Part Two: Sacha Winzenried – Partner & Leader of the Energy, Mining & Utilities Practice, PwC Indonesia
In part two of a two-part interview, PwC’s Sacha Winzenried speaks out about government relations, the changing cast of actors in the upstream oil and gas segment and how the moment is ripe to be rolling out counter-cyclical business strategies.
What role has PwC been playing in terms of advising the Indonesian government?
The state hasn’t yet appointed a consultant in an official capacity to analyze matters holistically, but by virtue of many years of engagement with the Pertamina hierarchy and officials at different levels of the government and state apparatus, PwC does play a role indirectly, notably through offering thought leadership. We utilise our studies to promote an industry-wide perspective that seeks to marry the requirements of the business community with the reasonable needs of the government and to analyze the possible implications of different scenarios that might or might not arise so as to better inform policy making and the broader reform process. Should the state feel the need to commission a consultancy-style study, PwC maintains the requisite expertise and other capabilities to be able to respond to that demand.
When our colleagues last reported on the Indonesian market in 2012, coal-based methane was portrayed as the next big growth spot. Despite the hype, that niche in the market seems to have flopped and is now pretty much off the radar. What exactly went wrong with CBM?
There was a big question mark around the reserves themselves that proved to be not quite as economically convincing as many promoters had first hoped. The level of investment on exploration has also been relatively small to date, and there was no specific investment regime in place that could have facilitated the process so ultimately the sweet spot in timing was missed. Vico is one player to have made something out of CBM, but you have to factor in the reality that they were able to extract advantage from a preferential supporting environment that tilted the balance in their favor. They could see that, provided that they identified adequate reserves, it would be possible to link that into the existing Bontang infrastructure facilities so as to cream off a marginal return. Any player having to go out there in the middle of nowhere and start from scratch, however, would quite frankly find it very difficult to commercially support their investment and convert the project into something bankable.
Today the hotspots lie elsewhere. Pertmina is fiercely focused on increasing its own production and developing the nation’s refinery capacity. These are going to be the big-ticket items where there’s going to be a clear need for collaboration with international entities both for financing and for technical assistance. These are the sorts of areas that the investor community should be keeping a keen eye on.
With all due respect, there’s effectively been no significant investment in national downstream capabilities since 1998 despite repeated promises on the part of successive administrations. Why should investors believe the situation would be any different this time round?
It true that historically the deadlines for materializing these sorts of pronouncements have all too often been missed, especially as Pertamina is a wholly state owned entity, in other words an instrument of government lacking true independence in decision making and placement of investment. Since the removal of the subsidy, Pertamina has additionally been bearing additional costs with fuel prices being deliberately maintained at a lower than market levels which will adversely effect the company’s spending power.
That aside, there’s been much more political push this time round and the drive to enhance domestic refining capabilities remains very consistent with the rest of the government’s manifesto, notably plans for more in-country processing of minerals. The crisis mentality is also helping to push events along. There is very much an acknowledgement on the part of both the politicians and Pertamina that this needs to happen this time round so as to avert a full-blown energy security crisis. We are therefore confident that plans for new infrastructure development will be going ahead.
Domestic demand for LNG infrastructure such as regasification terminals will also be high on the development agenda as will gas infrastructure in general. Much will hinge on the outcomes of the new legislation and the extent to which PGN or some other body is empowered as a gas aggregator because that could potentially drive the materialization of an integrated gas network with all the support opportunities that that would imply. The power generation segment is also proving quite dynamic at the moment with a noticeable upswing in interest in geothermal, coal-fired power and mini-hydro.
How is the cast of actors changing? Back in 2012, the small independents seemed to be in the ascendancy positioning themselves as the forefront of opportunistic acquisitions and the initial development of smaller-scale, stranded reserves. Since then it seems there’s been a real shakeout and consolidation taking place.
