Liberalizing petroleum market

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.