Ari Hernanto Soemarno – Former CEO, Pertamina – Indonesia
The former CEO of Indonesia’s iconic national oil company, Pertamina, and an informal advisor to the presidency, reflects on the primary challenges facing both the new government and the state oil and gas champion.
You are renowned for your leadership of Pertamina during the latter half of the 2000s and continue to shape opinions on energy policy. What has been keeping you most busy of late?
It was certainly an eventful start to the year. During the presidential campaign, I counseled Joko Widodo from an energy perspective prior to his participation in the public debates. Then, once he had been officially nominated, I agreed to head up the energy group within the transition team that was established to ensure a smooth handover of power and the continuity of policymaking. Today I hold no official function, but am always ready to help out the presidency in an informal advisory capacity as and when solicited. I will not be taking on a new public position in government however. My time for fighting political battles is over. I leave that to the younger generations.
From an energy perspective, what do you identify as the main challenges on the president’s desk?
President Widodo has prioritized economic development as one of the central themes of his first term in office, but having a sound energy policy in place is a precondition to realizing the economic prosperity the country aspires to. The national economy will only be able to move forward if there is sufficient electricity to sustain a growth spurt. Maintaining the status quo will not be enough in itself. Actually the country needs to generate an extra 7 to 8 GW per year over a 5-year period if national economic growth is to rise in line with it’s potential. That translates into finding roughly 35 to 40 additional GW over the course of the president’s first term.
Achieving such a task will be challenging. Stalled power projects and energy infrastructure programmes will need to be restarted and the bottlenecks unblocked. The government will also need to find ways to better align the country’s energy mix with its natural resource endowments. Incentivizing the exploitation of such resources will also be crucial. Right now, Indonesia is considered one of the least attractive countries worldwide for hydrocarbon exploration according to a Wood McKenzie survey. The statistics bear out this assertion: over the past decade there have been markedly few new oil and gas discoveries in Indonesia. We are badly underperforming on hydrocarbon exploration. Even the tiny sultanate of Brunei enjoys a better track record. This is not due to a lack of resource wealth, but rather the result of a deeply unfavorable regulatory and fiscal context for discovery, extraction and commercialization. This has to be changed. Fast.
What would you say distinguishes this particular presidency from previous administrations with regard to energy policy?
There has been a distinct shift in both prioritization and tone. Oil and gas strategy is now high on the presidential agenda and is explicitly linked to economic reform and development. Indonesian hydrocarbons are today seen less as commodities to be traded and more as a dynamo to national economic prosperity. Their centrality to the nation’s development path is thus much better understood.
You will also hear officials in the ministry talking more about ‘energy security’ than ‘resource sufficiency’. This is certainly a step in the right direction and is reflective of a greater awareness about Indonesia’s needs and capabilities and the potential mechanisms for bridging any gaps in supply and demand.
Pursuing energy self-sufficiency can be considered an ephemeral dream and exercise in futility. Take, for example, the popular clamor to build oil more refineries. Though this may well reduce the nation’s dependency on imported fuel, the danger is that that reliance on fuel imports would merely be converted instead into a dependence on crude oil imports which could be even more costly. After all, only 75 percent of crude oil becomes refined product during the refining process so the quantities that would need to be imported would be considerable. The risk would be that, for all the good intentions, you could end up with a worse deal overall. This is why it’s so vitally important to critically assess the different pathways open to us and to formulate a smartly thought out energy policy that simultaneously secures the best deal for the nation and delivers the sort of security of energy supply that guarantees demand will be met.
Can we interpret the return to OPEC as an expression of this new focus on ‘energy security’?
Very much so. Indonesia possesses an illustrious heritage as an oil exporter and, back in the day, was actually one of the first members of OPEC. Times have changed and we today contemplate a radically different energy outlook. Firstly we are now a net oil importer. Secondly we possess some of the highest economic growth expectations in the world after India and China. Our population dynamics and developmental stage in industrialization mean our energy consumption will rise further still. This presents compelling arguments for returning to the OPEC fold and securing our energy supply. The big oil producers of the world will be keen to sell to us in our new mantel as one of the world’s big consumers. By being networked into the group, we will be able to deal directly with them and secure mutually beneficial supply contracts.
