Pertamina Business Information, Profile, and History

History of Pertamina

Besides agriculture, oil and natural gas are Indonesia's most important assets. Oil production amounts to upward of 500 million barrels exported annually since 1986, contributing more than 40% of the state's current income. The importance of oil production underlies the continuing importance of PERTAMINA, Indonesia's state oil and gas mining company, for the nation's economy.

Since the 17th century, when much of the Indonesian archipelago came under the control of the Netherlands and its Dutch East Indies colonial administration, the region has been renowned for its vast natural resources, especially tin. Until the middle part of the 20th century, however, the country's oil deposits remained largely untapped. History records that Indonesians in the Sumatra Strait successfully defeated attacking forces from the Portuguese armada by hurling oil-soaked fire balls at the foreigners and burning their vessels.

Dutch seafarers avoided a similar fate by arming their battle ships with cannons to repel the fire balls from a safe distance. With Indonesia a colony, the Dutch soon began tapping the country's oil reserves for their own gain.

In 1887, Adrian Stoop, a former engineer with Zijlker, a Dutch oil company, set up his own business in Surabaya. Having found oil deposits, he established a refinery at Wonokromo in 1890, and expanded with another one in Cepu, Central Java, in 1894. Two larger oil companies, Koninklijke Nederlandsche Petroleum Maatschappij and Shell Transport and Trading Company, were quick to assume the advantage over Stoop by setting up, in 1902, a joint venture in oil shipping and marketing operations in Indonesia. In 1907 the two Dutch concerns, impressed with each other's progress, merged into one group, which eventually became known as Royal Dutch/Shell, or Shell for short.

Other oil companies attempted at the turn of the century to establish a foothold in Indonesian oil mining. Most failed or were swallowed up, in part or whole, by Royal Dutch/Shell. For example, a number of foreign companies looking to explore in the Irian Jaya province in 1935 set up a joint company called Nederlandsche Nieuw Guinea Petroleum Maatschappij, 40% of it shares being held by Shell.

During the inter-war years Indonesia had become the Far East's largest oil producer, and the prospect of the country's falling under Japanese control after the bombing of Pearl Harbour dismayed Indonesia's Dutch rulers. When the Dutch government realized Indonesia could no longer withstand a Japanese advance, many of the country's oil installations and facilities were destroyed. Before the Dutch army and the oil companies could complete the scuttling operation, the Japanese forces occupied a fair number of the remaining installations, putting them under the control of the invader's regional military commander.

With the end of the war in 1945 and the proclaiming of Indonesia's independence in August of that year, to become fully effective in 1949, that country's anti-colonial independence fighters, resuming the fight against Dutch rule, quickly seized on what remaining oil fields and installations they could secure from the retreating Japanese. Recognizing this popular ferment, in September 1945 the Dutch administration included in the country's new constitution Article 33, which outlined the "people's desire" to develop their oil and gas sectors. In practical terms, Article 33 meant the establishment that month of a national oil company, Perusahaan Tambang Minyak Negara Republik Indonesia (PTMN-RI). In a wider sense, Indonesia started out on the road to reducing its dependence on foreign oil companies to tap its energy deposits and to managing the industry for its own gain.

At the same time, independence fighters in south Sumatra retained control of regional oil facilities and set up their own company, Perusahaan Minyak Republik Indonesia (PERMIRI). Elsewhere in Java, another oil company, Perusahaan Tambang Minyak Republik Indonesia (PTMN), held jurisdiction.

This postwar period was, debilitating for Indonesia's oil industry, as rival independence movements used installations and facilities to gain advantage over the Dutch colonial rulers. For a time PERMIRI was able to run the Dutch blockade and sell oil to Singapore. By 1948, however, Dutch forces had ended exports of PERMIRI's supplies. In the same year, Dutch forces ended exploration at oil fields controlled by PTMN in Central Java.

After Indonesia's full independence in 1949, the country had to contend with foreign oil companies still tapping its most valuable oil and gas reserves. Royal Dutch/Shell and Standard-Vacuum Oil Company (Stanvac), two large foreign oil groups operating in the region, still had concessions to continue work in Indonesia until 1951. That year, Indonesia's house of representatives ordered the government to set up a state committee for mining affairs and to postpone granting concessions and exploration permits to foreign oil companies.

