many changes in Pertamina. The country's Oil and Gas Law 22, passed in 2001, includes provisions that will eventually turn the giant oil concern into a limited-liability company. Law 22 also intends to break up Pertamina's monopoly over the Indonesian energy industry by encouraging foreign competition and investment.

Since the 17th century, when much of the Indonesian archipelago came under the control of The Netherlands and its Dutch East Indies colonial administration, the region has been renowned for its vast natural resources, especially tin. Until the middle part of the 20th century, however, the country's oil deposits remained mostly untapped. History records that Indonesians in the Sumatra Strait successfully defeated attacking forces from the Portuguese armada by hurling oil-soaked fire balls at the foreigners and burning their vessels.

Dutch seafarers avoided a similar fate by arming their battleships with cannons to repel the fireballs from a safe distance. With Indonesia a colony, the Dutch soon began tapping the country's oil reserves for their own gain.

In 1887, Adrian Stoop, a former engineer with Zijlker, a Dutch oil company, set up his own business in Surabaya. Having found oil deposits, he established a refinery at Wonokromo in 1890, and expanded with another one in Cepu, Central Java, in 1894. Two larger oil companies, Koninklijke Nederlandsche Petroleum Maatschappij and Shell Transport and Trading Company, were quick to assume the advantage over Stoop by setting up, in 1902, a joint venture in oil shipping and marketing operations in Indonesia. In 1907 the two Dutch concerns, impressed with each other's progress, merged into one group, which eventually became known as Royal Dutch/Shell, or Shell for short.

Other oil companies attempted at the turn of the century to establish a foothold in Indonesian oil mining. Most failed or were swallowed up, in part or whole, by Royal Dutch/Shell. For example, a number of foreign companies looking to explore in the Irian Jaya province in 1935 set up a joint company called Nederlandsche Nieuw Guinea Petroleum Maatschappij, with 40 percent of its shares held by Shell.

During the interwar years Indonesia had become the Far East's largest oil producer, and the prospect of the country's falling under Japanese control after the bombing of Pearl Harbor dismayed Indonesia's Dutch rulers. When the Dutch government realized Indonesia could no longer withstand a Japanese advance, many of the country's oil installations and facilities were destroyed. Before the Dutch army and the oil companies could complete the scuttling operation, the Japanese forces occupied a fair number of the remaining installations, putting them under the control of the invader's regional military commander.

With the end of the war in 1945 and the proclaiming of Indonesia's independence in August of that year, to become fully effective in 1949, that country's anticolonial independence fighters, resuming the fight against Dutch rule, quickly seized on what remaining oil fields and installations they could secure from the retreating Japanese. Recognizing this popular ferment, in September 1945 the Dutch administration included in the country's new constitution Article 33, which outlined the "people's desire" to develop their oil and gas sectors. In practical terms, Article 33 meant the establishment that month of a national oil company, Perusahaan Tambang Minyak Negara Republik Indonesia (PTMN-RI). In a wider sense, Indonesia started out on the road to reducing its dependence on foreign oil companies to tap its energy deposits and to managing the industry for its own gain.

At the same time, independence fighters in south Sumatra retained control of regional oil facilities and set up their own company, Perusahaan Minyak Republik Indonesia (PERMIRI). Elsewhere in Java, another oil company, Perusahaan Tambang Minyak Republik Indonesia (PTMN), held jurisdiction.

This postwar period was debilitating for Indonesia's oil industry, as rival independence movements used installations and facilities to gain advantage over the Dutch colonial rulers. For a time PERMIRI was able to run the Dutch blockade and sell oil to Singapore. By 1948, however, Dutch forces had ended exports of PERMIRI's supplies. In the same year, Dutch forces ended exploration at oil fields controlled by PTMN in Central Java.

After Indonesia's full independence in 1949, the country had to contend with foreign oil companies still tapping its most valuable oil and gas reserves. Royal Dutch/Shell and Standard-Vacuum Oil Company (Stanvac), two large foreign oil groups operating in the region, still had concessions to continue work in Indonesia until 1951. That year, Indonesia's house of representatives ordered the government to set up a state committee for mining affairs and to postpone granting concessions and exploration permits to foreign oil companies.

