RI considers careful change to liberalized downstream sector

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.