Indonesia Ends Subsidy of Low-Grade Gasoline

BY :TABITA DIELA

JANUARY 02, 2015

Jakarta. Indonesians can finally enjoy a lower price of gasoline, thanks to a new fixed subsidy scheme introduced by the government and falling global oil prices.

On Wednesday, chief economics minister Sofyan Djalil announced that starting Thursday, Pertamina’s widely used low-octane gasoline (RON88), known as Premium, will sell at Rp 7,600 (61 cents) per liter — a drop from Rp 8,500 per liter.

The sharp fall in global oil prices has made it possible for the government to no longer subsidize Premium and to lower the priceat the pump, Sofyan said.

He added that the government would now only subsidize diesel — the price of which has also dropped from Rp 7,500 per liter to Rp 7,250.

“The price of Premium, which now stands at Rp 7,600 per liter, is no longer subsidized by the government; only diesel is subsidized — at Rp 1,000 per liter,” Sofyan told reporters at a press conference in Jakarta on Wednesday.

The market price for diesel now stands at Rp 8,250. The government chose to continue its subsidy of the fuel as it is widely used in public transportation vehicles.

Distribution aspects The government will continue to provide fuel distributors with further subsidies by allowing them to bill the state for any distribution costs, Sofyan added. This would provide them with a reasonable profit margin to support their operation.

Indonesia, an archipelagic nation of more than 17,000 islands, is still struggling with high logistics costs due to inadequate supporting infrastructure. Fuel distributors in particular have felt the brunt of this,  spending large amounts of their operational budget to send fuel outside of Java, where the country’s main economic activities take place.

Under the newly implemented subsidy scheme, the government will bear the logistical costs of distributing fuel outside of Java, Madura and Bali islands.

The state will also cover the 10 percent value-added tax for gasoline and motor vehicle fuel tax, the rate of which is different in every region.

Fuel distribution in Indonesia is still  dominated by state-owned energy firm Pertamina, though the sector was liberalized during former president Susilo Bambang Yudhoyono’s term.

Only a handful of private companies deal in the industry, including AKR Corporindo, which won the tender to distribute the previously subsidized Premium.

Also in attendance at Wednesday’s press conference was Energy and Mineral Resources Minister Sudirman Said, who conceded the government still needed to adjust the price of Premium throughout the country so that distribution companies may see profit when distributing fuel in remote areas of the archipelago.

Market mechanism The decline in oil prices has given the government the perfect opportunity to “familiarize” the Indonesian people with the relationship between global fuel supply and prices, and its volatility, Sudirman said.

The minister added that the government was working to foster a healthier and more competitive environment in the country’s fuel distribution sector, so that fuel prices may eventually be set by market mechanism.

The government is still giving reasonable margins for Pertamina, which controls a majority of the fuel distribution in Indonesia, while also pushing the company to work more efficiently.

“We give them enough margin, but we are also encouraging Pertamina to improve its businesses, especially in its development of refineries and storage facilities, so the company may still cover the costs of distributing [fuel] across Indonesia,” Sudirman said.

Gasoline sales across the archipelago are still dominated by Pertamina’s Premium. But as the price difference between Premium and higher-quality fuel, especially RON92, continues to narrow, more opportunity opens up for the state firm’s competitors to sell their products.

For years, foreign rivals, including France’s Total and Royal Dutch Shell, have been patiently waiting for the momentum that would encourage Indonesians to shift to their RON92-grade fuels.

Pertamina sells RON92 under the brand name Pertamax, while Total offers TOTAL Performance 92 and Shell has Shell Super.

Separately, Pertamina chief Dwi Soetjipto said the company was working to improve its businesses in both the upstream and downstream sectors.

The energy company has repositioned its Hong Kong-incorporated fuel trading arm Pertamina Energy Trading Limited (Petral) into a true global oil trader, so it may not only distribute oil to the Indonesian market, but also trade on the international stage.

Petral’s main duties were to facilitate oil imports for Indonesia, but a recent probe conducted by President Joko Widodo’s new energy reform team uncovered a slew of discrepancies in its operations. Among them is the unit’s practice of adding the highly flammable mixture naptha into its RON92 fuel supply to lower its octane to that of a RON88 product.

Most international oil and gas companies no longer supply the RON88 grade of gasoline. Its scarcity has spurred the Indonesian government to gradually reduce its imports of the product, and place pressure on Pertamina to boost production of RON92 gasoline. The state aims to one day phase out the import and use of RON88.

Pertamina’s Dwi confirmed the company was currently working to increase its output of RON92 products, in addition to expanding storage capacity, while also trimming down logistics and sales costs.

“We know that when the price difference between [subsidized and] non-subsidized fuel becomes smaller, Pertamina must be ready to face tighter competition,” Dwi added.

Starting Saturday, the price of Pertamax  will drop from Rp 9,950 to Rp 8,750 per liter  for gas stations located in the Greater Jakarta area, said Pertamina marketing director Ahmad Bambang.

In addition to RON92, Pertamina, Total and Shell also offer the higher-octane RON95, a fuel product of even better quality and therefore more expensive.

Pertamina provides RON95 under the name Pertamax Plus, which sold at Rp 10,000 per liter prior to the new fuel subsidy scheme.

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