This was a modest first attempt by Indonesia to tap its oil and gas reserves for its sole gain. Plans were slow in developing. In 1954, the government forged a four-year agreement with Stanvac to give Indonesia greater input in how its oil industry was developed.

The Stanvac agreement expired in 1960, when the Indonesian government enacted Law 44, concerning oil and gas mining. Exploration and mining were now to be carried out only by the government, under the management of a state company. Hereafter, foreign companies such as Shell and Stanvac were no longer to be regarded as concession holders but as contractors, and had to renegotiate their agreements with the Indonesian government accordingly.

Again, plans were slow to bear fruit. Indonesia knew that it lacked the massive funds needed to explore and produce oil on its own. Negotiations, over which the United States took great interest and an eventual lead, were concluded in June 1963. The resulting agreement held that Shell, Stanvac, and Caltex, the major foreign oil companies operating in Indonesia, were to become contractors of PERMIGAN, PERMINA, and PERTAMIN, respectively. The foreigners would retain management of the oil installations, but 60 percent of profits from all activities would go to Indonesia.

Beyond profits, however, the Indonesian government was intent on maintaining general managerial responsibility for all oil exploring and drilling installations in the country. General Ibnu Sutowo, president-director of Pertamina, explained: "This does not mean that we insist on making every decision, but we do insist on making any decision we find necessary."

Although Indonesia remained, in large part, dependent on foreign oil companies, it had made an attempt to obtain crude oil on its own. In 1962, Indonesia joined the Organization of Petroleum Exporting Countries (OPEC), although at this time the oil-producing cartel was hardly the economic force it was to become during the 1970s.

The country's first state-owned oil company, Exploitasi Tambang Minyak Sumatra Utara (PT ETMSU), had been set up in 1957. After changing its name soon after to PT PERMINA, Indonesia made its first crude oil export on March 24, 1958, when the tanker Shozmi Mam carried 1,700 tons, worth about $30,000, to a foreign buyer.

Slowly, Indonesia established the infrastructure to produce its own crude oil on a lasting basis. PERMINA Oil Academy enrolled its first group of engineering students in 1962. In the same year, PERMINA purchased one aircraft for its operations and--a year later--secured approval from the government for the purchase of oceangoing tankers for crude oil exports.

By 1965, PERMINA had successfully drilled a total of nine oil fields, the resulting wells producing 21,000 barrels of oil per day. This progress instilled the Indonesian government with enough confidence to secure agreement from Shell to purchase all of Shell's assets for around $10 million over a period of five years after 1966.

It was not until 1971 that PN Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) was established by the Indonesian government as the only national oil company that could extract oil and natural gas throughout the country. The state company had been formed earlier in 1968, again by government legislation, after the merger of PN PERTAMIN and PT PERMINA, the existing state oil companies. Under the 1971 legislation, Pertamina was to be run by a board of directors, headed by a president director, and five other directors. The state-owned company, headquartered in Jakarta, was to operate in close cooperation with the Indonesian government.

Pertamina needed the assistance of foreign oil companies. Under production agreements, the foreign contractors were to receive 40 percent of profits from exploration and drilling, while the Indonesian government carved out 60 percent of all gains. This all changed, however, in 1973 when the oil barrel price began to increase sharply. Pertamina renegotiated in 1974 complex agreements that stipulated that when the price of a barrel of crude oil climbed above a recognized base price, the incremental rise would be shared between the government and the contractor at a split of between 85-15 and 95-5 percent.

The West's growing thirst for energy supplies at this time gave tremendous impetus to the growth of Indonesia's LNG--liquefied natural gas--industry. The beginnings of LNG exploration dated back to October 24, 1971, when Bob Graves, exploration manager for Mobil Oil Indonesia, completed a drill-stem test on a wildcat well in the Arun oil field in North Sumatra. Graves had already drilled 14 holes in the field, an area of rice paddies, fish ponds, and coconut trees, but had found nothing. The 15th drill-stem test, Arun A-1, was successful. Alex Massad, Mobil Oil's exploration and production chief in New York, proposed further drilling in the area for natural gas, at a cost of 400,000. The directors at Pertamina recognized the potential for profits from Arun-1. The successful drilling of Arun-2 and Arun-3 in early 1972 confirmed the presence of large LNG reserves.

