You can contact the author (Teguh Hidayat) by email, The author live in Jakarta, Indonesia.

See my activities in Instagram, @teguhidx.

A Stupid Story about Oil and Gas

In your opinion, what are the main commodities of Indonesia? Is it coal? Or crude palm oil (CPO)? Both are correct, but there is another commodity that the value of its export is greater than both coal and CPO. And if you still remember, we've been studying this thing ever since we were still in elementary school. Yup, that commodity is oil and gas.

Based on recent data from the BPS (Badan Pusat Statistik, the central bureau of statistics of Indonesia), in the period of January to November 2011, Indonesia had exported oil and gas worth US$ 37.7 billion. This figure is greater than the export value of coal and CPO, which were US$ 24.7 and 19.7 billion respectively. In detail, the oil and gas export of US$ 37.7 billion is consisted of US$ 20.8 billion of gas, US$ 12.4 million of crude oil, and US$ 4.4 billion of processed oil.

On the other hand, Indonesia also imported oil and gas at a value of nearly equal to the value of exports, ie US$ 37.1 billion, but with a different composition, which is dominated by the processed oil of US$ 25.8 billion, followed by crude oil of US$ 10.0 billion, and gas US$ 1.3 billion. From this data we can then conclude that most of the oil produced in the country was sent abroad for being 'cooked' into gasoline, diesel, kerosene, etc., before being thrown back into the country for mass consumption. But we will not discuss this issue.

Back to topic. We know that in Indonesia, there are many companies that became great companies because they are playing in the sector of coal and CPO, as Indonesia is one of the largest producer of both commodities. Bumi Resources (BUMI) is one of the largest coal companies in the world, while Sinarmas Agro (SMAR) is also one of the largest palm oil companies in the world. They are two of several business groups that dominate the export of Indonesian coal and CPO. In the equity market, the sectors of coal and CPO is two of the most visited by public investors. In addition to BUMI, there are plenty of other big names in the coal sector, such as Indo Tambangraya (ITMG), Bukit Asam (PTBA), until Adaro Energy (ADRO). While in the palm oil sector, there are Astra Agro Lestari (AALI), PP London Sumatra (LSIP), and Bakrie Sumatra Plantations (UNSP).

And if we look at the data that the export value of oil and gas are bigger than the export of coal and CPO, then Indonesia must also have some companies that become 'kings of oil'. Then the oil and gas sector in the stock market is also inhabited by many high-profile oil and gas companies. But the reality isn’t like that. If we look at the oil and gas sector in the Indonesian Stock Exchange, there are only two big companies there, ie Medco Energi (MEDC) , and Perusahaan Gas Negara (the Gas Company of the State/PGAS). PGAS itself actually does not produce gas, but only a trader. While MEDC, the size of its production is very small and did not reflect the value of Indonesia's oil and gas exports, that reached tens of billions of dollars.

Then who is exactly controls the oil and gas industry in Indonesia? Well, I think you all already know the answer: Foreign oil companies. Indonesia is a haven for a lot of foreign oil and gas companies. Almost all global oil coporations have their operations here. You name it: Chevron, Exxon, BP, Total SA, Shell, Hess, Anadarko, Petrochina, CNOOC, there are all of them! Even Petronas of our rude neighbor Malaysia, is also exists. The only local company that is big enough to compete with them is only Pertamina. But even this SOE is not that big. For comparison, Pertamina’s total assets at the end of 2010 was Rp267 trillion or about US$ 26 billion. Just compare with its former protege, Petronas, which had assets of US$ 139 billion for the same period.

Actually, perhaps it is not our entrepreneurs fault, if they are not able to exploit Indonesian oil potential. Crude oil and natural gas are located far away in the depth of earth, so the production cost is very expensive, as local companies do not have the technology. If you want to produce palm oil, you may just open the land, planting the trees, then wait for the crops 2 or 3 years later. Meanwhile, if you want to produce coal, you just have to find the location of the mine, then dig the soil for 200 - 300 meters only from the land surface, and there you go!

While to produce oil, you have to drill to a depth of 4,000 meters below the ground, sometimes up to 6,000 meters. More difficult, most of the oil and gas is located on the coast or even in the middle of the ocean, so the production cost is much more expensive than drilling on land. So, to be able to produce oil in a large scale, a company needs a huge capital support, can be up to tens of billions of US Dollar, and of course: The support from the Government. According to the CEO of Pertamina, Karen Agustiawan, one of the causes of the small size of Pertamina (if compared with other global-scale oil companies), as well as the small size of oil production, is due to lack of capital or fiscal policy support from the government in the past (perhaps in the present as well), and also because of lack of technology.

However, if a company has enough capital to explore and drill an oil well, then the profit gained could be very very huge, if the project is succeed. Many of foreign oil companies operating in Indonesia, at first they did have to disburse large capital. But later, as you can see, they are the ones who then mastered the Indonesian oil business. They are also the ones who enjoying the rising price of oil each year, instead of us.

The point is, I just wanted to remind all of you, to make these foreign oil companies become fair in their operations, then at least they can be listed on the Indonesia Stock Exchange so that the public at large, or at least the capital market participants, can watch their operations in Indonesia precisely. Take a look at Unilever BV, a Dutch company that makes Indonesia as one of its main markets, and its subsidiary in Indonesia, PT Unilever Indonesia (UNVR), is actually listing on the exchange. Then how about you, PT Chevron Pacific Indonesia?

To bring the foreign oil and gas companies (which operate in Indonesia) into the stock market, to make it more visible, is a more realistic option rather than the nationalization, as Venezuela did (unless if Susilo Bambang Yudhoyono is equally fierce with Mr. Hugo Chavez, but I think it is not possible). As for capital market investors, the presence of Chevron and the like may be an attractive investment alternative in the oil and gas sector, maybe could make the sector as attractive as coal and CPO sectors.

Or, what if it is Pertamina to hold the IPO, so that people can openly supervise the performance of the company and also pushing it to make it better. What do you think, Mr. Dahlan Iskan?

Original article was written at January 12, 2012

No comments: