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Interview Eric

Herman – General Manager, Puma Energy, Indonesia

Eric Herman - photo

The general manager of a mid- and downstream oil company that has recently taken the local market by storm reveals the unique opportunities presented by employing a counter-cyclical business strategy at a moment when asset disposals are rife. He also sheds light on the benefits to be derived from tapping into the ‘mining sector and energy provision’ nexus.

Puma Energy, a globally integrated midstream and downstream oil company and subsidiary of the commodity trading multinational Trafigura, has been going through an expansionist phase and yesterday actually posted profit increases of 16 percent compared to a year ago. Tell us about these successes and the strategies underpinning them.

That’s absolutely right. We are in the midst of a highly interesting period in Puma’s lifecycle. As global oil prices have dropped, a lot of the majors have been increasing their downstream asset disposals, but Puma remains steadfast in executing its original business strategy and already is reaping the rewards: a rise in gross profit from USD 325 million in Q2 2014 to USD 375 million in Q2 this year. The other major piece of news has been the announcement of a very healthy USD 500 million investment into Puma from our main shareholders, Trafigura and Sonangol. This increase in share capital very much represents a tick in the box and endorsement of our business strategy and crucially provides us with scope for action as and when we see opportunities unfolding in the marketplace.

Only 18 months ago, we weren’t maintaining full operations in South East Asia and were perceived as a company primarily focused on emerging economies. We have, however, been working very hard to broaden out that original network and expand into new markets around the globe. If three years ago we were operational in 19 markets, the figure today stands at no less than 47 and reflects our movement into hub markets such as Australia, South Africa, the UK and North America. Simultaneously we have been complementing this geographical expansion with a diversification of product lines and customer bases. This not only affords us a very stable business platform in which risks are sensibly hedged, but also places us in a very enviable ‘first-mover’ position when you consider that we now constitute the only player in the downstream segment possessing truly global network and genuinely integrated supply chain.

Stretching beyond our traditional product areas, we have been energetic in branching out into the supply of gas, lubricants and bitumens. Today I am proud to say we possess the 4th largest bitumen fleet of vessels in the world and 16 dedicated bitumen terminals which is pretty impressive considering that we only decided to move into that particular market one and a half years ago. This sort of rapid transformation is very much in line with our corporate ethos and philosophy and what we affectionately refer to as ‘puma pace.’ We’ve also enjoyed some eye-catching highlights on the way: supplying the US military craft as well as Obama’s Air force one and the Pope’s official carrier, ‘Shepherd one.’

What have been the main milestones characterizing Puma’s engagement with the Indonesian market?

Indonesia had already been designated as a strategically important market for our parent company which is entirely logical given the country’s vast mineral wealth and Trafigura’s long established track record as one of the heavyweight trading houses in precious metals. There are different ways to enter a market such as Indonesia and the pathway Puma eventually resolved upon was to buy into a company with an existing asset base and reputation. We essentially bought into Medco’s downstream business back in 2012 and then, early last year, acquired the remaining shares. This represented a fundamental step forwards for the local entity as it empowered us to be in control of our own destiny.

By buying up someone else’s house and remodeling it to our liking, we were able to slot into the market faster than would otherwise have been the case. We still had to take our time, however, to thoroughly evaluate the local partner and conduct the proper due diligence. We were aware that some foreign entities have ended up with inappropriate local partners through having been overly hasty in their selection process and were eager to avoid that particular pitfall. In Medco, we thankfully selected an iconic and reliable local brand whose downstream apparatus would serve as a stable foundation on which to build further.

Our in-country strategy right now is basically to supply high-speed diesel to the mining industry as an entry point. There is a lot of demand from the energy thirsty extractive industries and it actually makes perfect sense to focus on this B2B niche given the embedded expertise of Trafigura. In the longer perspective, however, we can perhaps also envisage branching into retail and the lubricants market.

Tapping into the nexus between energy and mining is increasingly mentioned an emergent market opportunity in Indonesia and probable growth spot for suppliers and distributors. What is so attractive about catering to this niche market?

The Indonesian mining sector is highly dependent on securing a steady and reliable fuel source and its actors are increasingly willing to pay for an internationally classed distributor that can guarantee security of supply. A large percentage of a mine’s operations requires a consistent supply of clean fuel otherwise the machines will not function optimally. International and local mining firms alike are actively seeking reputable partners with capabilities to fulfill their energy needs at a competitive price. We are confident that we are just the sort of entity that can fit the bill.

How do you assess the competition and Puma’s points of differentiation?

