RI considers careful change to liberalized downstream sector

Berni K. Moestafa, The Jakarta Post, Jakarta

In contrast to the upstream sector, liberalization of the downstream sector of the oil and gas industry has been slow.

With a population of over 210 million and fuel demand growing by about 3 percent to 5 percent a year, Indonesia promises oil and gas investors a fat market and plenty of room for competition.

Given the vital role of oil, however, the transition from a tightly controlled market to one where free competition reigns is a sensitive matter. In fact, there is little chance of Indonesia adopting a full open market just yet.

"Oil is simply too important," said Pertamina downstream director Muchsin Bahar. "No country has fully adopted a free market on its oil and gas sector. Even in America you have an oil security policy," he recently told The Jakarta Post.

A year since the new oil and gas law came into effect, the business of oil refineries, fuel and gas storage, and distribution and trade that make up the downstream sector remains firmly in the hands of state-owned oil and gas company Pertamina.

Their exclusive rights come with the responsibility to provide fuel throughout this country and at the same price, regardless of where or in how remote an area it is being sold.

Past decisions to increase fuel prices has often led to riots, with one incident in May 1998 that precipitated then-President Soeharto's downfall.

The new law, meanwhile, calls for competition. It will turn Pertamina into a purely profit-oriented company so that the responsibility of ensuring fuel supplies nationwide will no longer be Pertamina's.

However, new guidelines over the price of fuel and the security of the national fuel supply are only scantly covered by the law, and debates on these two issues remain contentious.

That being said, the main hurdle for opening up the downstream sector is the government's thoughts on how far it wants market forces to dictate fuel prices and supply.

The introduction of direct price competition has yet to be decided upon, and should the government decide against it, companies must sell their fuel according to a given price range. Prices would still fluctuate in line with the market, but will do so uniformly across all gas stations regardless of the company that runs them. Such a condition would require companies to compete through cost efficiency to gain the highest possible profit margin at a given price.

Backers of the uniform retail price have said that the scheme would dismiss the likelihood of fuel smuggling between regions where fuel prices differ as a result of varying transportation costs, due to Indonesia's vast geography and its poor infrastructure.

On the other hand, it also means that the uniform fuel price across the country must cover delivery costs, even to the farthest regions, while the price difference must be borne by consumers in the rest of Indonesia where the actual cost is lower.

Such may be the trade-off in ensuring a nationwide fuel supply under the conditions of a liberalized downstream sector. Pertamina is veering towards this direction with its promotion of a uniform retail fuel price.

In this context, Muchsin explained that Pertamina preferred to avoid a direct price competition with foreign oil giants who are able to import fuel at cheaper costs than the price of the fuel produced here.

According to him, Pertamina, in general, is operating efficiently, but its oil refineries are less efficient and rate below the standards of foreign-owned refineries.

"We don't have to go head-to-head in the market, or we may end up bankrupt for good," he said. "Even I wouldn't buy fuel from a Pertamina gas station if I knew I can get it for less elsewhere."

Even so, the government is retaining the direct price competition as an option.

"It should be free competition, because competition will drive efficiency. It is this efficiency that benefits consumers, since prices can go down and the service may improve," said Nurwinakun, a spokesman at the Ministry of Energy and Mineral Resources.

Competition in the retail sector is not expected until 2005, when Pertamina is set to relinquish all of its monopoly rights in the downstream sector.

The government will also have set up a regulatory body that will, in part, replace Pertamina's previous roles and also supervise the downstream sector.

This body is to ensure that oil companies will help maintain fuel supplies in times of deficit, which may include selling fuel in remote regions, Nurwinakun added.

The regulatory body, known by its Indonesian acronym, Batur, will also set the tariff rates on gas for both industrial and household consumption.

"But Batur won't make unilateral decisions. Decisions will be based on inputs from many parties such as the business community and the consumers," he explained.

Batur consists of a committee comprising nine oil experts or professionals, whom are to be appointed by the President with the approval of the House of Representatives.

The government regulation for establishing Batur is expected to be finalized soon, with a draft regulation having been submitted recently to the State Secretary for approval.

Also pending is the re-evaluation of Pertamina's assets to separate company assets from those owned by the state. Nurwinakun said the task may be finalized by early 2003. Pertamina virtually owns or operates all of the infrastructure in the downstream sector that has been guaranteeing the country's fuel supply over the years.

The assets will provide the company with a big head start once the market is liberalized. The World Bank even proposed to the government that Pertamina sell its assets so that newcomers would be able to gain a foothold in the market faster, but this suggestion was turned down.

"So far, foreign players are just at the stage of getting the operation permits. We are holding them back until we've set up Batur to make certain of the entire process," said Nurwinakun.

Among the foreign companies looking for business in the downstream sector is Dutch-based PT Shell Indonesia.

"We are indeed interested in the retail business, such as in operating gas stations," said Shell's local external business affairs manager, Waly Saleh.

He said the retail side of the oil industry was a good prospect, given the small number of gas stations in this country.

Thailand has some 10,000 gas stations for its population of 65 million, he said, and in comparison, Indonesia has only about 2,000 gas stations despite a population of more than 210 million. In order to attract investors, however, Waly added, prices needed to go up.

At present, most fuel prices are pegged at below-market prices based on Mid-Oil Platte Singapore (MOPS) rates, and the government plans to increase the price rate to 100 percent of the market next year, up from the current 75 percent rate on most fuel types.

Waly said a feasible price should be at a level that covers the MOPS rates plus costs, while allowing for some profit. He went on to say that until the price issue is resolved and all necessary regulations issued, foreign players would remain in the waiting.

"The new oil and gas law provides hope for this industry, but a lot of things are unclear so we're adopting more of a wait-and- see position for now," he said.