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Jakarta goes selling
again
By Bill Guerin
JAKATA -
Having consistently failed to reach its privatization
targets, and battered once again by a bank lending
scandal, the Indonesian government is seeking to sell
off yet another of its crown jewels - a major chunk of
the state-owned gas distribution and marketing company
PT Perusahaan Gas Negara (PGN).
The sale is
expected to raise Rp1.5 trillion to Rp2 trillion from
divestment of 30 percent of the company. The government
will keep a minimum 51 percent for the medium term. But
just as the government was getting brave enough to
restart its sputtering privatization sales, it was
rocked by a lending scandal at Bank Negara Indonesia
(BNI), which has resulted in the arrest of two senior
executives in connection with US$200 million worth of
allegedly spurious letters of credit and raised the
suspicions of multinational investors, who quite rightly
remain dubious of the books of any Indonesian company,
governmental or not.
Unloading state-owned
companies, including PGN and BNI, is vital to plugging a
ballooning state deficit that, coupled with rising
expenditures, is expected to widen to an estimated 2
percent of gross domestic product (GDP), or Rp5.1
trillion.
The government's failure to divest
three state companies - pharmaceutical companies Kimia
Farma and Indofarma, and airport operator PT Angkasa
Pura II - earlier this year forced government planners
to revise downward their privatization target to Rp6.1
trillion. However, the government said on Tuesday that
it could now bring in around Rp8 trillion ($945 million)
in privatization proceeds this year.
Although
the PGN divestment had been planned for this month, it
will now take place in December after several would-be
strategic investors were said to have been unhappy with
an Arthur Andersen audit of the company's 2001 finances.
Ernst and Young crunched the numbers again and filed a
report on Monday with the Financial Markets Supervisory
Agency (Bapepam).
ABN AMRO Rothschild, Credit
Suisse First Boston and Danareksa Sekuritas are expected
to kick off the domestic road show on November 10,
taking it international on November 12. PGN's dominant
market position, established network coverage and
customer base, good track record and experienced
management are its strong points.
The company
sells 91 percent of Indonesia's domestic gas. Its major
suppliers have all signed 20-year contracts with
take-or-pay clauses. Some 18 percent of PGN's revenue in
2002 came from charges the suppliers pay to run gas
through PGN's network.
Long-term transmission
contracts, which account for some 95 percent of PGN's
total gas supply, generate stable revenue and cash flow.
Approximately 50 percent of the projected operating
profits over the next three years will come from its 60
percent-owned subsidiary PT Transportasi Gas Indonesia
(TGI). PGN has some 2,547 kilometers of gas pipelines
serving six separate distribution networks via three
transmission pipelines but it badly needs funds to pay
for several pipeline projects in the works.
However, the company's revenues and growth
prospects are linked to the success of the economy in
general. In 2002, for example, 82 percent of its revenue
came from end-user sales to industrial companies, whose
demand is directly linked to GDP.
Moody's
Investors Service, which rated PGN higher than the
government itself earlier in the year, explained the
apparent anomaly away by the fact that all of PGN's
current outstanding debts are soft loans from
international credit agencies that were lent to PGN by
the government and are not subject to cross-default on
the government's other debt obligations.
Demand
for gas has outstripped supply for the last two years,
and it is imperative to bring more gas fields on line to
keep pace. PGN wants the government to up the divestment
to 39 percent to ensure sufficient funds for financing
new gas pipeline projects in Java and Sumatra. A major
expansion program aimed at meeting growing demand will
be funded mainly by debt, with the rest from operating
cash flow.
PGN expects to develop an East
Java-West Java pipeline and a 1000-kilometer East
Kalimantan-East Java pipeline in 2005. Its viability has
been questioned, given that the gas price in Java is
uncompetitive compared with that of LNG (liquefied
natural gas). Japan is buying LNG at well above $3 per
million BTU (British thermal units), but PLN's ceiling
price for buying gas is $3 across the country.
Given the extra costs for transporting their gas
from East Kalimantan or Sumatra, producers in East
Kalimantan may well prefer to sell their gas for LNG
production in Bontang than send it to Java via a
pipeline.
PGN has plans for two gas-receiving
terminals in Java, expected to be completed by 2007, to
receive LNG from Papua and South Sulawesi.
"We
might seek loans worth $1.4 billion to finance the two
projects. But the numbers will become less and less if a
strategic investor comes in," said PGN's president
director, Washington Simanjuntak.
A
399-kilometer South Sumatra-West Java transmission
pipeline project, linking Grissik to Jakarta via
Pagardewa in South Sumatra and Cilegon in West Java,
expected to be completed in 2006, will feed gas from
South Sumatra to the industrial heartland of West Java.
