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For decades, we maintained fuel prices
below international levels through subsidies. For years, we granted state-owned
oil firm Pertamina exclusive access to distributing subsidized fuels. This
setup was not without its reasons.
The “patronage” for consumers has been well-maintained, considered a way to share the benefits of our natural resources with our citizens. That notion is, however, definitely misguided.
The rising demand for fuel, as our economy grows, requires increasing subsidy outlays to a point where the availability of funds for public investment in health, education and infrastructure places a severe strain on the overall budget. Attempts to reduce the subsidy by increasing domestic fuel prices, as witnessed recently this year, provided a remedy that was only partially successful.
Still, the government is being challenged to forecast the necessary funding levels in the highly volatile international oil-pricing environment, as fuel has to be bought from the international market. This has inevitably retained a major element of uncertainty for fiscal planning and public budgeting.
Because our state-owned firm has exclusive access to distributing subsidized fuels, the company effectively maintains its monopoly position by controlling the supply of the majority of fuels delivered for domestic consumption.
Consequently, other market players are effectively excluded from supplying subsidized petroleum fuels, about 60-70 percent of the fuel market. This monopoly in the downstream fuel market, with a single company taking care of everything in the supply chain of fuel, can no longer fulfill the demand. Demand for gasoline, for example, is predicted to grow at a rate of 10-12 percent per year for the next 10 years.
This growing demand has expanded the domestic fuel market so much that a single company cannot efficiently service the market. The demand is and will be too huge for a single company to efficiently serve.
It is not surprising that this market structure has led to prolonged underinvestment in fuel infrastructure and distribution logistics. Currently, we do not have sufficient infrastructure to hold operational fuel stocks as well as emergency fuel stocks of any kind. We do not have enough capacity in our oil refineries to produce fuel from our crude.
If our objective is to ensure the security and sustainability of adequate fuel supplies to our fuel market, we must invest in infrastructure. At the very least, we have to spend US$50 to 75 billion over the next five to 10 years to secure fuel supply and stocks. With this magnitude of investment, we cannot expect our oil and gas company alone can deliver all required infrastructure.
There is only one option — we must allow new entrants to enter our petroleum fuel market and gradually establish a competitive structure, which leads to the abolition of our state-owned company’s position as a monopoly. With a more open market allowing new entrants, the financial and operational burdens of fuel security can then be shared between our state-owned oil company and other players, i.e., the private sector.
A shift from the “patronage” regime cannot be achieved merely by taking administrative steps to remove longstanding fuel subsidies. This rationalization of fuel prices is of course necessary but insufficient, but it should be seen as the initial step. More fundamental is to change our philosophy on how we see fuel markets. Every day we have to buy fuel at price levels formed by market competition, which is beyond our influence.
Those price levels express the real value of the fuel we consume and apply not only to our land but also to the entire market of the world — international prices. When we intervene to insulate our economy in varying degrees from international prices, consumers inevitably receive wrong price signals, leading to a distortion on the real value of fuel.
Next is the restructuring of our fuel market. Of course, the opening of this market will need to be phased-in to bring new entrants and initiate competition. Both are aspects that are provided for in the Oil and Gas Law, but today effectively non-existent.
It is also important to reform the operation of our state-owned company in parallel or even somewhat ahead of the fuel sector market opening. The reform has to allow our oil and gas company to efficiently operate and be competitive.
Pertamina has gradually moved to a more independent entity, gaining momentum from corporate reforms in the best long-term interest of its shareholder. We have to support these transformation efforts and respect the rules governing a limited liability company, as well as to allow the company to operate with commercial independence. Any social obligations that are imposed on this company must be adequately compensated.
A greater level of transparency is a must and we have to support any efforts to attain such transparency. It is therefore fundamental from a market opening and corporate reform standpoint for the company to unbundle its operations. Refining, pipelines and storage, wholesale and retail operations should be accounted for as separate profit centers.
The opening of the petroleum products market and restructuring of our state-owned company will take time. The design and management of this transition should be well-planned and overseen pursuant to a high-level policy initiative so that the government is well prepared to handle such a complex set of reforms.