Mobil Oil was not alone in spotting Indonesia's rich LNG deposits. In 1971, Huffco, a Texas-based oil company drilling in palm swamps near the coast in east Kalimantan, drove a drill down the Badak-1 well site. Badak-1 produced a major gas discovery for Huffco.

On the strength of the Arun and Badak finds, Pertamina established a LNG unit, headed by Bambang Bramono, head of foreign gas marketing. The unit oversaw Mobil and Huffco development of their LNG finds. It soon became clear that Japan was to be Pertamina's main customer for natural gas.

The Indonesians' 50-year experience in the production of crude oil, and the political and economic machinations surrounding such endeavors, enabled them to gain the best advantage from LNG development. Pertamina extracted agreements from Mobil and Huffco that they would produce the natural gas, but that the Indonesian company would then sell it to foreign purchasers. All negotiations with prospective Japanese buyers, beginning in 1973, were headed by Indra Kartasamita, who worked in the company's sales and transportation division.

Contracts with foreign buyers followed, beginning in late 1972. Japanese electric utilities, including Kansai Electric Power Company, Chubu Electric Power Company, and Kyushu Electric Power Company, were among the first customers. Pertamina then signed a 20-year contract with Pacific Lighting Corporation, the parent of a California gas company. In 1979, Pertamina signed a five-year contract with Mitsubishi Oil Co., Ltd. of Japan, to double the latter's purchase of crude oil.

Pertamina's LNG operations were headed by General Ibnu Sutowo, who was directly responsible to Indonesian President Soeharto. Soedarno Martosewojo, a Pertamina director and chemical engineer, was appointed as LNG coordinator.

Once the taps that extracted LNG from deep below the Indonesian shorelines were switched on, production climbed steadily. It reached 312.6 billion standard cubic feet in 1976, compared with 150.8 billion in 1972. The LNG plant in Arun was fully completed in mid-1978, while the plant at Badak came onstream in July 1977, commencing production a month later. In 1990, the annual production from the two plants was 15.7 million tons and was exported almost entirely to Japanese users. There were also modest exports of LNG to South Korean users. Also in the pipeline was the export of 1.5 million tons of LNG to Taiwan each year, a market that was expected to open up in late 1990. This was agreed between the Chinese Petroleum Corporation and Pertamina in 1986. Then in 1995 the two companies signed a $6 billion deal, which would extend Pertamina's LNG export contract until 2018.

The rise in the price of oil following Iraq's invasion of Kuwait in August 1990 was expected to rejuvenate exploration and drilling in Indonesia. Over the five years since 1986, when the price of oil slipped to below $20 a barrel and remained static for a time, so too did the number of installations in Indonesia. During this period, 693 exploratory wells were drilled, comprising 385 wildcats and 308 delineation wells. These drillings saw a 35 percent success rate.

By mid-1989, the country had 78 onshore and offshore installations, covering 55 production contracts with foreign oil companies, and 18 joint operating arrangement areas. Of these installations, 29 were producing oil, while 49 were still in the exploration stage.

After its success in developing Indonesia's LNG deposits, Pertamina was eager to explore and tap geothermal energy sources around the country. In its early stages of development, steam production began at the first geothermal field in Kamojang, West Java. New fields set to begin production included those in Dieng plateau in Central Java, Mount Salak and Drajat in West Java, and Lahendong in North Sulawesi. Aside from expanding its crude oil production, LNG production enabled Indonesia to develop new markets in domestic gas uses, in fertilizer and petrochemical plants, refineries, and electric power generation.

In 1993 and 1994, Pertamina launched a restructuring program designed to cut costs and increase efficiency. During the course of its efforts, however, the company became entangled in one of Indonesia's worst economic crises. By the mid-1990s, Indonesia was experiencing low employment, price increases, food shortages, and major devaluation of its currency, the rupiah. In fact, by December 1997, the rupiah had been devalued by nearly 40 percent over the course of one year. As the country's banks failed, the Indonesian government looked to the International Monetary Fund (IMF) for a bailout. The IMF agreed, offering approximately $23 billion in funds to restore the region's financial health.

