Government to regulate fuel distribution

Government to regulate fuel distribution

Leony Aurora, The Jakarta Post, Jakarta

The following is the second of a series of articles to mark the
liberalization of the country's downstream oil and gas sector
later this year.

The government is to divide the country into four trading zones
to help ensure the proper distribution of subsidized fuel
products after state oil and gas firm PT Pertamina loses its
monopoly in the downstream sector in November.

The first zone will include Java and Bali, the second Sumatra,
the third Kalimantan, Sulawesi, Maluku and Papua, and the fourth West
and East Nusa Tenggara provinces, the Oil and Gas Downstream
Regulatory Agency (BPH Migas)'s director of fuel products, Adi
Subagyo Subono, said recently.

"In our draft scheme, we have demarcated the zones based on
(fuel) supply points," said Adi.

Each province within the zones will be designated a developed,
less-developed or underdeveloped area.

BPH Migas Chairman Tubagus Haryono said that a company that
wanted to distribute subsidized fuel in a developed area, like
Java, which has more potential customers and consumes larger
volumes of fuel, would also be required to build gas stations in
less developed and underdeveloped areas, such as Papua.

"Otherwise, they would only invest in the developed areas,"
said Tubagus.

The government is currently preparing public service
obligation (PSO) regulations governing how Pertamina and the
newcomers to the market will distribute subsidized fuel products
-- kerosene, diesel and premium gasoline.

Pertamina will be appointed to sell fuel products processed in
the country's nine refineries, which have a total capacity of
some 1 million barrels of oil per day, said the Ministry of
Energy and Mineral Resources' director of oil and gas, Erie
Soedarmo.

At present, this supplied 70 percent of domestic fuel needs.

"We have to protect the local refineries," said Erie.

Some of the facilities, which were aging and inefficient,
would be threatened with closure without purchase guarantees for
their products, he added.

"The refineries are the backbone of economy. In an emergency,
we will depend on them," he said.

Pertamina has requested that the government pay the Mid Oil
Platts Singapore (MOPS) prices for oil products, plus an
additional 17 percent for storage, transportation and
distribution, and 10 percent value-added tax, said Erie.

The government was still considering the request, he added.

Currently, the government covers all the costs and expenses
incurred by Pertamina in supplying and distributing fuel
throughout the country, adding 20 U.S. cents for every barrel
transported and another 20 cents for each barrel produced
locally.

To meet domestic demand, the government imports some 300,000
barrels of refined fuel products per day.

"The procurement and distribution of imported (subsidized)
fuel will be carried out by way of tender, which can be
participated in by Pertamina as well as the new players," said
Erie.

Under the new mechanism, the government is hoping for lower
prices as companies compete with one another to get a piece of
the action.

Tender would be conducted separately for each area with the
contracts lasting a maximum of one year, depending on the volume
of fuel to be distributed. "In (the oil and gas) sector, one year
is considered a long time as it is impossible to predict global
oil prices," said Erie.

Tubagus said players that wanted to take part in distributing
regulated, or subsidized, fuel products would have to have a
general license to store, transport, and retail such products.

"They have to store the stocks domestically to make it easier
to mobilize supplies in the event of a fuel scarcity," said Tubagus.
This policy would also promote the development of new storage
facilities around the country, he added.

As newcomers to the market would most likely not have storage
facilities, particularly in remote areas, they could rent storage
space from Pertamina, providing it had excess capacity, or from
other firms under what is known as the "open access" system.

With so many regulations currently still at the drafting
stage, analysts have questioned whether the government will be
ready to apply PSO arrangements to so many new players on time.

"The easiest thing to do would be to direct Pertamina to
undertake the PSO for another year," said Erie.

BPH Migas, however, is more confident.

"We will finish the drafts. They will be ready on time," said
Adi.