This was a modest first attempt by Indonesia to tap its oil and gas reserves for its sole gain. Plans were slow in developing. In 1954, the government forged a four-year agreement with Stanvac to give Indonesia greater input in how its oil industry was developed.

The Stanvac agreement expired in 1960, when the Indonesian government enacted Law 44, concerning oil and gas mining. Exploration and mining were now to be carried out only by the government, under the management of a state company. Hereafter, foreign companies such as Shell and Stanvac were no longer to be regarded as concession holders but as contractors, and had to renegotiate their agreements with the Indonesian government accordingly.

Again, plans were slow to bear fruit. Indonesia knew that it lacked the massive funds needed to explore and produce oil on its own. Negotiations, over which the United States took great interest and an eventual lead, were concluded in June 1963. The resulting agreement held that Shell, Stanvac, and Caltex, the major foreign oil companies operating in Indonesia, were to become contractors of PERMIGAN, PERMINA, and PERTAMIN respectively. The foreigners would retain management of the oil installations, but 60% of profits from all activities would go to Indonesia.

Beyond profits, however, the Indonesian government was intent on maintaining general managerial responsiblity for all oil exploring and drilling installations in the country. General Ibnu Sutowo, president-director of PERTAMINA, explained: "This does not mean that we insist on making every decision, but we do insist on making any decision we find necessary."

Although Indonesia remained largely dependent on foreign oil companies, it had made an attempt to obtain crude oil on its own. In 1962, Indonesia joined the Organization of Petroleum Exporting Countries (OPEC), although at this time the oil producing cartel was hardly the economic force it was to become during the 1970s.

The country's first state-owned oil company, Exploitasi Tambang Minyak Sumatra Utara (PT ETMSU), had been set up in 1957. After changing its name soon after to PT PERMINA, Indonesia made its first crude oil export on March 24, 1958, when the tanker Shozmi Mam carried 1,700 tons, worth about US$30,000, to a foreign buyer.

Slowly, Indonesia established the infrastructure to produce its own crude oil on a lasting basis. PERMINA Oil Academy enrolled its first group of engineering students in 1962. In the same year, PERMINA purchased one aircraft for its operations and--a year later--secured approval from the government for the purchase of ocean-going tankers for crude oil exports.

By 1965, PERMINA had successfully drilled a total of nine oil fields, the resulting wells producing 21,000 barrels of oil per day. This progress instilled the Indonesian government with enough confidence to secure agreement from Shell to purchase all of Shell's assets for around US$10 million over a period of five years after 1966.

It was not until 1971 that PN Pertambangan Minyak Dan Gas Bumi Negara (PERTAMINA) was established by the Indonesian government as the only national oil company which could extract oil and natural gas throughout the country. The state company had been formed earlier in 1968, again by government legislation, after the merger of PN PERTAMIN and PT PERMINA, the existing state oil companies. Under the 1971 legislation, PERTAMINA was to be run by a board of directors, headed by a president director, and five other directors. The state-owned company, headquartered in Jakarta, was to operate in close cooperation with the Indonesian government.

PERTAMINA needed the assistance of foreign oil companies. Under production agreements, the foreign contractors were to receive 40% of profits from exploration and drilling, while the Indonesian government carved out 60% of all gains. This all changed, however, in 1973 when the oil barrel price began to increase sharply. PERTAMINA renegotiated in 1974 complex agreements which stipulated that when the price of a barrel of crude oil climbed above a recognized base price, the incremental rise would be shared between the government and the contractor at a split of between 85-15 and 95-05%.

The West's growing thirst for energy supplies at this time gave tremendous impetus to the growth of Indonesia's LNG--liquefied natural gas--industry.

The beginnings of LNG exploration dated back to October 24, 1971, when Bob Graves, exploration manager for Mobil Oil Indonesia, completed a drill-stem test on a wildcat well in the Arun oil field in North Sumatra. Graves had already drilled 14 holes in the field, an area of rice paddies, fish ponds, and coconut trees, but had found nothing. The 15th drill-stem test, Arun A-1, was successful. Alex Massad, Mobil Oil's exploration and production chief in New York, proposed further drilling in the area for natural gas, at a cost of US$400,000.