Other planned projects in the offing are a
pipeline for the transmission of gas from Sumatra to
Malaysia's west coast and a 380-kilometer pipeline from
Duri to Belawan, North Sumatra.
Natural gas is
already piped into Singapore from gas fields in West
Natuna in the South China Sea through a 640-kilometer
pipeline, which was launched two years ago. However,
Sumatra is projected to become the main source of gas
for the Trans-ASEAN (Association of Southeast Asian
Nations) Gas Pipeline Project.
PGN's pride and
joy, the Interstate Gas Transmission project, a $420
million natural gas pipeline deal between PGN and
Singaporean gas utility, Power Gas Ltd, was completed in
August. Stretching 470 kilometers from Grissik in South
Sumatra to Singapore's Sakra Island via Sakernan in
Jambi and Batam Island, the pipeline has 229 kilometers
of pipeline onshore and the is rest underwater.
The pipeline is part of a network linking gas
fields in South Sumatra with Singapore, via Batam, and
to crude oil fields in Duri, Riau, operated by PT Caltex
Pacific Indonesia. It is also an integral part of a
master plan to build the Indonesian Integrated
Transmission Pipeline (PTGI), aimed at meeting the
demand for gas across the country.
The network
feeds 150 million standard cubic feet per day of gas
from fields operated by ConocoPhillips and PetroChina in
Sumatra to Power Gas, with the volume ramped up
annually, in a 22-year supply contract. Singapore will
buy an estimated $9 billion in natural gas over the
contract term, and the project has given jobs to some
2,500 Indonesian workers.
This was the first
venture by the private sector into the gas
transportation sector following "de-monopolization"
through the 2001 Oil and Gas Law, and heralded in
similar forays to the sector.
Eighty percent of
the expected 100 million cubic feet of gas a day will be
sold to the state electricity company PLN, which is to
pipe the fuel to power stations in West Java. The field,
which has gas reserves of about 300 billion cubic feet,
is expected to begin production in 2005.
PGN's
solid domestic customer base consists of more than 650
large industrial users. More than 70 percent of these
operate in three sectors - chemical and glass and
ceramic manufacturers as well as metal producers.
However, unlike large scale users in the US, for
example, most of these industrial users could easily
switch fuel from gas to oil if the balance moved back in
the latter's favor.
Clean-air rules, applied
rigorously in the West, do not yet exist in Indonesia
and thus there is no compelling reason to use natural
gas other than a price advantage. Encouraged by the
earlier removal of fuel oil subsidies, end users were
being persuaded to switch to natural gas, thus fueling
the continuing growth in demand for gas.
Notwithstanding the feathers in its cap, PGN's
inherent weakness is the mismatch of its short-term
take-or-pay end user contracts, which have less than two
years to run, against the long-term take-or-pay supply
contracts. PGN could be exposed to the risk of
non-renewal of sales contracts upon maturity,
particularly if the government fails to maintain a
stable operating environment and industry structure for
the gas industry.
Despite its vast reserves,
Indonesia's domestic gas sector remains grossly
underdeveloped compared to its neighbors. Gas reserves
are estimated at 150 trillion cubic feet, and contracts
have been signed for only 30 trillion feet. Gas has been
developed as a foreign exchange earner from exports
while the domestic market, where investment in pipelines
and other enabling infrastructure was minimal, has been
largely neglected.
The government has now said
that a pillar of its fuel diversification policy would
be to price gas competitively, particularly for power
generation.
Downstream oil and gas regulator,
BPH Migas, established in May this year is mandated to
set the eagerly awaited consumer prices and tariffs for
network access.
Amid rising demand from
industrial plants in Java, the government has said it
would keep gas prices low to create a multiplier effect
in the overall economy, by creating more employment in
the petrochemical industry and providing farmers with
cheaper fertilizer to boost agricultural production. But
the joker in the pack may be the political
considerations.
Fuel subsidies have been
progressively reduced and were due to be scrapped next
year, but only last week legislators and the government
agreed to allocate a bigger slice of the budget pie -
Rp14.5 trillion ($1.73 billion) - for subsidies in next
year's state budget.
"Fuel subsidies are up
because oil prices have changed," Director General of
Oil and Natural Gas, Iin Arifin Takhyan said.
However, as Minister of Energy and Mineral
Resources Purnomo Yusgiantoro warned, ending subsidies
in an election year would be difficult because of the
political situation in the country.
(Copyright
2003 Asia Times Online Co, Ltd. All rights reserved.
Please contact content@atimes.com for
information on our sales and syndication policies.)
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