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.