2023 was a pretty good year for Indonesia’s state-owned oil and gas giant Pertamina. The company posted a net profit of $4.8 billion and paid over $900 million in dividends to its sole shareholder – the Indonesian government. This represents 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 factors. Obviously, demand for oil and gas recovered as the pandemic subsided and economic activity returned to some semblance of normality. In fact, one could say that demand increased a little too much in 2022, which, together with the Russian invasion of Ukraine, pushed up oil and gas prices.

For this reason, the Indonesian government allowed Pertamina, which has a near-total monopoly on domestic gasoline sales, to raise prices by around 30 percent in 2022. Even with the price increase, the state still bore a heavy financial burden protecting the public from the volatility of global energy markets. The final amount for the year was around $22 billion.

Government support for Pertamina includes direct subsidies for products such as diesel and LPG, as well as reimbursement of the difference between the cost of procuring certain fuels and the selling price. In other words, the government covers the difference when the cheap Pertalite petrol is sold for Rp 10,000 per litre, but Pertamina actually costs Rp 14,000.

In 2022, the difference was actually very large due to rising oil prices worldwide. The government paid nearly $16 billion just to make up for the price differences. In 2023, when energy markets stabilized and prices at the pump rose, government support to Pertamina was $12.8 billion, of which $5.6 billion was direct subsidies and $7.2 billion was used to cover the price differences.

While this is lower than in 2022, it still represents a significant expense. This is one of the reasons why we have been receiving increasing signals from the government that further reforms to fuel subsidies may be on the horizon. Therefore, when we talk about financial performance, it is also important to understand that Pertamina, similar to the state-owned railway company KAI, is neither structured nor operates as a profit-making commercial enterprise.

Pertamina’s main goal is to keep fuel prices low for Indonesian consumers. It does this by leveraging its significant structural influence over the supply and distribution of oil and gas and by receiving large financial support from the state budget. While Pertamina paid the Indonesian government more than $900 million in dividends last year (the highest payout in years), this is only a fraction of what the government has invested in the company.

Pertamina is usefully contrasted with another state-owned oil and gas company located just across the Strait of Malacca: Malaysia’s Petronas. Like Pertamina, Petronas is a government-owned oil and gas giant. 2023 was also a very good year for the company (though not as good as 2022), recording a net profit of $17.7 billion on revenue of $75 billion.

However, Petronas has a different function and structure than its Indonesian counterpart. Its main purpose is to generate revenue for the state, and it does that quite well. Between 2019 and 2023, Petronas paid over $40 billion in dividends to the Malaysian government.

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 thus most of Pertamina’s operations are focused on meeting local demand, even at loss-making prices. In 2023, 71 percent of Pertamina’s revenue came from domestic energy sales and only 10 percent from exports.

Petronas’ revenue structure is basically the opposite of that, with 74 percent of its revenue in 2023 coming from exports or overseas business and only 26 percent from the domestic market. Because Malaysia has a smaller domestic market, it 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 operated in a similar way to Petronas today, generating large revenue streams for the government by exporting Indonesia’s surplus oil. But as the decades went by, domestic demand increased while oil reserves declined. This led to less focus on domestic energy needs and significant government support was required to keep fuel prices stable and affordable.

Although Pertamina and Petronas are superficially similar, they now serve very different functions in their respective economies and global oil and gas supply chains. And while they could both point to 2023 as a good year, the actual drivers of these financial results were very different.