PETROLEUM POLITICS

Good luck. Trim the work force of 28,800 people? Parliament will have something to say about that. Turn Pertamina into a holding company overseeing strategic business units in exploration, production, processing, transport and distribution? Ditto. In February, President B.J. Habibie presented legislators with a bill that strips Pertamina of its 28-year-old oil distribution monopoly. "We hope to pass the law before the new Parliament commences sitting by the end of August," says Erie Sukardja, head of the legislature's oil law committee. Parliamentary elections are due June 7. The MPs will join provincial and sectoral representatives in an electoral college that will choose the country's next president in November.

Backed by Kuntoro, who enjoys a reputation for competence and honesty, the proposed law aims to open up Indonesia's energy market and spark more interest in offshore gas fields in the country's east. Kuntoro hopes that competition will make Pertamina corruption-free, transparent and internationally competitive. If the current Parliament fails to pass the bill, however, there are fears that it may never become law. And that could mean that Martiono - or his successor, if Habibie does not win the presidency - will be grappling with the same problems that have been dogging Pertamina for decades.

Corruption is one of them. Under Martiono's predecessor, Sugianto, Pertamina identified 159 contracts that it said were awarded to the family and friends of Suharto, who resigned as the country's president last May. The company rescinded or renegotiated some of the contracts, which were said to be disadvantageous to the government. As a result, says Pertamina, it is saving $65 million a year, helping it earn $169 million on sales of $5.1 billion for fiscal year 1997-98. But Sugianto, before he was replaced, had forecast losses of $312 million. Kuntoro has questioned Pertamina's accounting systems, which he described as "opaque and incompetent."

Pertamina estimates that $3.5 billion in new investment is needed every year to keep oil production at 1.5 million barrels per day, the level since 1975. If new gushers are not developed and new refineries built, it warns, the country may become a net oil importer by 2010 - and may not produce the stuff at all by 2050. The problem: foreign oil companies are turned off by government incentives, which now give the prospector just 15% of oil production. Forty of Indonesia's 60 oil-bearing basins (proven oil reserves are estimated at 9.1 billion barrels) remain untapped.

This is not what was supposed to happen when the company was started in 1968. Its founder, retired general and Suharto friend Ibnu Sutowo, argued that developing countries needed a state oil company to facilitate the transfer of technology and capital. He pioneered a radical innovation - the production-sharing contract (PSC), in which foreign oil and gas companies were to pay "rent" on their fields in the form of a percentage of crude production. Ibnu offered a 60:40 split in favor of the government after the PSC holder had recovered 40% of its costs by getting 100% of the production. Oil output increased from around 500,000 barrels per day in 1967 to three times that in 1975.

Flushed with success, Pertamina borrowed heavily to start a wide range of business ventures, including a tanker fleet and Krakatau Steel Mill at Suharto's behest. A four-week interruption in oil exports to Japan in 1974 wreaked havoc on the company's cash flow. It defaulted on short-term loans to U.S. banks. Ibnu, who had been running Pertamina as his virtual fiefdom, was dismissed. The government had to embark on a $10.5-billion bailout. It decided to scrap the 40% recovery ceiling and upped the state's share of production to 85%.

Along with that came questionable practices. In the next two decades, Suharto's family and friends became involved in every stage of oil production and marketing. In the early 1980s, two companies linked to Suharto's sons Tommy and Bambang Trihatmodjo were granted oil export monopolies. "Oil was the motor of the Suharto family wealth," says a senior energy official. Time magazine recently pegged the Suharto current holdings at $15 billion.

Under Sugianto, Pertamina set about investigating the contracts. But officials worried that he was going too slowly, so Habibie replaced him with Martiono. "We have to win society's trust," says Martiono. "I've tried to make the tender procedures as transparent as possible." So far, says Pertamina, a government inter-agency team has completed probing all but seven of the 159 allegedly tainted deals. Pertamina says steps are being taken to cancel or renegotiate a number of the contracts.

The proposed oil and gas law has met a mixed reaction. Nearly everyone agrees on the need to whittle Pertamina's monopoly powers and increase its transparency. "But the house is divided into three [on the bill]," says legislator Djusril Djusan. "Those radically for, those radically against and those undecided." A growing nationalist chorus evokes fears of foreign domination. "There is no guarantee the bill will lead to efficiency or will benefit consumers," argues economist Arif Arryman. "It will shift the marketing and distribution monopoly from Pertamina to a foreign oligopoly."

Martiono shares Parliament's worries about the social impact of rising energy prices, which are currently subsidized by the state. The International Monetary Fund persuaded Jakarta to raise prices up to 80% last year, but the order was recalled after riots erupted. "Golkar [the ruling party] is trying to ram this bill through," says former energy minister Mohammad Sadli. "No one knows who the next president will be or what the new parliament will be like." Despite Martiono's brave words, the dream of a world-class Pertamina seems to be receding every day.