Govt to tender subsidized fuel

Govt to tender subsidized fuel

Fitri Wulandari, Jakarta

Snaking lines of people purchasing subsidized kerosene may be
a less common sight in the future as state oil and gas company
Pertamina loses its monopoly over the distribution of the fuel.

The government will open up the oil and gas downstream sector
to competition next year. Part of the plan is to hold a tender to
select companies that will supply subsidized fuel products in the
country.

Erie Soedarmo, director of the oil and gas business at the
Ministry of Energy and Mineral Resources, said the current system
where the government controlled the fuel supply via Pertamina was
vulnerable to supply disruptions.

"There is a danger in relying only on one source. When
something happens to Pertamina, it immediately affects fuel
distribution," Erie told The Jakarta Post over the weekend.

"Allowing more players to distribute subsidized fuel will also
ensure low prices for consumers and minimize problems with
shortages," he said.

Erie cited recent cash flow problems faced by Pertamina, which
in turn put national fuel stocks at critical levels and affected
fuel distribution in some regions.

Growing fuel consumption, along with declining crude oil
output and limited refinery capacity, will put fuel distribution
at risk if it continues to be handled by one company, he said.

Under the new plan, the government will subsidize only three
fuel products -- kerosene, automotive diesel and premium
gasoline. While kerosene is widely used by low-income households
and small businesses, automotive diesel and premium gasoline are
also used by public transportation operators.

The Oil and Gas Downstream Regulatory Body (BPH Migas) will
determine the volume of the subsidized fuel products to be
distributed, and designate trading zones.

BPH Migas will hold an open tender to pick the suppliers.

"To attract investors, it will be offered in a long-term
contract," Erie said.

Investors who can offer the cheapest price will win the
tender, he said.

The open bidding to determine the suppliers of the subsidized
fuel products is part of the government's plan to establish a new
oil-based products trading system as Pertamina relinquishes its
monopoly over the oil downstream sector following the
implementation of Law No. 22/2001 on oil and gas.

The law aims at opening up the oil and gas industry, over
which Pertamina has held a monopoly for decades.

Under the planned trading system, oil-based fuel products will
be grouped as regulated or non-regulated fuel products. Regulated
fuel products will include subsidized fuel.

Non-regulated fuel products are different types of fuel that
will be sold at market price. The products in this category will
be separated into two groups based on fuel quality and prices.

Pertamina will still play a role in supplying subsidized fuel
nationwide, but it will have to face competition in the supply of
non-regulated fuel products.

Erie said the new trading system was aimed at cushioning the
country in its transition to a fully free market system.

However, those opposed to oil and gas liberalization said free
market competition would cause fuel prices to soar and in turn
cause political unrest.

One advantage to the new fuel trading system, Erie said, was
that the government would be able to control fuel subsidies since
cheap fuels would be made available only to those who needed it.
At present, subsidized fuels are enjoyed by everyone regardless
of their economic status.

The government is bracing for higher fuel subsidies this year
because it decided not to raise fuel prices to avoid political
unrest during the elections despite soaring worldwide oil prices.
Despite being a member of the Organization of Petroleum Exporting
Countries, Indonesia imports 20 percent of oil-based fuel
products as domestic refineries can only produce 80 percent of
consumption, or one million barrels a day.

Government officials have said a US$1 increase in oil prices
(on average over one year) against the oil price assumed in the
state budget will add between Rp 700 billion and Rp 800 billion
to the deficit. While oil prices have shot up to a record $40 a
barrel, the state budget assumes oil prices at $22 a barrel with
fuel subsidies reaching Rp 14 trillion.

However, energy expert Ramses Hutapea said opening up the
market in the oil downstream sector should be done gradually in
line with the country's economic growth.

"Free market should not be applied based on the type of fuel
products but on economic growth because it relates to purchasing
power. This would be more effective to avoid political chaos,"
Ramses told the Post, adding that the liberalization of the oil
sector would take at least 10 years.