The directors at PERTAMINA recognized the potential for profits from Arun-1. The successful drilling of Arun-2 and Arun-3 in early 1972 confirmed the presence of large LNG reserves.

Mobil Oil was not alone in spotting Indonesia's rich LNG deposits. In 1971, Huffco, a Texas-based oil company drilling in palm swamps near the coast in east Kalimantan, drove a drill down the Badak-1 well site. Badak-1 produced a major gas discovery for Huffco.

On the strength of the Arun and Badak finds, PERTAMINA established a LNG unit, headed by Bambang Bramono, head of foreign gas marketing. The unit oversaw Mobil and Huffco development of their LNG finds. It soon became clear that Japan was to be PERTAMINA's main customer for natural gas.

The Indonesians' 50-year experience in the production of crude oil, and the political and economic machinations surrounding such endeavors, enabled them to gain the best advantage from LNG development. PERTAMINA extracted agreements from Mobil and Huffco that they would produce the natural gas, but that the Indonesian company would then sell it to foreign purchasers. All negotiations with prospective Japanese buyers, beginning in 1973, were headed by Indra Kartasamita, who worked in the company's sales and transportation division.

Contracts with foreign buyers followed, beginning in late 1972. Japanese electric utilities, including Kansai Electric Power Company, Chubu Electric Power Company, and Kyushu Electric Power Company, were among the first customers. PERTAMINA then signed a 20-year contract with Pacific Lighting Corporation, the parent of a California gas company. In 1979, PERTAMINA signed a five-year contract with Mitsubishi Oil Co., Ltd. of Japan, to double the latter's purchase of crude oil.

PERTAMINA's LNG operations were headed by General Ibnu Sutowo, who was directly responsible to Indonesian president Soeharto. Soedarno Martosewojo, a PERTAMINA director and chemical engineer, was appointed as LNG coordinator.

Once the taps which extracted LNG from deep below the Indonesian shorelines were switched on, production climbed steadily. It reached 312.6 billion standard cubic feet in 1976, compared with 150.8 billion in 1972.

The LNG plant in Arun was fully completed in mid-1978, while the plant at Badak came onstream in July 1977, commencing production a month later. In 1990, the annual production from the two plants was 15.7 million tons and was exported almost entirely to Japanese users. There were also modest exports of LNG to South Korean users.

Also in the pipeline was the export of 1.5 million tons of LNG to Taiwan each year, a market which was expected to open up in late 1990. This was agreed between the Chinese Petroleum Corporation and PERTAMINA in 1986.

The rise in the price of oil following Iraq's invasion of Kuwait in August 1990 was expected to rejuvenate exploration and drilling in Indonesia. Over the five years since 1986, when the price of oil slipped to below US$20 a barrel and remained static for a time, so too did the number of installations in Indonesia. During this period, 693 exploratory wells were drilled, comprising 385 wildcats and 308 delineation wells. These drillings saw a 35% success rate.

By mid-1989, the country had 78 onshore and offshore installations, covering 55 production contracts with foreign oil companies, and 18 joint operating arrangement areas. Of these installations, 29 were producing oil, while 49 were still in the exploration stage.

After its success in developing Indonesia's LNG deposits, PERTAMINA has been eager to explore and tap geothermal energy sources around the country. In its early stages of development, steam production has already begun at the first geothermal field in Kamojang, West Java. New fields set to begin production include those in Dieng plateau in Central Java, Mount Salak and Drajat in West Java, and Lahendong in North Sulawesi. Besides expanding its crude oil production, LNG production has enabled Indonesia to develop new markets in domestic gas uses, in fertilizer and petrochemical plants, refineries, and electric power generation.

PERTAMINA remains of key importance to the Indonesian economy. The rise in the price of oil at the beginning of the 1990s augurs well for its immediate future.

Principal Subsidiaries: PERTAMINA North Sumatra; PERTAMINA South Sumatra; PERTAMINAKalimantan.