JAKARTA -
"Of course the risks are high. But if not us, who else
is willing to take the risk?" So asked Hilmi Panigoro,
chief executive of PT Medco Energi Internasional Tbk
(Medco), earlier this year in an interview with local
media.
He was charting the strategy for the
company his older brother, Arifin Panigoro, oil tycoon,
empire-builder and confidant of President Megawati
Sukarnoputri, has built into Indonesia's biggest
publicly traded oil and natural-gas company. Medco has a
total market capitalization of US$486 million and
operations in Southeast Asia, the Middle East and North
America. Its share price closed on Monday at Rp1,425
(about 15 cents).
It is 85% owned by holding
company New Links Energy Resources, with the remaining
15% held by public and financial institutions. New Links
in turn is 34% owned by Thailand's top energy enterprise
PTT Exploration and Production (PTTEP). Credit Suisse
First Boston (CSFB) owns 20% and Panigoro and his family
hold the remainder.
When affirming its recent B+
corporate credit rating on Medco, Standard & Poor's
explained that though the outlook for the company was
stable, the rating was constrained by the short life of
proven reserves, large capital expenditure requirements,
concentration risks, and the company's "very aggressive
financial policy". This last comment may have been a tad
understated, given the force with which Medco has been
divesting and acquiring assets in the oil and gas
sector.
Last week it was announced that India's
largest oil refiner, Indian Oil Corp (IOC), wanted to
buy into Medco. Though IOC controls nearly 60% of the
petroleum-products market in India and owns nine
refineries in the country, it does not have a stake in
any producing oil and gas fields.
Reports have
said that IOC may buy a 40% stake in Medco in a deal
worth about $600 million, although the company's market
capitalization is less than $500 million. Its declared
assets as of December 31 last year were $979 million.
The board of IOC has approved a bid, though this will
need to be approved by the IOC's largest shareholder,
the Indian government.
However, a Merrill Lynch
report says the valuation of Medco had been inflated by
a recent surge in its shares on speculation of an
acquisition. Shares of Medco on the Jakarta Stock
Exchange (JSX) jumped 29% in one day, August 11, from
Rp375 to Rp1,650, with 13.7 million shares changing
hands on the first reports that IOC might buy an equity
stake in Medco.
It was also reported last week
that Emirates National Oil Company (ENOC), a company
owned by the government of Dubai in the United Arab
Emirates and chaired by Sheikh Hamdan bin Rashid
al-Maktoum, deputy ruler of the emirate, was buying the
46% stake Panigoro owns in troubled Dragon Oil, which is
already 60%-owned by the ENOC.
Medco's
profits up Medco's total revenue last year was a
modest $463 million, but the company reported a 20%
increase in first-half net profit this year to $52.7
million from $44 million in 2003, mainly due to higher
oil prices, which averaged $30.65 a barrel in the first
half, up from $22.81 during the same period last year.
Revenue was up 9.6% for the first half of this year at
$227.96 million.
Last year, Medco projected that
its 2004 oil production would drop by 14% on depleted
reserves. Though production has been declining, the part
acquisition last month of Australia's mid-sized energy
company Novus Petroleum Ltd is expected to result in a
50% net increase in Medco's combined oil and gas
reserves, according to the company's finance director,
Sugiharto.
However, the company itself has
projected that its proven oil reserves of 154 million
barrels of oil equivalent will last only four years,
while its proven and probable reserves of 754 million
barrels of oil equivalent will run out in 12 years.
Novus has assets in Australia, Indonesia, Oman,
Pakistan, the Philippines and the United States, with
proven and probable reserves of 107 million barrels of
oil equivalent. The acquisition was fully financed from
the company's $250 million unsecured notes issued in
May, and from operating cash of about $40 million.
"The Novus assets are attractive to us, as they
can expand our interest in Indonesia and give us the
potential for geographic diversification of our asset
base," explained Sugiharto.
By selling some of
the Novus reserves, Medco will also raise more funds to
look for other acquisitions, but analysts have cautioned
that financing the Novus buyout mostly by debt would
burden Medco and risk its net profit if it turns out
that Novus has no reliable long-term reserves.
Nonetheless, Medco has struck a deal with Silk
Route Investments to negotiate the sale of Novus'
reserves in the US, and part of its interests in
reserves in the Middle East and Pakistan. Medco has also
agreed to sell some of the Novus reserves in Australia
and Indonesia to Santos Ltd for about $110 million.
Last month's deal covers the sale of Novus'
entire 4.75% stake in the Australian Cooper Basin
oil-and-gas block and also includes the sale of an 18%
interest in the Brantas block and a 9% stake in the
Kakap block, both in Indonesia.
