Interview: BPH Migas strives to create competition, promote gas use
Tuesday, December 8 2009 - 02:44 AM WIB
Question: What are the priority programs of BPH Migas to the end of the year?
Answer: We are in the process of completing the assignment of (private) business entities to supply subsidized fuels for 2010, as companions of (state owned oil and gas firm) PT Pertamina. We are now in the phase of giving the business entities time to make final preparations, for instance to complete the infrastructure.
This is the first time private companies become suppliers of subsidized fuels. How much shall they be involved in carrying the strategic task in the future?
This is a mandate set in the law. The law stipulates that business entities that supply subsidized oil-based fuels deserve to receive equal treatment. What we want to establish is an oligopolistic market, in which the government sets the price with Pertamina as the main player.
There are two commodities traded in the oligopolistic market, that is subsidized oil-based fuels and non-subsidized oil-based fuels. In managerial economics, there is an index that is used to measure the concentration of a market, that is Herfindahl-Hirschman Index (HHI). Based on the index, I find that the non-subsidized fuel market is a very concentrated one with Pertamina controlling 93 percent of it. In subsidized fuel market, its market share even reaches 99 percent.
How much should Pertamina?s market share be reduced to create an ideal competition?
Under a (free)-market mechanism, all suppliers should be given equal opportunities. Furthermore, information (provided to the suppliers) should be complete rather than asymmetric. In reality, (the country?s) non-subsidized fuel market remains a concentrated one because only Pertamina has refineries and a complete distribution network. Now, there are 30 private firms (engaged in fuel distribution business), but the fuel they distribute only account for 10 percent (of the total amount distributed in the market).
Has LPG business been set free to follow market mechanism?
LPG comes under the domain of Directorate General of Oil and Gas (at the Ministry of Energy and Mineral Resources). As a matter fact, the current price of LPG is still too low for investors.
So, what are the main tasks of BPH Migas?
Our domain includes oil-based fuel, gas transportation through pipelines in the upstream oil and gas sector
Do you think the fuel market has been ready for competition?
Non-subsidized fuel market has been following market mechanism for quite some time. Since the gap between the prices of subsidized fuel and non-subsidized fuel is wide, people are inclined to buy subsidized fuel. That?s why we need a clear regulation. The problem now is: Is batik home industry entitled to subsidized fuel such as kerosene? Under the existing regulation, it is not. One the other hand, it is categorized as a small-scale industry (which, under the existing regulation, is entitled to get subsidized fuel). The existing regulations have not set clear rules regarding to this group of consumers. The rules are clear as far households are concerned as long they use subsidized fuel for illumination purpose, rather than making batik, etc. Meanwhile, they are all small people. Kerosene is used by small people for various activities. And then, the government launched the program to encourage households to use LPG rather than kerosene. The conversion program has brought fruits. The consumption of kerosene has decreased gradually. There is another way (to reduce the consumption of kerosene by households), that is using pipeline gas. Pipeline gas for households has been proved very economical. Pipeline gas now costs at between US$7-8 per mcfd or between Rp 2,000 and Rp 3,000 per meter cubic, which, in comparison, is about 49 percent of kerosene?s price and between 60 and 70 percent of non-subsidized LPG?s price.
It means that, for public consumption, city gas should be made a commercial business.
You are right. But, the government needs to support the initial investment. For instance, the development of a city gas in Jambi needs Rp 200 billion. A city gas in Jambi will, however, allow the government to save between Rp 70 and 80 billion per year in subsidy as a result of the decrease in the consumption of subsidized kerosene. That means the government will no longer need to provide subsidy within three years. For private investors, however, it is not economical, not feasible. It will become profitable, only if the volume is big. But, Jambi needs only 2 mmcfd. The investment will have a payback period of 25 years with an IRR (Internal Rate of Return) of 10.5 percent. Let?s compare it with the cost of capital. If the cost of capital is 6.5 percent, how much will the expected return? You have to also take country risk into account. That?s why the payback period is 25 years and the IRR is 10.5 percent. That?s why the pipeline gas program for households should be treated similar to the electricity provision program for villages. (It should be developed using) grants etc. But, it should be managed professionally by regional government-owned companies or private firms. And they have to buy gas at commercial price and sell it at commercial price as well. For instance, if the investor buys gas the price of $6 or $7 (per mcfd) and sells it for $9 (per mcfd), that is equal to about Rp 2,500 and Rp 3,000 per cubic meter. Households need an average 10-15 cubic meters of gas per month. If they use LPG, they have to buy three 3-kg canisters of LPG per month. In addition, they have to pay transportation costs to bring the LPG. If they use gas, what they need to do is only turning the gas valve on.
I once proposed how to cut the city gas investment. For instance, there is no need to install meters (at customers? houses). We don?t need to measure the flow of gas (to their houses). Let them pay a fixed amount of bill per month, for instance Rp 40,000 per month. They will unlikely re-channel the gas to other places, to industry for instance, because the pressure of gas (to households) is only 0.1 bar. Meanwhile, industry needs a minimum pressure of 16 bars for electricity. In order for a meter to get installed at his or her house, a customer has to pay to Rp 500,000. This excludes the fee payable to the workers who install the meter. In Kuala Lumpur, for instance, people don?t use meters.
How?s about investment for other facilities such as fuel storage?
