Surrounding PGN’s loss, the Potential for Corruption Spreads

Jakarta, – There are a series of irregularities in several PT Perusahaan Gas Negara (Persero) Tbk or PGN projects in supplying natural gas. The mouth of abnormalities caused the financial performance of the subsidiary of Pertamina to be unhealthy. In its operations until 2022, PGN’s revenue reached only US$3,569 million, while the value of its liabilities exceeded US$3,753 million. At least three projects bring losses to PGN instead of profits. These included the overpriced acquisition of three oil and gas blocks, losses on Lampung’s floating storage and regasification unit (FSRU), and the stalled liquefied natural gas terminal in Teluk Lamong, Surabaya.

These loss-making projects became the Supreme Audit Agency’s (BPK) findings. The state auditor suspects fraud or irregularities in the use of the budget for a number of these projects, leading to state financial losses. The results of BPK’s compliance examination with PGN’s 2017-2022 revenue, cost, and investment management, published in April 2023, showed 16 findings. However, the significant fraud potential is in the three projects.

“After we investigate, it turns out that there is a problem. The recommendations have been submitted to law enforcement officials,” said Hendra Susanto, Deputy Chairman of BPK, July 2023.

The BPK report has entered the Corruption Eradication Commission (KPK). However, the KPK has not yet wanted to comment on the report. Likewise, the Attorney General’s Office (Kejagung) must know the latest BPK report. “I haven’t gotten the information yet,” said the Head of the Attorney General’s Office of Law and Human Rights, Ketut Sumedana, when confirmed Wednesday (16/8/2023).

Anomalous acquisition of 3 oil and gas blocks

The BPK report revealed that the value of the acquisition of three working areas or oil and gas blocks by PT Saka Energi Indonesia (SEI) was too expensive, namely US$ 56.6 million or approximately IDR 865 billion. Two oil and gas blocks are located in Ketapang and Pangkah, off the coast of East Java. The other is in Fasken, Texas, United States. The state auditor recorded losses from acquiring the three oil and gas blocks, reaching US$ 347 million or equivalent to Rp 5.3 trillion.

Saka Energi is a PGN subsidiary that was formed in June 2011. As of 2021, Saka Energi has ten oil and gas fields, six already in production. The rest are still in the exploration stage.

Only a year after its establishment, Saka Energi made its first acquisition of an oil and gas block in Ketapang for 20 percent or US$ 71 million from Sierra Oil Services Limited through a sale and purchase agreement in November 2012. The Ministry of Energy and Mineral Resources also recognized and approved this agreement. A Saka Energi business entity, PT Saka Ketapang Perdana, acquired block participation rights.

Indications of fraud emerged when PGN never explicitly mentioned in its annual report that it had a business relationship with Sunny Ridges, affiliated with Sierra Oil Services. The BPK report also said that transactions related to the block acquisition took place with Sunny Ridges.

According to open data related to cross-border shell companies, Sunny Ridge appears with two entities. The first is Sunny Ridge Offshore Limited, registered in the British Virgin Islands tax haven. There needs to be detailed information about the company’s owner, address, or management. However, Portcullis TrustNet, domiciled in Singapore, appears as an agent and operational intermediary.

The second entity, Sunny Ridge Group Limited, is registered in another tax haven country, Seychelles. In line with the first entity, Portcullis TrustNet is referred to as an agent.

In Indonesia, Sunny Ridge Group’s name is traced as part of the Northstar Group, an investment company run by national entrepreneurs Patrick Walujo and Glen Sugita. Patrick is currently the CEO of GOTO, while Glen is known as the head of the Persib Bandung soccer club.

According to the National Coordinator of Publish What You Pay (PWYP), Aryanto Nugroho, the emphasis on beneficial ownership or ownership status regarding which parties are doing business is needed because it involves where the acquisition funds flow. Moreover, if this acquisition is accurate, there are indications of fraud, and it deserves legal proceedings.

“Who is the beneficial owner or boss? It means that beneficial ownership must be pursued when there is this acquisition. It is important for law enforcement officials to see the connection when conducting searches,” Aryanto told Law-justice, Thursday (17/8/2023).

