At the end of February, the Indonesian Attorney General’s Office arrested and announced charges against five executives who work at subsidiaries of the state-owned oil and gas giant Pertamina. A handful of executives from private firms were also charged. Investigators allege that between 2018 and 2023 the suspects conspired to defraud the public by importing oil at inflated prices and overcharging consumers for adulterated gasoline, incurring $12 billion in state losses. So, what is going on here?
First of all, we need a quick refresher on the history of oil in Indonesia. Indonesia used to be a very oil-rich country. Much of Indonesia’s economic growth in the 1970s, for instance, was driven in part by oil exports. And Pertamina has been the central actor in exploring, developing and exporting Indonesia’s petroleum resources for decades.
As a consequence, it wields immense power within Indonesia’s political economy. For instance, Pertamina has a near total monopoly on retail sales of gasoline. There are a few private companies in the market, but they are mostly only in the largest cities and are few and far between. For the vast majority of Indonesians, if they need gasoline they have only one choice, which is to get it from a Pertamina station.
The other thing to know is that Indonesia is no longer as oil-rich as it once was. As petroleum reserves have been depleted over the years and domestic demand has grown, Indonesia has become a net oil importer. The government does not like to rely on imports, because it means they have less control over the supply chain and the price. It’s actually been a goal of both the past and current government to increase local refinery capacity in order to boost energy security.
Because of this, Pertamina is required to source crude oil and fuel locally. Only when this is not possible – for instance, when crude production is too low or refineries are operating at capacity – is Pertamina allowed to import oil. What authorities are alleging is that the suspects conspired to authorize fuel imports at inflated prices, even though domestic supplies were available at potentially lower cost.
A second part of the scheme is that lower quality fuel was being adulterated and then sold to consumers at a higher price. Pertamina’s shipping subsidiary is also accused of marking up shipping fees. Basically, it seems what happened is that at each link of the supply chain the price was marked up over and above the actual cost of production, and someone pocketed the difference.
The government of Indonesia heavily subsidizes Pertamina. When Pertamina’s costs of production go up, for example if it has to import crude when global prices are high, the government absorbs most of this cost increase. Conspiring to drive up fuel imports would have been especially costly in 2022 when the Russian invasion of Ukraine and post-pandemic supply chain disruptions drove global energy prices sky-high. And indeed, public spending on energy subsidies has ballooned since the pandemic cost the state billions of extra dollars a year. We now know some of that was due to certain parties deliberately inflating costs so they could skim off the top.
One thing I find interesting is that it would be difficult for a few lone wolves acting in isolation to commit systemic fraud on this scale, as it involves multiple links throughout the supply chain. And yet, even though the scheme was running for many years, only now are charges being brought. Why? It’s rather convenient that the fraud was uncovered just days after the government announced plans to centralize control of Indonesia’s major SOEs, including Pertamina, under a new super-holding company.
We’ve seen other SOEs, including pharmaceutical company Indofarma and mining company PT Timah, have fraud cases brought against them shortly after they were consolidated under newly formed holding companies. It’s possible that as Indonesia consolidates its SOEs and looks to integrate them more fully with international capital markets, there might be some added incentive to crack down on these kinds of schemes that were until now easier to ignore.
