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.