Returning to the BPK report, the acquisition of the Ketapang Block is said to have been awkward from the start. The problem is the approval of the Ketapang Block acquisition tender given by the PGN Board of Commissioners and Saka Energi, according to the BPK, preceded the due diligence process, so more was needed to continue the acquisition process. The acquisition due diligence began when Saka Energi wrote to the acquisition intermediary, Goldman Sachs, in June 2012. It was stated in the letter that Saka Energi expressed its readiness to redeem Sunny Ridges’ participating interest in the Ketapang Block of at least 10 percent with a transaction value of US$ 3 million per 1 percent.

Then on July 25, 2012, Saka Energi sent a letter to Sunny Ridge in which the message was about the willingness to pay 20 percent of the participation rights in the Ketapang Block for US$71 million. Surprisingly, when confirming to make up for the acquisition dowry, Saka Energi only appointed PT PricewaterhouseCoopers Indonesia Advisory (PWC) as its consultant to conduct a due diligence study process in September 2012.

The report results from PWC itself only came out on October 18, 2012. Saka Energi then hired a public accounting firm, Hadiputranto, Hadinoto & Partners (HHP), to test PWC’s due diligence results.

In the BPK report, Saka Energi claimed that it could submit an offer related to the acquisition several months before the due diligence results were released. The benchmark for offering acquisition value is based on external data outside PWC and HPP. Saka Energi’s management at that time used parameters from oil and gas consultant Wood Mackenzie, whose data was then re-analyzed by Saka internally. In other words, due diligence was carried out based on Saka’s judgmental decisions that ignored the due diligence of the two agencies. “Saka proposes an offer to PGN to make an investment decision. PGN has its study team for pricing,” wrote the BPK.

In tracing state losses in the acquisition of the Ketapang Block, BPK cited a study by the Affiliated Institute for Research and Industry of the Bandung Institute of Technology (LAPI ITB). The institute stated that the valuation of the Ketapang Block assets resulted in a net present value or NPV of US$10 million, far below the price paid by Saka Energi of US$71 million. “LAPI ITB explained that the oil and gas business is risky, so the NPV value must increase,” wrote BPK.

According to the BPK, if the NPV profit ratio to the purchase price is 1, then there is strong confidence that investors will benefit. Based on calculations, the acquisition value that can provide profits is only US$40.5 million, not up to the acquisition price by Saka Energi, which reached US$71 million. The acquisition budget is well-spent because it is US$30.5 million, equivalent to Rp543 billion.

The end of this acquisition cost has made Saka Energi lose money. Until 2022, losses due to investment in the Ketapang Block will reach US$54.6 million. According to BPK, the base of the loss was because Saka Energi used unrealistic revenue estimates. Saka Energi’s management predicted a world crude oil price of US$100 per barrel for 2014-2041. However, the oil price in that period was volatile and missed the estimate by half.

Referring to BPK’s assessment again, the losses were caused by Saka Energi’s shareholders or PGN’s directors based on the wrong scenario. Unfortunately, the then President Director of PGN, Hendi Prio Santoso, now the President Director of Mind Id, agreed to the proposed acquisition of the Ketapang Block, which referred to the wrong scenario.

BPK’s findings related to the Ketapang Block acquisition are similar to the indications of irregularities in the Pangkah and Fasken Block acquisition projects. The addition of the Fasken Block in 2014 was said by BPK to have been carried out before due diligence was completed. Even then, Hendi Prio approved the purchase without the due diligence results.

Saka Energi’s acquisition of the Pangkah Block in 2013 was also said by BPK to refer to something other than due diligence. However, again, Hendi Prio did not question it. BPK also said Hendi could have been more optimal in supervising operations according to the company’s work plan and budget or RKAP.

This inappropriate acquisition mechanism resulted in waste that impacted financial losses. The Pangkah Block acquisition cost US$51.1 million, while the Fasken Block cost US$14.8 million.

We have tried to contact Hendi Prio to ask about this new BPK finding, but he responded when the news was released.

