Oil and gas liberalization: A real test for President Susilo
Oil and gas liberalization: A real test for President Susilo
Rudijanto, Contributor, Jakarta
The liberalization of the Indonesian oil and gas sector
constitutes a real heavyweight test in the first 100 days of
President Bambang Yudhoyono's administration since not only his
own image is at stake but also the future of the nation as a
whole.
The heated debates on the appropriate timing as well as the
percentage of the fuel price increase in the past weeks show that
implementing the liberalization of the country's oil and gas
sector is not an easy job for whoever leads the nation.
Accustomed to enjoying the government's fuel subsidy,
Indonesians are ready to react not only to the actual fuel price
hike but even to clear signs of a fuel price increase conveyed by
those in authority.
Students grouped in the Students' Executive Boards throughout
the Greater Jakarta areas have already voiced their opposition to
the planned 40 percent increase in fuel prices. The students have
demanded the government review the policy.
Aside from possible large-scale protests like the ones in 1997
that forced Soeharto's government to lower fuel prices, other
possible reactions include the raising of the prices of basic
commodities and public transportation.
Due to the sensitivity of the issue previous administrations
have taken very careful steps, if not too few, in implementing
the liberalization of the oil and gas sector since the
promulgation of Law No. 22 on oil and gas in 2001 that targeted
the liberalization of this sector in 2005.
One of the important goals of the liberalization in this
sector is to release the huge burden of the fuel subsidy on the
state budget. Though targeting a fuel subsidy of only Rp 14
trillion in 2003, it turned out the government spent Rp 20
trillion (about US$2.4 billion) in that year.
The estimated fuel subsidy this year of Rp 59.2 trillion is
far higher than the country's education budget of Rp 22 trillion.
If there is no fuel price hike in 2005, the estimated fuel
subsidy will reach Rp 70 trillion, far higher than the country's
defense budget of around Rp 21.99 trillion in 2004.
That is why Vice President Jusuf Kalla revealed that the
government planned to raise fuel price by around 40 percent in
the new year. Such a rise will enable the government to cut the
fuel subsidy to Rp 25 trillion in 2005.
However, the House of Representatives and the central bank
have reminded the government of the need for proper timing as
well as an appropriate level of increase in order to avoid any
disruption that may jeopardize the country's economy.
The House already sent a clear message that any fuel price
increase within 2004 is unacceptable due to the expected rise in
inflation by the year end. Responding to the government's plan to
raise the fuel price in 2005, House Commission XI objected to any
increase in January 2005.
The commission asked the government to postpone the fuel price
hike to March or April since any fuel price increase conducted
early next year would put a heavy burden on economically
disadvantaged people who will suffer as a result of the expected
rise in inflation by the end of this year.
Meanwhile, The deputy governor of the central bank Hartadi
Sarwono also warned the government that any increase in domestic
fuel prices would have an immediate impact on the country's
inflation rate.
Though the level of the increase in the fuel price is of
primary importance for the central bank, due to its relation to
the inflation rate, Sarwono urged the government to make sure the
timing was accurate, considering factors such as a manageable
exchange rate and harvest time.
The sensitivity of this issue under current circumstances has
prompted the administration to postpone the planned
liberalization in 2005 to 2010. Minister of Energy and Mineral
Resources Purnomo Yusgiantoro said that the government was able
to implement only semi-liberalization in 2005.
This means that the government will still regulate the prices
of some fuels up to 2010 when the government completely abolishes
the fuel subsidy. Thus, over the span of five years, the nation
can expect several fuel price hikes, hopefully without social
upheavals.
Indonesia's success in gradually allowing the market to
regulate the price of fuel will have positive impact on the state
budget. Instead of spending for the subsidy, the government will
be able to allocate the funds for other urgent sectors, including
education and infrastructure projects.
With the abolishment of the fuel subsidy, the government can
also expect an inflow of investment in the oil and gas sector,
particularly in the downstream sector. Aside from bringing in
more badly needed foreign investment and job opportunities, the
coming of investors in this sector is also expected to urge the
state-run oil and gas company Pertamina to be more competitive.
Accustomed to being the cash cow of state officials in the
past, Pertamina is lagging behind other major oil companies such
as ExxonMobil, BP, Shell or even Petronas. However, many people
also worry that the liberalization of the oil and gas downstream
sector will hurt Pertamina.
As of this year, the penetration of international lubricant
companies in the Indonesian market has cut Pertamina's share to
60 percent. The planned operation of some new players in
Indonesian downstream oil and gas market is expected to shrink
Pertamina's market.
Already Malaysian state-owned oil and gas company Petronas
announced its readiness to market fuel in Indonesia starting next
year. The company has allocated an investment of US$30 million
for this purpose.
Petronas Niaga Indonesia President Director Fariz Mustafa
revealed that the company would sell high octane fuel Primas RON
97 in the Indonesian market. The company plans to build five to
10 fuel stations and a storage facility.
Aside from Petronas, other oil companies, including Shell,
Caltex and Elnusa and Sigma Rancang Persada, also have similar
plans to grab Pertamina's market share in the upper segment of
the fuel market, particularly in the non-subsidized high octane
fuel.
Along with the growth in the number of cars using high-
compression engines, the demand for high octane fuel keeps rising
in the country.
Pertamina's data reveals that the monthly sales of high octane
Pertamax Plus jumped by 120 percent this year compared to last
year, while the sales of another high octane fuel Pertamax
increased to 60 percent.
Indonesia has issued seven licenses for oil companies to
import and sell fuel in Indonesia. Those companies are expected
to invest a total of US$345.4 million in Indonesia to carry out
their business.
Other investors including the second-largest US oil company
Chevron Texaco Corp, PetroChina Co, Total SA and BP Plc are among
the companies seeking licenses to import and sell fuel in
Indonesia.
That is good news for an investment-hungry country such as
Indonesia but a nightmare for Pertamina. Some people have said
that the liberalization is unfair to Pertamina since the company
has to share its market with other players that, unlike
Pertamina, are not burdened with other unprofitable tasks such as
distributing heavily subsidized kerosene.
Oil and gas liberalization will certainly be a nightmare not
only to Pertamina but to most Indonesians. However, the decision
to embark on this unpopular move has been made with the issuance
of Law No. 22 on oil and gas in 2001.
The whole nation as well as oil and gas investors are
expecting positive actions in President Susilo's first 100 days
in office in handling the issue. Here comes the real heavyweight
test for the President.
Any indecisiveness over this issue will not only ruin his
reputation but the future of the nation as well. Letting the
debates and speculations drag on will not only confirm his
previous image of being indecisive, but also create room for
speculators to ruin the economy.