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

'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.