It might seem hard to imagine, but from the 1960’s to 70’s, Pertamina was considered one of the best run national oil companies in the world. In fact, Malaysia’s Petronas was modelled and structured around Pertamina, including its pioneering use of Production Sharing Contracts (PSC) that characterise many oil producing countries today. However in 2018, that statement seems rather distant now. Because just last week, the Indonesian government stepped in once again to terminate President Director and CEO Elia Massa Manik, who barely served a single year at the helm of the state oil giant.
Ostensibly, the reason why Manik, along with four other directors , was sacked was due to a recent oil spill in Balikpapan, and for the shortage of subsidised gasoline across the archipelago. Also removed were Marketing Director - Muchamad Iskandar, Processing Director - Toharso, Asset Management Director - Dwi Wahyu Daryoto and Petrochemical and Processing Megaproject Director - Ardhy N. Mokobombang. Nicke Widyawati, Pertamina’s human resources director, will now be the acting chief executive, while Budi Santoso Syarif will serve as the new Processing Director, Basuki Trikora Putra as Corporate Marketing Director, Masud Hamid as Retail Marketing Director, Haryo Junianto as Asset Management Director, Heru Setiawan as Petrochemical and Processing Megaproject director and Gandhi Sriwidjojo as Infrastructure Director.
This continues from a dangerous trend that began last year, when CEO Dwi Soetjipto and Deputy CEO Ahmad Bambang were removed for ‘leadership issues’ (read more here http://bit.ly/2HQTNRE). Manik was appointed as the new CEO in 2017 in the aftermath, and now has departed.
This development comes as Indonesia’s self-sufficiency for energy worsens. One of the positions dismissed was the Petrochemical and Processing Megaproject Director. Since the 2000’s, Indonesia has been running a severe (and growing) deficit of fuel products, with refineries that desperately need upgrading. Much vaunted collaborations with Saudi Aramco, NIOC and Rosneft have been announced, but to date, none of the promised new mega-refineries have emerged. In a perfect world, Pertamina would be able to fund new refineries by themselves, but in Indonesia’s world of subsidised fuels, Pertamina took a US$2.4 billion loss last year in fuel retailing due to market distortions. Two weeks ago, the Indonesian government handed eight upstream blocks whose exploration rights were expiring to Pertamina as ‘compensation’ for continued fuel retail losses, which is a blow of confidence to upstream investors that were only recently enticed back to consider Indonesia after the country finally made positive changes to its Production Sharing model.
The problem here is evident. Indonesia cannot expect to maintain its costly fuels subsidy program by patching up holes and initiating continuous management restructuring programs. It always seems that the government takes one step forward (the upstream revenue sharing overhaul) then undoes all the good by taking two steps back (management instability is seen as a major sign of risk by investors). We wish good luck to the new CEO of Pertamina, who has many huge expectations to live up to, some of which look very challenging. Hopefully for Indonesia’s sake, his days are not numbered too.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)