The fact that our fuel demand is
increasingly met through higher imports is really alarming. Today, not only
do imports comprise two-thirds of gasoline and one-third of diesel fuel for
domestic consumption, but also one-third of crude oil for intake to our
refineries. Exposure
to international oil markets is thus astonishingly huge.
Our crude
production is falling; it has steadily decreased to much less than 1
million barrels a day. Mature oil fields with declining rates of production
and a shortage of investment in new exploration contributes to low rates of
production. Our refining capacity also remains stagnant. We have not
expanded our refining capacity over the past 20 years.
The combination
of an unfavorable rate of crude production and a shortage of refining
capacity, in the face of avid domestic consumption, has led to increasing
dependency on imports — increased vulnerability in our energy security. In
fact in 2005, this country was the only OPEC member that was a net oil
importer.
Too heavy a
dependency on imports is risky in many ways. As we set fuel prices fixed
below the international market rate, soaring and volatile import prices
have led to a large and unpredictable subsidy allocation, creating an
excessive fiscal burden. Sadly, this forces us to forego vital investments
such as in health, education and infrastructure, and makes the subsidy
allocation difficult to predict leading to numerous government-budget
revisions.
This mismatch
is even worse when we project our demand for the next 10 to 20 years. We
are committed to having economic growth of 7 percent a year and with that
commitment, a huge volume of gasoline and diesel needs to be secured to
fuel the engine of development. In the coming 10 years, the demand for
gasoline will double and that for diesel will increase by one-third.
Of course we
have to work on the demand side by promoting efficiency measures, as well as
on the supply side by increasing production. But more fundamentally, when
we are relying on imports, is to develop a mechanism or an instrument by
which price shocks can be effectively absorbed, and our budget securely
set, hedged against uncertainty.
We should
consider what the International Energy Agency (IEA) has initiated. The IEA,
established in the wake of the 1973 oil crisis, requires its members to
have a Strategic Petroleum Reserve (SPR) as a way to hedge against oil
price shocks. The members have to maintain an oil stock sufficient to
fulfill demand for three months, either held exclusively for emergency
purposes or for commercial and operational use.
The US, an IEA
member, has an SPR of 174 days, of which 98 days is held by industry and
the balance by the government. The UK is another IEA member having an SPR
of 268 days entirely held by industry. Non-IEA countries such as China and
India have launched their own reserve programes to hold the same stock
levels mandated by the IEA.
We cannot wait
to have an SPR until we are in a very bad shape. At least, for now, the
government has to provide legislation as well as policies on the long-term
perspective for an SPR, and start collaborating with industry to formulate
a scenario of fuel stockholding obligations.
Policies have
to be developed to ensure that the SPR is a part of price-smoothing
instruments to “protect” consumers from volatile import prices. Given the
present circumstances, the Mid-Oil Platts Singapore (MOPS) price would best
serve as a basis for developing a scenario for an SPR.
We cannot fully
pass the volatility of MOPS on to domestic prices, and the SPR has to be
designed to fulfill that intention.
In addition, an
SPR has to be seen as a hedging mechanism against oil price jumps that are
deemed to have a major impact on our national economy. A definition of
“major impact” must be set to justify the need and the size for the SPR,
and later on as a basis for triggering a release of SPR stocks.
Also, the SPR
has to be developed as a building block to mitigate a severe fuel supply
disruption. An unplanned refinery shutdown would be a major reason to
justify holding back-up fuel stocks.
Power outages
can be avoided by providing buffer stocks of fuel for a power plant. An SPR
should hold fuel stocks that are consumed in a large quantity by consumers.
Today, we should focus on stocks for gasoline and diesel, but later on a
stock of liquid petroleum gas (LPG) and crude would also be necessary.
Finally, the
SPR has to be developed both for emergency purposes through public stocks,
as well as for commercial and operational use via stockholding obligations
on industry or private stocks. We might expect stock levels held by the
public to be generally larger than the government’s stockholding
obligation. Currently, Pertamina holds fuel stock for 20 days for
commercial and operational use. Public stocks should be much larger than
that.
The revision of
Oil and Gas Law No. 22/2001 should define the fundamental traits of any
SPR. The law should clarify who will ultimately be accountable for
implementing the SPR, who will own the stock, and the roles of our
state-owned oil company Pertamina and industry players, etc.
In the mean
time, we can identify and assess what is the current available infastructure,
including refineries, oil terminals, pipelines, floating storage units,
etc., and their capacity. How can they be pledged for SPR?
The expansion
of existing refineries and development of new refineries and crude
terminals has to be within the framerwork of SPR implementation. Exploring
potential access to neighboring storage and oil trading hubs in Singapore
might also be necessary for short-term purposes. It is important to have a
consensus among policymakers on a realistic timeframe for SPR development,
short- and medium-term, as well as long-term.
Overall, the
aim of having an SPR is to ensure the security and sustainability of
adequate fuel supplies, i.e., gasoline and diesel, for the domestic fuel
market. A key task of course is to guarantee the availability and smooth
distribution of fuel to everyone anytime, anywhere. ●
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