Liberalizing petroleum market

Law No.22/2001 on oil and natural gas will end on Oct. 23 state firm Pertamina's monopoly in importing and distributing petroleum products in Indonesia, but do not expect foreign gasoline stations to be a common sight along the country's highways any time soon.

Even though Indonesian consumers will be best served by opening the market to all types of companies -- marketing firms that buy products locally or import processed or partially processed petroleum products and the ones that produce elsewhere or purchase oil from Indonesian reserves -- Pertamina will continue to hold a dominant position in the distribution of final petroleum products.

First of all, Pertamina already has physical assets in place, has enjoyed a long lead time in the market and has accumulated extensive market knowledge. The state company still monopolizes domestic refining at least until the few domestic and foreign investors already licensed to build oil refineries complete their projects within the next three to four years. And more important for distribution and marketing is that Pertamina still controls bulk petroleum handling and storage facilities.

Moreover, as long as the government-fixed prices of domestic fuels remain below international prices, the bulk of oil fuels sold in the country will remain regulated (subsidized). We reckon therefore that Pertamina, given its extensive distribution networks and storage facilities throughout the country, will continue to be entrusted to manage the distribution of subsidized fuels. This factor alone would give the state company a powerful competitive advantage in the domestic market.

The government has issued licenses to more than 35 domestic and foreign companies to operate either in petroleum refining, storage or wholesale and retail, but it will take two to three years for them to develop their own marketing infrastructure, without which they will not be able to make any significant inroad to the domestic market.

Hence, we think the rush to obtain the refining and marketing licenses constitutes more a quick response to grab the opportunity and to get in while the door remains open. Thus far, only Shell Plc has opened the first foreign gas station in Lippo Karawaci, a suburb of Jakarta, while another foreign investor -- Malaysia's Petronas -- is still building its first gas station in Cibubur near Bogor. Compare this to the more than 2,860 stations already operated by Pertamina throughout the country.

The foreign investors, notably such major integrated petroleum companies as Shell, Petronas, Total, Beyond Petroleum, ExxonMobil and Petrochina, which have extended experience in the upstream oil industry in Indonesian exploration and production of crude oil, have a long-term objective for their investment programs in downstream petroleum activities. They are quite right, in view of Indonesia's big market potential of more than 220 people.

One should also realize that the petroleum market is not a single market, but a variety of specialized product and service markets. The market for final petroleum products encompasses a large variety of products, each with its own handling and market characteristics. For fuels, the market includes a large range of products, including various grades of gasoline (regular gasoline and those with high octane), diesel fuels, distillates, jets and bunker fuel.

Similarly there is a varied market for lubricants that require hundred of different products ranging from motor oils to lubricants with special properties, and wholesale and retail sales of petroleum products are primarily a service industry. The value added is derived from delivering the specific quantity and quality of products at the right place and time and on a reliable schedule. It may also involve providing complementary products or services that increase value to consumers. All this offers wide, growing opportunities for new investors.

Even though it will be some time before foreign gasoline retailers are able to establish many gas stations in the country, consumers will still benefit greatly because Pertamina, with the foreign competition looming over its head, will feel compelled to improve its services, otherwise it will gradually lose its customers.