Insider Stories - The share price of state gas distributor PT Perusahaan Gas Negara Tbk, has been under pressure following news that says the company may be acquired by a unit of PT Pertamina.

This news added to the negative sentiments after the plan to push for open access scheme that would allow traders to use PGAS's infrastructure by paying fees.

Shares of Perusahaan Gas, traded under the code of PGAS at the Indonesia Stock Exchange, has fallen 6.25 percent this month to Rp 4,800 at the end of trading day on Friday (11/22).  The stock price stood at Rp 5,100 on Oct. 31.

Last week, State-Owned Enterprise (SOE) Minister Dahlan Islan said the government is studying the possibility for Pertamina, through its gas trader unit PT Pertamina Gas (Pertagas) to acquire PGAS.

The spirit of this idea is to create a giant oil and gas company to challenge rivals in Southeast Asia.

Ali Mundakir, the Vice President Corporate Communication at Pertamina said the company has completed a study about the merger study between Pertagas and PGN. The surviving entity will become a subsidiary of Pertamina.

"If approved, the merger between PGN and Pertagas is a strategic move," Ali said, adding that it means Pertamaina, which relies the bulk of its revenue from the upstream oil and gas operation will also get a booster from PGN's business in the downstream sector for gas.

"It will strengthen the national energy resilience program," he said.

According to Pertamina's financial report, its assets last year stood at $40.88 billion. If PGAS were added to Pertamina, it would only add the figure to $44.79 billion.

That remains smaller than the size of the closest oil and gas rivals in Southeast Asia, which are Malaysia's state owned oil and gas company, Petronas and Thailand's state-owned listed oil and gas company PTT Public Company Limited (PTT).

In 2012, Petronas' assets stood at $159.94 billion, while PTT at $53.33 billion.

PGAS, on the other hand, proposed to acquire Pertagas.

The company's corporate secretary Heri Yusuf argued that by acquiring PGAS, it will maximize the utilization of natural gas in Indonesia. "The consolidation of state-gas companies is the best option to develop the natural gas to have maximum utilization here," he said.

Dahlan, the SOE Minister who supervise all state-controlled companies, did not give any signals on which options he would prefer to take.
Haryajid Ramelan, an analyst at Capital Bridge said PGAS actually has been contributing significantly in gas infrastructure in Indonesia, as in the last 10 years, the company has developed gas infrastructure of more than Rp 40 trillion.

PGAS only had Rp 1.4 trillion of capital before going public in 2003, its market value now has reached more than $11 billion now.

"As a state-owned company, PGN has good governance, so when there is issue that it will be acquired by Pertamina, investors were reacting negatively. This reaction was an indication that Pertamina's coming is considered contra-productive," Haryajid said.

It has been common that executives from a state-company typically resist a merger, as the result could be job cuts to make the company efficient, while top management may lose control over the company.

However, it has also been widely known that state-companies, especially Pertamina, has been a cash cow for political interest in the past, a factor that has hindered the company to grow bigger than Petronas, despite Indonesia actually began developing its oil and gas fields earlier before Malaysia.

Why There Are Conflicts?

The conflict between the two Indonesian state-controlled companies arose due to similarity of the business between PGN and Pertagas.

One particular issue that triggered the spat was when both realized there were cross sections between PGN's distribution gas pipelines and Pertagas' pipes in 11 spots in East Java and West Java.

PGAS initially said it was willing to pay reasonable charges to be allowed to cross Pertagas' area.

However, for unknown reason, Pertagas never get back to PGN to settle the matter.

Adding to the complicacy, PGAS has been pressed by the government to open the access of its pipes to other gas distributors, and as compensation, it is expected to receive fees from traders or distributors for the use of PGAS's pipe.

A ministerial regulation issued by the Energy and Mineral Resources Ministry that should push for "open access" scheme for gas pipe networks in Indonesia actually has been issued since two years ago, but until now the government has been in limbo to force it due to resistance from PGAS management.

The spirit of the 2011 regulation was to liberate the gas sector and ease customers access to get gas and avoid monopoly in the sector.

Should this scheme is implemented, it will benefit Pertagas and other gas traders, as it means the unit of all can have access to PGAS's distribution pipe with some fees.

However, Ridha Ababil, the vice president for corporate communications at PGAS said open access scheme cannot immediately be implemented as PGAS would need an additional $1.2 billion in investment to upgrade its facilities into gastransmission pipes, which needs to be stronger as they must be able to withstand high-pressure gas transmissions.

PGAS's existing "distribution" pipes are designed only to meet specific customers need, meaning if it is forced to be used as transmission pipes, damages, which may lead to accidents would be inevitable.

PGN's Dependence on Gas Distribution Business

Meanwhile, on the financial side, it is unarguably that PGAS relies the bulk of its revenue from gas distribution business, rather than gas transmission.

Of the company's $2.2 billion revenue in the first nine months, around $2 billion is contributed from gas transmission, while only $141 million came from gas transmission fees. PGN managed to increase its customers to 91,109 in January-September 2013 from 89,868 in the same period last year.

PGAS now controls around 80 percent of the country's total gas pipelines trough its distribution as well as transmission pipelines.

PGAS runs more than 3,750 kilometer of gas distribution pipes in Indonesia, which customers include hotels, restaurants, independent power producers (IPP), manufacturing companies and even households, which area have been covered by PGAS's networks.

On the other hand, PGAS also operates 2,160 km of "high pressured" gas transmission pipes. Some of them are the 544-km transmission pipe that connects Grissik (South Sumatera) and Duri (Riau), which has been operating since 1998.

This facility transports natural gas from the Grissik gas plant to Chevron Pacific Indonesia's steam flood project to boost oil production in Central Sumatera.

PGN owns the transmission pipe and the Grissik plant sources its natural gas from a production sharing contract (PSC) block operated by Conoco Philip Indonesia in South Sumatera.

Consumers Are Losing

An analyst who refused to be named said the saga reflects the mess in how the government structured its state-firms, initially founded to serve the greater public interest.

"Nobody is winning in this war. Who is losing more? It is the customers who await for gas infrastructure development. Some industries, like the ceramics in East Java, food and beverages, are still suffering for lack of gas supply. I urge the government to settle this saga and make sure we have infrastructure development going!," he said.