There are three types of competition: SOEs that have traditionally been running everything, some local players that have established a definite presence in the supply market such as AKR Corporindo and then the oil majors that have extended out into the midstream and downstream.

Of the SOEs, Pertamina is the big elephant in the marketplace that, in spite of its considerable sway, cannot realistically attend to the entire archipelago’s supply chain needs alone. There therefore remains many decent opportunities for a company like Puma to collaborate with the national champion to help plug the needs of the Indonesian economy. In terms of international competitors, the field is rather thin. Super-majors like Total and Shell maintain their retail stations, but the subsidizing of fuel has never made the lower part of the value chain particularly profitable and, under the current economic climate, the tendency for them has been very much to pull back from anything outside their core capabilities. Vis-à-vis the local entities, our global network, exposure to international best practice and accumulated expertise from around the world enable us to deliver a much more robust service offering.

It’s important to remember that Puma enjoys a long history in dealing with emerging markets and really understands what it takes to build and grow a business in contexts where the legal frameworks change frequently and the rules of the game remain fluid. Having taken the time to roll out a long-term business plan and to familiarize ourselves with the indigenous culture and regulatory structures, we are well positioned to operate smoothly as we seek to grow our Indonesian operations. This sets us apart from some of our competitors and renders us a much better partner to the nation. By contrast, those that have short-circuited the process in the first place by cutting corners with their entry strategies will likely find it much heavy going when they attempt to scale up their activities.

Puma’s other distinguishing feature is its flexibility, versatility and speediness in decision-making. How does this come about?

Absolutely. We are much more agile than any oil major could ever aspire to be and this confers upon us a significant advantage: we can adjust to changes in market demand or regulation very swiftly where as their very hierarchical, vertically structured command and control systems inhibit such rapid response times. We can adapt very precisely to our clients needs as and when they evolve. It all stems from Puma’s corporate ethos characterized by a very flat management structure that delegates considerable operational control to the country managers. As the country managers are the closest authority to the client, we trust their judgments. This allows us to bypass all that hierarchy, red tape and inefficient cost structures that bog down so many of our competitors. This ethos trickles down into the inner workings of the company: our office space is set up as an open-plan trading floor in which all staff, irrespective of seniority or rank, have the access to exactly the same phone, desk and computer.

How strategically relevant are Puma’s Indonesian activities given all that is going on elsewhere across the company’s business portfolio?

Indonesia offers massive potential and is fundamental to our South East Asian footprint. We may not have a retail presence in every country, but more often than not we do assume a critical role as linchpins in the security of energy supply. We aspire to position ourselves at the very epicenter of Indonesia’s energy supply solutions.

That is not to say it will be an easy ride and we are well aware of the need to proceed in a robust and purposeful manner. The Indonesian market is always going to present greater complexity than a country such as Botswana with a population of 3 million and a relatively stable, small-scale infrastructure where we can be pretty sure of hitting our business objective. The sheer scale of the market and expansiveness of the geography make Indonesia an entirely different proposition, but not one that daunts us.

On the face of it, Indonesia looks like a supply chain nightmare. With over 18 000 islands and a legacy in which the infrastructural development of population-heavy Sumatra and Java has been privileged at the expense of the periphery and outer regions, there are considerable unmet energy needs. Then there is no central grid into which you can plug in and play as might be expected in Europe or North America. Instead you encounter isolated power plants fed by diesel at considerable expense and substantial pressure for generation of environmentally unfriendly coal fired power due to the local abundance of that particular resource. To cap it all off, you confront a myriad of permitting issues at the regency and local authorities levels that also threaten to wreak havoc with any supply chain that you might be attempting to set up and entail winning over each local community in turn.

Nevertheless what others might interpret as formidable barriers to entry, we view as excellent opportunities. For a start, domestic demand for supply and distribution of imported oil products will only increase as the population mushrooms and the country scales the value chain. There will be much work to do in putting in place and tying in the necessary supply chains and Puma, as one of the biggest oil traders in the world, will be very well positioned to fulfill that function. What’s more our engagement with the market comes at an opportune time precisely at the moment when the new government and presidency are promoting equitable growth and the energy integration of remote regions. The incumbent government’s program for action necessitates extensive energy infrastructure development to world-class standards and it is companies like Puma, with a track record of 55 new builds per year and annual 1.6 billion spend on capex, that possess the tools to realize such dreams. As such Indonesia represents a highly prospective market that is increasing in significance.

Click here to read more articles and interviews from Indonesia, and to download the latest free oil and gas report on the country.

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