'Fuel issue' may pose a big challenge to new government

Rudijanto, Contributor, Jakarta

Whoever wins the presidential election will face a big test in 2005, when the country implements the liberalization of the downstream sector in oil and gas.

The liberalization of the oil and gas downstream sector which will include the removal of the government's fuel subsidy could become a hot potato for the government because in any part of the world, the rise in fuel prices remains a sensitive issue.

In line with the liberalization of the downstream sector in oil and gas, state oil and gas company PT Pertamina will lose its monopoly on the distribution of fuel to consumers, that it has enjoyed for around 27 years.

The liberalization will pave the way for the participation of other players, including international players. The possible inclusion of international giants in this sector has, however, alarmed not only Pertamina but also other industrial sectors, as well as observers.

Except for kerosene sold to households, fuel prices, such as Premium gasoline and diesel oil (for automotive and industrial use), are currently sold at 15 to 25 percent below the market price.

Although the government's fuel subsidy has gradually been reduced since the late 1990s, the amount of spending to maintain fuel prices at a "safe" level is still high.

This year alone, the government expects to spend about Rp 20 trillion (US$2.3 billion) in fuel subsidy. By comparison, the government's fuel subsidy in 2002 reached a total of Rp 31.45 trillion, almost a half of Rp 61.18 trillion in 2001.

The higher oil prices on the international market increase, the bigger the subsidy that the government must provide to control fuel prices nationally.

Although fuel prices have been partially pegged to the international market prices, the government still cannot afford to fully let the prices float in accordance with the market mechanism particularly within the next two years.

Still fresh in the minds of the population is that drastic fuel price hikes have always resulted in strikes and even riots. President Abdurrahman Wahid had to postpone a fuel price hike (at an average of 12 percent) that had been slated to come into effect on April 1, 2000, due to a wave of protests by students and others.

Another example of the sensitivity of the fuel price issue is the massive protests that demanded the resignation of President Megawati Soekarnoputri, whose government had announced a fuel price increase early this year.

When protests started to endanger her government and national stability, Megawati agreed on another postponement of fuel price increases on Jan. 15.

Since fuel prices are strongly linked with the stability of the government in this country, many have already shown concern over the prospect of liberalization in this downstream level of the oil and gas sector.

Noted Indonesian oil-market analyst Kurtubi quickly warns that not only in Indonesia but also in other oil-producing countries, any effort by the government to increase the price of fuel always results in riots. Doubtless many agree with him.

The people's sensitivity toward this issue can hardly change within a few years. With this in mind, the question is whether Indonesia is ready for the liberalization of the downstream sector in oil and gas.

It is a common knowledge that liberalization entails that prices are adjusted to a certain level -- that provides a profit margin for players in the downstream sector of oil and gas. Such an adjustment can only signify a price hike, since the current price level is still below the market price due to the government's subsidy.

A price increase is inevitable. For instance. when the price of crude oil was US$26 per barrel and the rupiah exchange rate was Rp 8,500 per US dollar, the average basic production cost of Pertamina for gasoline was already Rp 1,800 per liter, about 15 percent below the international market price.

Under the market mechanism, with so many players entering the business from refinery up to transportation, storage and retail, the selling price without a subsidy reaches Rp 2,500 per liter. This "minimal level" enables new players to enter the downstream sector.

Considering that most Indonesians are sensitive toward an increase in the price of fuel, one may wonder how the current government -- and the future elected government -- handles adjusting prices to a level that interests would-be investors in this sector.

This issue becomes a hot potato not only for the government but also for Pertamina.

"We at Pertamina cannot do anything about this because it is the government's decision. Are we ready for it? Ready or not, we have to be well prepared," said Arnan Siswandi, a member of Pertamina's Expert Group for Fuel Market Development.

Kurtubi also reminds the nation that Indonesia is not ready for this liberalization that is scheduled to be implemented before 2006. Such a timetable is based on the assumption that the population can accept fuel market price levels.

"In the first phase, fuel prices should equate with the basic production costs of Pertamina. In the second phase, the domestic price should equate with the international price, that already includes cost plus margin," says Kurtubi.

International players in oil and gas are closely monitoring the development of the country's oil downstream industry. Currently, some foreign oil and gas companies such as Shell, Petronas and BP have expressed their interest in entering the domestic retail market.

Some foreign players have even asked the government to allow them to access Pertamina's refineries, depots, ports and other facilities.

Director General of Oil and Gas at the ministry of energy and mineral resources, Iin Arifin Takhyan, said that these foreign players plan to build 2000 gas stations in Indonesia.

But what if Pertamina refuses them the open access that they desire? Pertamina itself seems reluctant to give them such access, since the company has been apprehensive about the liberalization of this sector from the very beginning.

"If these players want Pertamina to spoon-feed them, they will not provide any benefits for this country, because Pertamina as a state company operates with capital from the government. But if they plan to construct their own refinery and depots, then that is good," said Arnan.

While all players in this would-be open downstream sector of oil and gas are waiting for the actual implementation of liberalization in 2005, the nation is preparing for the first direct presidential election in 2004.

Whether he or she likes it or not, the future elected leader of this country, after the first presidential election in 2004, has to deal with this hot potato. Hopefully, it will not become another time bomb that eventually shakes the nation.