The energy and mineral resources (EMR) ministry targeting the new investment in the oil and gas sector to rises around 45 percent from US$12.1 billion to $17.6 billion in this year - Photo by the EMR Ministry Office

JAKARTA (TheInsiderStories) – PT Perusahaan Gas Negara Indonesia Tbk (IDX:PGAS) is expected to approve the establishment of an oil & gas holding company at its extraordinary shareholders meeting later today (25/01); this will pave the way for setting up a legal entity.

The establishment of an oil & gas holding company tracks the creation of a similar mining holding company set by the government late last year.

Under the current plan, Pertamina will act as the holding entity of state-owned oil & gas companies. The holding firm will comprise four sub-holdings, namely, Upstream, Processing, Retail and Gas.

In the gas subholding, all state-owned gas companies, led by PT Perusahaan Gas Negara Tbk (IDX:PGAS) and PT Pertamina Gas (Pertagas), will be grouped together under one entity. It is not yet determined just how the gas holding will be created.

However, the State-Owned Enterprise Ministry (SOE) has stated that there are several alternative schemes to integrate the gas companies under the subholding, including a merger, an acquisition, or an asset handover (inbreng). It appears as though the inbreng scheme is favored because the procedure is simple and will involve no cash transfers, said Sampurno.

Pertagas currently has assets of US$1.81 billion. In the nine months to September 2017, it booked a net profit of US$96.65 million. PGAS, on the other hand, posted revenues of US$2.16 billion in the nine months to September and a net profit of US$98 million, the lowest in the last five years.

The creation of oil & gas holding company has not been a smooth sailing process. The plan has stirred public debate, both in the public and parliament. However, the government carries on the plan, arguing that the move will be for the best interest of the nation.

Based on the study of the State-Owned Enterprise Ministry, the decision to create an oil & gas holding company is expected to provide more benefits than downsides for the company and government as well as the investors and general public.

The benefits of which will include helping create an efficient value chain in the gas industry from upstream, midstream and downstream; improving supply of gas, savings of expenditure, capital expenditure and operating procedures, increasing liquidity, increasing the investment capacity and financial structure and boost the growth

The creation of sub-holding will make the development of gas infrastructure in the country to be more effective as there is no need for the two companies to compete. As happened in the past, PGAS, as the largest national gas distributor, often competes with Pertamina’s Pertagas in developing gas infrastructure networks in various locations.

In addition, the holding company is expected to help boost government revenues and stimulate industrial growth. The integration of gas operators from upstream to downstream is expected to make gas distribution more efficient and ultimately help reduce gas prices.

By integrating the operation of PGAS and Pertagas, both companies could optimize their assets and avoid redundancy as well as creating larger entity. The integration of both companies is also expected to help boost development of gas infrastructure in the country and ultimately giving wider access to the public to get gas supply.

The integration of gas sector from upstream, midstream and downstream will provide optimum benefits to Pertamina, PGAS and the public at large. From financial perspective, the Oil & gas Holding is projected to increase investment capacity of the entities to Rp416 trillion or US$32 billion in the next 15 years as well as resulting in value creation Rp329 trillion or US$25.3 billion.

The creation of sub holding gas will also help making it easier for the government to determine affordable gas price for end-users by determining gas processing and distribution margins.

For PGN, the control of gas infrastructure development under its management will allow the company to develop gas infrastructure more efficient and flexible.

As publicly known, the utilization of gas in the country is still relatively low, compared to the potentiality of Indonesia. Significant amount of domestically produced natural gas have to be exported for failure of domestic distributors to distribute gas due to lack of gas infrastructure support.

In addition, gas price has been relatively higher compared to gas price in the international market, making it difficult to the national industries to compete with international players.

President Joko Widodo has earlier called on the energy and mineral resources ministry and gas producers to seek ways to reduce gas price sold to strategic industries. However, so far, the plan is yet to be realized. This is one of major challenge of the oil & gas holding company, namely creating effective value chain of the country’s gas sector, from upstream, midstream and downstream. (*)