It equally makes sense for OPEC to welcome us in again. Since the shale revolution, the balance of power has been shifting and there have been other disruptions with significant oil producing nations such as Iraq out of the market for prolonged periods of time. As many emerging economies set about trying to become energy producers in their own right and as the oil market tilts more to being a buyers market, OPEC is on the lookout for consumers to sell to. Indonesia can fulfill a role as a steady and reliable customer. Both sides stand to gain from such an arrangement.
How do you rate the performance of the government over its first 8 months in office?
It’s still early days to start assessing performance, but the government is certainly action orientated which is, in itself, a very good sign. One bold step has been the reduction of the fuel subsidy. We’re not completely at market prices yet, but it’s a very positive step in the right direction and should give some breathing space to Pertamina which, to date, has had to shoulder part of the burden of this subsidy. Hopefully part of the money recouped can be reinvested straight back into the energy sector
There can be little doubt that upstream oil and gas is in urgent need of investment in Indonesia. This is partly symptomatic of a low global oil price resulting in billions of dollars worth of investment being scrapped by the super majors, but it is also reflective of the uncompetitive and unfavourable business climate. The epoch of easy oil in Indonesia is over and exploration is becoming evermore challenging as it moves offshore and into remote locations: if the drilling success ratio used to be one in five it is now more like one in ten. As the level of risk-taking increases the incentive structures have to increase correspondingly. Currently the energy ministry is fighting for a new fiscal ruling that would entice in investors. I, myself, have proposed amendments to the legislation that would render exploration much more attractive. This is, however, a work in progress and will take time.
Pertamina also has a fresh management board and would appear to be embarking upon a new development path with the announcement that it will be taking over operatorship of fields such as Mahakam on expiry of the PSCs. As a former CEO what words of advice do you have for the new management?
I have always advocated for a transition period for soon-to-expire blocks like Mahakam that maintains some sort of ongoing participation of the original operator. With Mahakam, we’re talking about a more or less mature field where the focus will be on trying to slow down the natural decline in production. It will be important to utilize cutting edge technologies that enable greater extraction volumes. Given that the deep technological and managerial understanding on how to exploit the field is ingrained within Total, it would be logical to keep them onboard in a technical support and advisory capacity. The time will be right for Pertamina to step up to the role of operatorship, but that doesn’t mean they have to go it entirely alone. There are nationalistic voices in the parliament advocating otherwise, but at the end of the day, the president is a very logical, rational person who clearly understands that foreign investment, technology and know-how will be necessary to move this country forward economically.
As for the future direction of Pertamina, the main challenge will be making the very most of the finite resources the company has at its disposal. The NOC will need to optimize its processes, make itself more efficient and invest wisely for maximum impact. The new management board will have to deal with external pressures that are burdening the financials: firstly, the ongoing though admittedly reduced fuel subsidies, secondly the global plunge in oil prices and thirdly the legacy of an aggressive overseas investment strategy that has yet to pay off. The new board’s primary task will be to navigate these pitfalls in the best way possible while all the time ensuring that the company remains competitive both domestically and internationally.
Some of the issues they have to grapple with today were unavoidable, but others stem from past strategies. My personal opinion is that going into ventures in Nigeria and Malaysia was perhaps not conducted prudently enough. The decision to acquire Murphy’s share, for example, was taken on the assumption of wildly optimistic oil prices. They were counting on significant upsides, whereas in reality global prices crashed. My advice is now to concentrate on the bread and butter issues that Pertamina does best at and to avoid distractions from the core tasks at hand.
Is there, then a danger of Pertamina spreading itself too thinly?
Quite frankly, a single NOC may be too few for an archipelago the size and diversity of Indonesia. Some islands may enjoy economies of scale such as Java and Sumatra, but others don’t and yet they still have power requirements and will have to be supplied in most economically viable way which in many cases means shipped gas. The Chinese model of multiple NOCs, each with their own focus, could be something to consider.
Ultimately Pertamina’s mid-term success will depend upon its ability to spend shrewdly. The company has already issued bonds to the tune of some USD 5 million and new blocks will also need to be auctioned so as to finance future activities such as operating Mahakam. The most sensible pathway I see would be to co-opt greater levels of foreign private sector investment in energy infrastructure development with a view to freeing up more funding for exploration activities. For most infrastructure developments a 20 percent shareholding should suffice and the cost saving would be considerable. Then Pertamina could set about anchoring its position as the largest gas supplier.