The overall aim is to attain sufficient security and sustainability of adequate fuel supplies in our fuel market. The current market regime cannot support this objective. Price rationalization and the deregulation of downstream oil industry is a must. Our oil state-owned company has to be further strengthened to become internationally competitive and a respected national petroleum company. ●
The “patronage” for consumers has been well-maintained, considered a way to share the benefits of our natural resources with our citizens. That notion is, however, definitely misguided.
The rising demand for fuel, as our economy grows, requires increasing subsidy outlays to a point where the availability of funds for public investment in health, education and infrastructure places a severe strain on the overall budget. Attempts to reduce the subsidy by increasing domestic fuel prices, as witnessed recently this year, provided a remedy that was only partially successful.
Still, the government is being challenged to forecast the necessary funding levels in the highly volatile international oil-pricing environment, as fuel has to be bought from the international market. This has inevitably retained a major element of uncertainty for fiscal planning and public budgeting.
Because our state-owned firm has exclusive access to distributing subsidized fuels, the company effectively maintains its monopoly position by controlling the supply of the majority of fuels delivered for domestic consumption.
Consequently, other market players are effectively excluded from supplying subsidized petroleum fuels, about 60-70 percent of the fuel market. This monopoly in the downstream fuel market, with a single company taking care of everything in the supply chain of fuel, can no longer fulfill the demand. Demand for gasoline, for example, is predicted to grow at a rate of 10-12 percent per year for the next 10 years.
This growing demand has expanded the domestic fuel market so much that a single company cannot efficiently service the market. The demand is and will be too huge for a single company to efficiently serve.
It is not surprising that this market structure has led to prolonged underinvestment in fuel infrastructure and distribution logistics. Currently, we do not have sufficient infrastructure to hold operational fuel stocks as well as emergency fuel stocks of any kind. We do not have enough capacity in our oil refineries to produce fuel from our crude.
If our objective is to ensure the security and sustainability of adequate fuel supplies to our fuel market, we must invest in infrastructure. At the very least, we have to spend US$50 to 75 billion over the next five to 10 years to secure fuel supply and stocks. With this magnitude of investment, we cannot expect our oil and gas company alone can deliver all required infrastructure.
There is only one option — we must allow new entrants to enter our petroleum fuel market and gradually establish a competitive structure, which leads to the abolition of our state-owned company’s position as a monopoly. With a more open market allowing new entrants, the financial and operational burdens of fuel security can then be shared between our state-owned oil company and other players, i.e., the private sector.
A shift from the “patronage” regime cannot be achieved merely by taking administrative steps to remove longstanding fuel subsidies. This rationalization of fuel prices is of course necessary but insufficient, but it should be seen as the initial step. More fundamental is to change our philosophy on how we see fuel markets. Every day we have to buy fuel at price levels formed by market competition, which is beyond our influence.
Those price levels express the real value of the fuel we consume and apply not only to our land but also to the entire market of the world — international prices. When we intervene to insulate our economy in varying degrees from international prices, consumers inevitably receive wrong price signals, leading to a distortion on the real value of fuel.
Next is the restructuring of our fuel market. Of course, the opening of this market will need to be phased-in to bring new entrants and initiate competition. Both are aspects that are provided for in the Oil and Gas Law, but today effectively non-existent.
It is also important to reform the operation of our state-owned company in parallel or even somewhat ahead of the fuel sector market opening. The reform has to allow our oil and gas company to efficiently operate and be competitive.
Pertamina has gradually moved to a more independent entity, gaining momentum from corporate reforms in the best long-term interest of its shareholder. We have to support these transformation efforts and respect the rules governing a limited liability company, as well as to allow the company to operate with commercial independence. Any social obligations that are imposed on this company must be adequately compensated.
A greater level of transparency is a must and we have to support any efforts to attain such transparency. It is therefore fundamental from a market opening and corporate reform standpoint for the company to unbundle its operations. Refining, pipelines and storage, wholesale and retail operations should be accounted for as separate profit centers.
The opening of the petroleum products market and restructuring of our state-owned company will take time. The design and management of this transition should be well-planned and overseen pursuant to a high-level policy initiative so that the government is well prepared to handle such a complex set of reforms.
The overall aim is to attain sufficient security and sustainability of adequate fuel supplies in our fuel market. The current market regime cannot support this objective. Price rationalization and the deregulation of downstream oil industry is a must. Our oil state-owned company has to be further strengthened to become internationally competitive and a respected national petroleum company. ●
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