Bonkers regasification project

The BPK report revealed PT PGN’s financial losses of at least US$131.27 million or around Rp1.97 trillion for the Lampung FSRU operation in 2020-2022. The base of the loss is due to the non-optimization of regasification in quantity in boosting the company’s financial performance.

FSRU Lampung is a ship equipped with liquefied natural gas or LNG processing facilities to be converted into natural gas. The FRSU has an LNG capacity tank of up to 170 thousand cubic meters with a maximum regasification capability of 240 million cubic meters daily.

The FSRU construction project was initiated by PGN in mid-2010. Initially, this floating terminal was projected to operate in Belawan, Medan, to supply energy around the Aceh and North Sumatra regions. The decision to build the FRSU was also based on the Presidential Instruction signed by Susilo Bambang Yudhoyono.

In this project, PGN disbursed up to US$250 million, equivalent to Rp3.8 trillion, referring to the current exchange rate. The funds were used to pay for the lease of a vessel owned by a Norwegian corporation (Hoegh) with a tenor of 20 years.

However, in March 2012, the government, through Dahlan Iskan, then Minister of BUMN, decided that the supply of industrial gas energy for Aceh and North Sumatra would be sent from the Arun LNG plant.

Then, FRSU, originally in Belawan, moved to Lampung to fill industrial gas supplies in the region and western Java. The change in operational location also changed the contract or agreement between PGN and Hoegh in October 2012. Hoegh novated this agreement to PT Hoegh LNG Lampung in 2013, while PGN novated it to PT PGN LNG (PLI) in 2014.

After the new contract was formed, PLI operated FSRU Lampung by processing LNG from Tangguh Refinery, Papua. However, business development could have fared better. The gas sales and purchase contract worth US$18 million metric, initially derived from supplying gas to PLTGU Muara Tawar in Bekasi, West Java, was stopped because PLN requested renegotiation.

In addition to finding that the project’s operation could have been more optimal, the BPK report also revealed a weak contract clause between PGN and Hoegh in the Lampung FSRU project. The problem is that the contract requires PGN to pay the rental price for a maximum capacity of 27 cargoes per year. The intensity of regasification is only around 10-15 percent of the total capacity, so the ability is never reached. As a result, the FSRU project became a loss because the revenue received needed to be more significant than the swelling operational costs.

The matter of the loss of the project was investigated by the Attorney General’s Office in 2016. This case even reached the investigation stage, although no suspects were named. Several PGN officials at that time, including Hendi Prio, were questioned by investigators.

However, the AGO decided to stop the investigation in 2017. The reason was that investigators at that time did not find evidence suggesting the existence of criminal elements of corruption in the Lampung FSRU project.

Energy economist observer from Gadjah Mada University (UGM), Fahmy Radhi, said that the loophole for corruption in the gas energy sector is indeed in the regasification process. He said the gap was wide open because no standard cost could be calculated when changing LNG into natural gas.

Fahmy said the regasification process is similar to the operation of blending or mixing petroleum which is often a mode of fuel production at Pertamina. From his studies, while joining the Oil and Gas Antimafia Task Force, the blending process became a loophole for corruption.

“Perhaps the regasification carried out by PGN opens up opportunities for moral hazard,” he said when contacted by Law-justice on Wednesday.

Another loophole for corruption, said Fahmy, could occur during the distribution flow. The potential for corruption in PGN is wide open when internal companies flirt with parties who distribute natural gas to the industry. The parties in question are sellers who often need pipes for distribution. However, they are still forced to get rations from PGN. “These traders usually have relationships with power, whether at the legislative or executive level,” he said.

Aryanto has another perspective on the corruption loopholes in PGN. He emphasizes the existence of games in the contract clause. The allegation of collusion in drafting contracts should be raised because of the lack of transparency regarding PGN’s agreements with other parties in several projects. At the same time, the due diligence process can also become an ‘arena’ for actors playing in the project.

“When discussing the contract between PGN and the vendor, the process becomes a loophole. During due diligence, whether the data used was manipulated (or) there were certain deals with vendors, it could have happened because the agreement was made without public supervision,” said Aryanto.

Source: Law