In anticipation of free market era Technically not yet prepared

Hendarsyah Tarmizi, The Jakarta Post, Jakarta

The opening of Shell Indonesia's first fuel station in Karawaci, Tangerang recently has marked a new era in the country's fuel market history, once solely controlled by state- owned oil and gas company Pertamina.

The oil giant is the first company outside Pertamina's network to sell fuel to Indonesian consumers. No wonder, if Shell's debut in the domestic fuel market has received a positive response from the public.

Although its gas station sells only high-grade (non- subsidized) fuel products, generally used only for expensive cars, many owners of ordinary cars from outside the Karawaci area come and fill their fuel tanks at the new gas station only to experience the difference in the service provided by the new fuel distributor.

"We are happy with the results. Motorists are excited about our presence and are happy to experience our quality fuels and good service," Fathia Syarif, the corporate communication manager of Shell companies in Indonesia, told The Jakarta Post..

According to Fathia, the opening of Shell's first fuel station in Karawaci constitutes a part of the company's long-term strategy to tap the country's huge fuel market.

She was reluctant to say when and where the company's next fuel stations will be opened. But Shell Indonesia's vice president for external and business affairs Wally Saleh said earlier than the company would open two more by the end of this year around Jakarta.

With more than 220 million people, Indonesia is among the largest fuel markets in the world. The fuel demand has continued to increase from year to year in line with the increase in the number of vehicles and expanded public transportation facilities.

This year, the country's total fuel demand is expected to reach to 65 million kiloliters or (65 billion liters), an increase from about 62 million kiloliters in 2004.

Pertamina estimates that the national fuel demand will remain stable at 65 million kiloliters next year. Subsidized fuel will account for about 41 million kiloliters of the total, while non- subsidized fuels will be about 24 million kiloliters, including those sold directly to corporate buyers.

With such a huge demand, the opening of the fuel retail market is unquestionably a big business opportunity for newcomers.

Hundreds of companies have applied for licenses to enter the business. And up to now, at least 140 companies have received provisional licenses to distribute fuel products. They include foreign companies such as Petronas of Malaysia, Shell Indonesia, BP, ExxonMobil and Caltex/Chevron Texaco. Local companies intending to enter the fuel retail business include PT Sigma Rancang Perdana, PT Pandu Selaras, PT Elnusa Petrofin, PT Elnusa Harapan, PT Krida Petragraha and PT Raven Sejahtera.

Under the new Oil and Gas Law No. 22/2001, the exclusive rights awarded to Pertamina to distribute fuels in the country will end within four years from the implementation of the law -- or in November this year.

But the government has extended Pertamina's rights to sell subsidized fuels, which account for more than 90 percent of fuels sold through public gas stations, until Dec. 31. This means that private oil companies including foreign fuel retailer operators are allowed to take part in the distribution of the subsidized fuels only from January next year.

Tubagus Haryono, the head of the oil and gas downstream industry regulatory body (BPH Migas) said recently that the guidelines for the distribution of subsidized fuels would be based on Presidential Decree No. 71/2005.

The assignment of the new distributors will be made through two mechanisms - a competitive bidding and direct appointment. "The ruling on direct appointment and competitive bidding is being prepared," he told a recent hearing with the members of the House of Representatives.

A company intending to be a distributor of the subsidized fuels will, for example, be required to have a distribution network not only in lucrative markets such as on Java but also on Sumatra and other provinces.

"We will not issue a permit to those intending to distribute subsidized fuels only in Java. It is not fair," Tubagus said .

The agency earlier promised to issue the ancillary regulations on the assignment of the new fuel distributors in the middle of this month. But until now, the regulation has not been issued.

It seems that Indonesian motorists will have to be patient given the complexity of the regulation and procedures that should be met before the new fuel retailer is permitted to operate, especially for the distribution of regular fuels which are now heavily subsidized by the government.

... Tehnically not prepared yet

The problem, in fact, is not only related to the delay in the government regulation on the assignment of the new distributors.

"I think, technically, the new distributors will be ready only by 2007," said Edi Purnomohadi, a senior official at BPH Migas.

"It is therefore almost certain that Pertamina will be reappointed to handle the distribution of subsidized fuels in the country in 2006.

Shell is one of a number of oil companies which have indicated their interest to take part in the distribution of the highly subsidized regular fuels.

But the company has to wait until the uncertainty about the rules governing the sale of such fuels is cleared to realize its plan.

"Once we are able to, we will offer these products with the same high quality and quantity standard you can expect from Shell," Fathia said.

"What we need now is clarity on the implementation of the governing regulation that are so important for any new players with serious investment plans," she added.

For Pertamina, which has been assigned to handle the distribution of subsidized fuels for more than 30 years, the removal of the PSO is not really bad news. In fact, the removal of the PSO, often considered a social obligation, will enable the company to focus on profit-oriented activities.

Pertamina has often been criticized for selling low-grade fuels, but as a whole, the company has successfully carried out the task. Pertamina has, for example, been able to apply a single price for all types of fuels it sells in the country.

Motorists, wherever they are in the archipelago, can buy fuel from Pertamina's gas stations at the same price. To apply a single price in a vast country like Indonesia is certainly not easy.

At present Pertamina operates more than 3,000 gas stations in the country, mostly under a franchising scheme with private companies. The fuel station owners generally receive a sale margin of 4 percent from Pertamina.

According to Pertamina's commercial and marketing director Arie Sumarno, the services provided by the existing gas stations are still mostly below standard.

"That's why improving the services of the existing fuel stations is Pertamina's main agenda to enable it to compete with the new fuel retail operators," he said.

Besides improving the services provided by its retail partners, Pertamina has also built a number of its own stations called Company Owned Company Operated (COCO) station.

At present, Pertamina operates about 24 COCO stations which were built in accordance with international fuel retail standards. They are mostly located in strategic locations in the country's major cities and supported by complete supporting facilities such as a mini market or a convenience store.

In order to operate the stations more professionally, Pertamina has established a special subsidiary PT Pertamina Retail to take charge of its fuel retail business. The new subsidiary plans to build 200 COCO stations in five years.

Analysts, however, warned that Pertamina could easily lose its strong market foothold in the fuel market if it fails to forge stronger relations with its retail partners, the owners of most of its fuel stations.

The new retail operators can easily lure the gas stations currently under the control of Pertamina, by merely offering a higher sale margin.

But above all, the privatization of the country's fuel market will benefit not only the new players but also Pertamina. Pertamina will no longer operate as an extension of the government so it can reap the benefits of its retail business while for new players, entering the fuel market is a lucrative and lasting investment.

More importantly, with the privatization of fuel distribution, people will have the option to buy fuel from outlets they consider provide better services.