Meanwhile, Soeharto's government was under attack for its corrupt policies. The president's 32-year reign came to an end in 1998 when he was forced to step down. His vice-president, B.J. Habibie, took over for a short while before Abdurrahman Wahid gained control in 1999. Wahid, nearly blind and suffering from two strokes, was eventually impeached in July 2001. Megawati Sukarnoputri was named his successor.

During this government shakeout, Pertamina experienced change of its own. While Soeharto had been in power, Pertamina had awarded 159 contracts to companies linked to Soeharto's family and friends. The Oil and Gas Journal claimed in July 1999 that "an independent report issued by Pricewaterhouse Coopers on July 9 revealed that graft and efficiency cost Pertamina about $6.1 billion in lost revenue during 1997 and 1998. The funds were lost due to embezzlement, illegal commissions, mark-ups on procurement contracts, and sheer inefficiency." Baihaki Hakim, a U.S. oil executive, was appointed CEO in 2000 and immediately began to overhaul Pertamina's corrupt business practices. By 2001, Hakim had issued the company's first financial report to the public, fired Soeharto cronies, cut jobs, and slashed more than $1 billion in costs. The new leader also changed the company's bidding process, making it more competitive, and began to file corruption charges against those who had defrauded Pertamina in the past.

Under President Megawati, the Indonesian government worked diligently to restore the country's financial health as well as its political stability. As part of its reform, Indonesia introduced its Oil and Gas Law 22, which would end Pertamina's monopoly over the country's energy resources and foster a competitive environment. Under the terms of Law 22, Pertamina's legal status was expected to change--turning it into a limited liability company--during 2003 in preparation for its eventual privatization in 2005. The company also would be forced to focus on its core operations and divest nonrelated assets and subsidiaries. The upcoming elections in 2004 threatened to overshadow the restructuring of the oil and gas sector, however, leaving Pertamina's future up in the air.

While Pertamina's role in the Indonesian oil and gas sector remained uncertain, the company continued with its internal strategy, which focused company efforts on becoming a global oil and gas company able to compete with the leading companies in the world. During 2001, Pertamina inked a deal with Petronas--Malaysia's state-owned oil company--that was worth approximately $3 billion. Under the terms of the deal, Pertamina would deliver LNG from the West Natuna gas field in the South China Sea to Malaysia. The company also kept its exploration business at the forefront of operations--it hoped to discover 118 million barrels of new oil reserves and 3.6 trillion cubic feet of natural gas reserves during 2003.

Principal Competitors

Petroliam Nasional Berhad; Singapore Petroleum Company Ltd.; Woodside Petroleum Ltd.

Further Reading

Abdullah, Ashraf, "First Pipeline Delivery of Natural Gas Launched," Business Times Malaysia, August 9, 2002, p. 5.

Bartlett, Anderson G., Pertamina: Indonesian National Oil, Jakarta: Amerasian Ltd., 1972.

"Big Changes Loom for Pertamina," International Oil Daily, November 19, 2002.

Hands Across the Sea: The Story of Indonesian LNG, Jakarta: Pertamina, 1985.

"Indonesia Considers Legislation That Would End Pertamina's 30-Year Petroleum Monopoly," Oil and Gas Journal, July 26, 1999, p. 27.

"Indonesia: Graft Won't Just Vanish," Business Week, June 1, 1998.

"Indonesia's Pertamina Misses Key Deadline for Corporate Revamp," International Oil Daily, April 3, 2003.

"Megawati's Short Honeymoon," Business Week, August 6, 2001.

"Pertamina Eyes 118 Million Barrels of New Oil Reserves in 2003," Xinhua News Agency, February 11. 2003.

Pertamina: History and Development, Jakarta: Pertamina, 1979.

Saragosa, Manuela, "Pertamina Signs Dollars 6bn LNG Deal with Taiwan," Financial Times London, October 27, 1995.

Shari, Michael, "Indonesia's Lone Ranger," Business Week, April 16, 2001.

------, "Megawati's Tightrope," Business Week, March 10, 2003.

— Etan Vlessing; Updated by Christina M. Stansell