The complexion of actors present in the market has undergone quite a few changes. New investment from the super majors had been stagnant for many years and there was a definite shift towards predominantly Asian regional players such as Petronas and Petrochina. With the onset of the oil price slump they have also been slowly cutting back on their rates of investment though their staying power within the market remains firm. There is still interest on the part of the smaller opportunistic and niche players, but not those mid-tiers that were at one time so numerous. That’s where we’ve seen a real thinning-out with entities like Hess and Murphy exiting the market and even more locally energetic outfits like Premier Oil, Talisman and Salamander proving vulnerable to takeover.
We’re right now we’re clearly transitioning to a new phase characterized by the dominance of Pertamina and other indigenous players. Quite how these ambitions are going to be funded will be the next big challenge. Will it again be through collaboration with major international oil companies? Through Japanese trading houses? Or through alternative opportunistic financing mechanisms? Time will tell.
How much demand does PwC encounter from local players wanting to optimize their performance and emulate the international oil and gas companies?
It’s becoming a greater and greater proportion of our workload. At the big end of town we see heavyweight firms such as Pertamina, PLN and PGN wanting to professionalize their processes with the latter intent on expanding into the upstream spaces as well. Then going down the ranks to the local conglomerates that have established an oil and gas arm, many of those are seeking advice on how to expand and mature those business dimensions. They want to expand the small 500 barrels a day that they’ve picked up somewhere along the way into developing a more enduring hydrocarbons business.
Can you give some concrete examples of how PwC has been assisting energy sector clients operate more viable businesses given the prevailing state of oil prices?
We’re helping quite a few of the energy sector SOEs reassess their mid to long term business strategies which requires a lot of analysis of the commercial viability of existing plans. Many will be considering divestments and remodeling of their supply chains and the cost structures that go with that and we can deliver that strategic eye and offer an end-to-end evaluation that departs from the sort of short-termist, knee-jerk decision making that used to characterize their business development prior to the price crash. These sorts of contracts involve all parts of our business from the financial advisory and analysis to the consulting expertise in evaluating the performance of the supply chains and in organizing appropriate joint ventures, acquisitions and divestments. The beauty of our offering is we can bring all of these elements together and deliver them as part of a holistic, integrated package.
We’ve been very focused on this industry for the past 20 years. What we possess in-house is the large group of dedicated experts so we don’t need to rely upon fly-in experts who might hold great industry awareness, but lack the local know-how. Thee acquisition of Booze last year has also considerably enhanced our strategy consultancy credentials especially for oil and gas in South East Asia where Booze maintained a highly performing business division. That’s allowed us to fill in gaps in the chain and empowers us to offer everything from strategy to implementation which is something the other big three really don’t possess for the local Indonesian market right now.
You’ve been on record in the past saying that the acronym BRICS should have a double ‘I’ in it. Do you stand by that today? And how strategically important is the Indonesian market?
The acronym BRICS has now outlived its usefulness with the bricks in the walls of economies like Russia and Brazil coming down. Clearly Indonesia with a population of 250 million, young workforce and expanding middle class is likely to develop into one of the significant economies both regionally and globally. It’s already the largest economy in South East Asia and will continue to grow. What’s been holding it back for a long time is the lack in infrastructure. The resources are here, the people are here and the infrastructure is coming. One these three pieces are in line, double-digit growth should be obtainable.
What advice do you have for entrepreneurs contemplating investing in Indonesian energy?
Any time of disruption like this is a golden opportunity for a newcomer to make a mark. Anyone seeking to include natural resources as part of their envelope should be looking at acquisitions and market openings if they have capital at their disposal to invest.
Potential investors, however, need to be very clear about the terms they are seeking to align with and the likely business impact over the long term. This is, after all, the sort of regime whereby a company can be obliged to pay taxes even before tuning over a profit so it would be foolhardy to assume that Indonesia works akin to other markets round the world.
It is imperative that an investor has a clear understanding of exactly what he or she is getting herself into. Because of the many complexities and distortions that afflict the local market, just because there is a compelling and rational business case in theory doesn’t mean a venture will necessarily work out for real. The bottom line is ‘do your homework.’