Medco at present
produces about 70,000 barrels per day (b/d), but during
the first half of this year production fell by 22%
year-on-year to 56,200 b/d on declining output from its
main oil-producing fields in the Kaji/Semoga and Rimau
blocks in South Sumatra.
However, in the same
period, the company's gas production rose to 78.5
million cubic feet a day from 74 million. The average
price for gas rose to $1.58 a thousand cubic feet from
$1.52 a year earlier.
Growth in production and
proved reserves, says Standard & Poor's, will depend
partly on the materialization of gas-sales contracts,
which in turn hinge on the development of Indonesia's
gas infrastructure to absorb Medco's large uncommitted
gas reserves.
Medco's proven gas reserves are
mostly in its Kalimantan and Sumatra fields and it is
exploring the Donggi and Senoro gas fields in Toili,
Central Sulawesi, which are estimated to have total
reserves of some 20 trillion cubic feet, almost twice
the 14 trillion cubic feet remaining in the Arun field
in Aceh.
Production at both fields is expected
to begin by 2008. "We have to monetize such abundant gas
reserves, so that over the next five years we can
balance our oil and gas production," Sugiharto said,
when announcing plans to boost production of natural gas
over the next five years to meet an expected jump in
demand from the power industry, the transport sector and
households.
The new president of state
oil-and-gas firm PT Pertamina, Widya Purnama, plans to
boost consumption of natural gas, in line with moves by
other countries in the region to switch to
cleaner-burning fuels. "Natural gas is expected not only
to be used in the form of LPG [liquefied petroleum gas]
or LNG [liquefied natural gas], but also for lighting,
automotive fuel and for other purposes," Purnama said in
August in his first statement to the press.
To
grab a bigger share of this growing market, Medco plans
to invest in infrastructure and begin to develop its
capacity to supply gas.
Oil and Gas Law No
22/2001 stripped Pertamina of its monopoly in the
industry, and its oil and gas fields are being handed
back to the government, though the company may continue
to operate the areas as a production-sharing contractor.
The Oil and Gas Upstream Regulatory Body (BP
Migas) has taken over Pertamina's authority to manage
oil and gas areas and oversee production-sharing
contractors. The Senoro field in Central Sulawesi is
jointly owned by Medco and Pertamina and supplies gas to
state-run electricity firm PT Perusahaan Listrik Negara
(PLN).
Indonesia has some 140 trillion cubic
feet of gas reserves and BP Migas recently signed $4.3
billion worth of LNG sales agreements with several
international and local oil and gas companies. The
agreements cover the sale of 1.7 trillion cubic feet of
natural gas, including one deal that commits state-owned
gas-distribution company PT Perusahaan Gas Negara (PGN)
to buy gas from Medco and ConocoPhilips to meet demand
in West Java and Batam.
Greater export
opportunities also fuel Medco's interest in gas. It has
already signed an agreement with Marathon Oil Corp to
export LNG from Donggi to the US West Coast.
Arifin Panigoro's entry into a sector with such
high operating risks started when he bought an oil rig
after Bawden Drilling, a foreign contractor, refused to
cooperate with him on his first project in the early
1970s. Buying this rig was his biggest challenge ever.
He relates that he had to go to the US to get a rig and
brought $300,000 to the table - a fortune in those days
- before managing to persuade state-owned Pertamina's
Japanese partner, Nissho Iwai, to put up a guarantee to
the Americans for the balance of the $4.5 million for
the rig.
By 1981 he had already won contracts
worth Rp20 billion, but his big break came in September
1982, when his group Meta Epsi won a tender for a
Pertamina project to install gas pipes. Working with a
foreign partner, Fluor, he built the Pertamina refinery
in Cilacap.
Panigoro went from strength to
strength in electrical construction, installation of gas
pipes and joint ventures in oil refining, and the peak
of his business achievements came when he founded Meta
Epsi Drilling Co (now Medco), which was floated on the
JSX in 1994.
Medco plans to forge ahead with
replacing reserves that have been exploited and to add
new concessions for growth, by boosting exploration and
by acquiring new fields.
In the interview
earlier, Hilmi Panigoro said the company saw tremendous
opportunities in Indonesia because the investment
climate was still in a poor state compared with other
countries and consequently there was no strong
competition in the country for oil and gas investors.
The unclear division of authority among the
central, provincial and regency administrations and
unreliable political and legal conditions have ensured
that the interest of foreign investors in Indonesia is
still at a low level, said Hilmi. "But for us, this has
provided an opportunity. American firms are not as
aggressive as they once were. Amid the weakened
competition, we have a chance to become a host in our
own country," he concluded.
(Copyright 2004 Asia
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