Pertamina and Petronas both had good years in 2023, but for different reasons

2023 was one pretty good year for the Indonesian state oil and gas giant Pertamina. The company posted a net profit of $4.8 billion and paid its sole shareholder – the government of Indonesia – more than $900 million in dividends. This marks a significant improvement from 2020, the low point of the COVID-19 pandemic for the oil and gas giant, when net profit fell to $823 million on revenue of $41.5 billion.

Pertamina’s financial recovery can be attributed to several things. Clearly, oil and gas demand recovered as the pandemic subsided and economic activity returned to some semblance of normality. We might even say that demand has rebounded a bit too much in 2022, which, along with Russia’s invasion of Ukraine, has pushed up the price of oil and gas.

As a result, in 2022 the Indonesian government allowed Pertamina, which has a near-complete monopoly on domestic gasoline sales, to raise prices by about 30 percent. Even with the price increases, the state still carried a heavy financial burden that protected the public from volatility in global energy markets. The final amount was approximately $22 billion for the year.

State aid to Pertamina includes direct subsidies for items such as diesel and liquefied petroleum gas, as well as compensation for the disparity in the cost of purchasing certain types of fuel and the price at which it is sold. In other words, the government will cover the difference if cheap Pertalite gasoline is sold for IDR 10,000 per liter, while the real cost of Pertamina is IDR 14,000.

In 2022, due to rising global oil prices, the difference was very large indeed. The government has allocated almost $16 billion to cover the price differences. In 2023, with energy markets stabilizing and higher prices at the pump, government support to Pertamina amounted to $12.8 billion, consisting of $5.6 billion in direct subsidies and $7.2 billion to cover price differences.

This is lower than in 2022, but still represents a significant expense. It’s one of the reasons why we’ve seen more signals from the government that additional fuel subsidy reforms may be on the way. It is also why, when talking about financial performance, it is important to understand that Pertamina, like the state-owned railway company KAI, is not structured nor does it operate as a profit-generating commercial enterprise.

Pertamina’s primary goal is to keep fuel prices low for Indonesian consumers, which it does by exercising its significant structural influence over the supply and distribution of oil and gas and by receiving large amounts of financial support from the national budget . It’s true that Pertamina paid the government of Indonesia more than $900 million in dividends last year (the highest payout in years), but that’s only a fraction of what the government put into the company.

Pertamina provides a useful contrast to another state-owned oil and gas company across the Straits of Malacca, Malaysia’s Petronas. Like Pertamina, Petronas is a government-owned oil and gas giant. It also had a very good year in 2023 (although not as good as 2022), with net income of $17.7 billion on revenue of $75 billion.

But Petronas has a different function and structure than its Indonesian counterpart, with its main purpose being to generate revenue for the state, a task that the company performs quite well. Between 2019 and 2023, Petronas paid the Malaysian government more than $40 billion in dividends.

What is the main difference between Pertamina and Petronas? The size of the domestic market. Indonesia’s domestic market is much larger than Malaysia’s, and as a result, most of Pertamina’s operations are focused on meeting local demand, even at loss-making prices. In 2023, 71 percent of Pertamina’s revenues came from domestic energy sales and only 10 percent from exports.

Petronas’ revenue structure is actually the opposite of that: 74 percent of revenues in 2023 will come from exports or overseas activities and only 26 percent from the domestic market. Because it has a smaller domestic market, Malaysia has more surplus petroleum resources for export and Petronas has been able to focus on becoming an internationalized, profitable company.

In the 1970s and 1980s, Pertamina functioned much more like Petronas does today, generating large revenue streams for the government by exporting Indonesia’s surplus oil. But in recent decades, domestic demand has increased while oil reserves have declined. This has resulted in a narrower focus on domestic energy needs and required significant government support to keep fuel prices stable and affordable.

Although superficially similar, Pertamina and Petronas have thus come to serve very different functions in their respective political economies and global oil and gas supply chains. And while they both had good years in 2023, the real drivers of those financial results were very different.