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Indonesia pricing policy dispute fuelled Pertamina shake-up

[JAKARTA] When Pertamina's former chief executive, Elia Massa Manik, was fired on Friday, he became the state energy company's shortest-serving boss in more than a decade.

His expulsion after 13 months followed repeated clashes with the government over fuel price controls estimated to have cost Pertamina US$1.4 billion from January to September last year.

Mr Manik's firing and the dismissal of four other executives, along with Pertamina's fuel sales losses, starkly illustrate the competing priorities of the state-run firm.

While the government wants the company to improve profits by reviving Indonesia's flagging oil output and building refineries to cut record fuel imports, it also wants Pertamina to keep fuel affordable and politically palatable.

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"As a state-owned enterprise, Pertamina's task is not just to seek profit but also to serve the needs of the community," Deputy State Owned Enterprise Minister Harry Fajar Sampurno said in a statement on Friday.

Mr Manik, though, had not "obeyed" the wishes of State Owned Enterprise Minister Rini Soemarno on fuel prices, trying to plead the case for higher prices directly with President Joko Widodo, according to Inas Nasrullah Zubir, a member of a Parliamentary commission overseeing energy.

Mr Manik sent a statement by text message on Saturday declining to comment on his dismissal, but saying Pertamina executives needed to ensure the oil company was not "left behind" while working to meet Indonesia's energy security goals.

Questions to the deputy energy minister on the shake-up were not answered.

Pertamina dominates Indonesia's energy industry. It has a virtual monopoly on petroleum imports and retail sales, and owns and operates the country's main refineries.

The company estimates it would need US$115 billion over the next decade to realise Widodo's plans to make Indonesia self-sufficient in energy.

Mr Manik had said in December a single price nationwide for "Premium" (RON 88) gasoline and "Solar" diesel could cost Pertamina losses of US$274 million a year.

"This is a burden on Pertamina (and) so far there has been no discussion of compensation," he told parliament.

The government then added to Pertamina's difficulties this year, saying fuel prices would not change until after the 2019 elections, and extended price controls to all retail fuels.

While Pertamina's growing upstream output will benefit from higher crude prices, unless retail fuel prices are increased, its "superior" downstream earnings will be unsustainable, S&P said in a ratings note on Tuesday.

Fuel prices are politically sensitive in Indonesia. More than 160 million people, around 60 per cent of the population, live on US$5.50 a day or less, according to recent World Bank data, leaving them vulnerable to price swings.

"People's purchasing power has to be number one," Ego Syahrial, then acting oil and gas director general, said at the same December hearing where Mr Manik spoke.

Since January 2016, benchmark Brent crude prices have nearly doubled, while net-oil-importer Indonesia has not raised fuel prices, forcing heavy losses on Pertamina.

Southeast Asia's largest economy grew 5.1 per cent in 2017, its best pace in four years, but consumption - the biggest contributor to the economy - has remained sluggish. That's a concern for Mr Widodo, who is seeking re-election in 2019.

State Owned Enterprise Minister Soemarno promised in March to enforce government fuel rules, telling Rakyat Merdeka newspaper in an interview she was "saddened" by Pertamina's complaints on the matter.

"We are doing this for the people," she said, noting that other state enterprises such as power utility PLN had not complained about rules impacting profitability.

After agreeing to dismiss Manik and four other directors, the head of Pertamina's board of commissioners acknowledged the company's financial dilemma.

The new leadership has been instructed to study "the changes in costs and the latest increases in (crude) prices," which were impacting Pertamina's performance, Board Chairman Tanri Abeng told reporters on Friday.