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.