We have issued a rule regarding open access to storage and transportation. The rule was issued long time ago. It seems however that business people prefer leasing storage from independent companies. For instance, if Pertamina has a spare capacity in one certain area and there are private companies in the area who need storage. They will prefer leasing the storage of other parties. They usually go other parties, such as Akr (PT Akr Corporindo Tbk).
Are there new investments in this sector?
There are. Oiltanking (PT Oiltanking Indonesia), for instance, has submitted its business registration application. There are other companies in the regions, (who plan investment in) fuel stockpiling. I don?t remember their names.
That means investment in this sector is growing.
It is growing. But, not as fast as expected. The problem is that most of our fuel are imported. The government has encouraged the development of new refineries. It even expects to increase the national total refinery capacity by 700,000 bpd. The problem is that the refinery?s margin is small and we also have limited feed here. In foreign countries, many refineries have been closed. Furthermore, refineries and fuel storages are not evenly spread throughout the country. Sixty percent of them are located in Java, which is because 60 percent of fuel consumers are also in Java, 20 percent in Sumatra. S, there is an imbalance. That?s why BPH Migas is pushing for the development of ?gas city?, not only city gas. The idea is how to develop an area with gas as the main source of energy. We started with the city of Blora (in Central Java). But at that time, we forgot approaching gas suppliers. We then moved to the city of Tarakan (in East Kalimantan). There, the situation is conducive. Tarakan is an ideal place since there are two gas producers who produce a total of 20 mmcfd. Meanwhile, gas city needs only slightly more than 1 mmcfd. The problem is how to convert the gas into CNG (compressed natural gas). Tarakan is an ideal place because it is isolated. It has gas but Tarakan has not used its own gas for 90 years. It sends its own gas to somewhere else, while getting energy sources from somewhere else, that is Balikpapan and, if not enough, importing from Malaysia. Another ideal city is Bontang (in East Kalimantan). We shall buy (gas to CNG) converters (for the city) using fuel subsidy. But, it is a long-term plan.
Thus, the main long-term theme of BPH Migas is gasification?
It is not the only one. (We also think about) how to increase gas utilization in the country. This is a mandate set in the law.
You are talking about gas for small-scale customers. How?s about (gas for) industrial customers?
Just the same. For instance, the development of gas transmission pipe network. But, this depends on gas balance, also on deliverability. It does not only depend on the availability of gas.
What are the reasons that tender of gas pipe development has stalled?
Not (ready) yet. Honestly speaking, when we tendered the Kalimantan-Java pipeline, we assumed the gas has been available. So, we did with the Gresik-Semarang pipeline. As it turned out, Gresik has not yet produced gas. This has become a serious obstacle. We know that gas is a strategic commodity.
We are back to the gas city topic. Bontang, as a city with huge gas production, has not yet utilized its own gas. The problem is related to the (non-existence of) infrastructure. Infrastructure (of gas) for households is expensive (to develop), while the return is small. Thus, we shall build CNG (production facilities). Investment for CNG is expensive, but the return is big.
How is it going with CNG?
CNG is not part of the domain of BPH Migas. However, once a gas has been transmitted through pipelines, it will fall into the domain of BPH Migas. CNG can actually become a solution to our dependence on oil. The weakness of CNG is that it can?t be transported within a distance of more than 200 kilometers, because it will affect the gas? pressure. Such a problem will not occur, if the gas is first turned into LNG and then regasified. But the investment is much more expensive.
Are there gas pipelines, such as the one in West Java owned by Pertamina (state owned firm PT Pertamina) , which can be allied with the pipeline owned by PGN (state owned gas distributor PT Perusahaan Gas Negara) in order to create an integrated pipeline?
There are. For instance, we have awarded a special rights for Pertagas (a subsidiary of Pertamina) to build 40 pipelines (across the country) and are in the process of awarding rights to build three more. Furthermore, there are several pipelines (projects) owned by Pertagas which are now in the phase of asking approval for toll fee, including in North Sumatra, Kalimantan and West Java. Once BPH Migas agree on a toll fee for a certain pipeline, anyone can get access to the pipeline. For sure, there are requirements that they have to meet. As you know, there is the so-called Gas Transportation Agreement. There is also rule regarding Access Arrangement. In the event of losses, who is to shoulder them?
Can a loss occur during transportation?
Certainly, it can. For instance, if the gas is condensated inside the pipe
So, the concept you are going to develop is ?anyone can get in and sell?. Will there be tender for that?
No. The tender is only for special rights.
How?s about the price?
The price will be determined by the market.
Isn?t there any idea of allowing gas price to change every day?
It?s possible. But, a gas sale and purchase contract is usually a long-term one. And gas is different from oil-based fuel in terms of characteristics. If you can?t sell your oil-based fuel today, you can put it in storage. You can?t do the same thing with gas. (end)
List of Fuel Distributors in Indonesia
| No | Company | Gas Station | Floating Storage | Fuel Storage |
| 1 | PT. Pertamina | 4446 throughout Indonesia | 3 (1 in Kota baru, 1 in Kalbut and 1 in Teluk Semangka ) | 119 throughout Indonesia |
| 2 | PT. Petronas Niaga Indonesia | 19 (14 in Jabodetabek, 4 in Medan, 1 in Bandung) | - | 2 (1 in Handa Terminal in Medan, 1 in Bumi Merak Terminalindo, Banten) |
| 3 | PT. Total Oil Indonesia | 3 ( 2 in Jakarta, 1 in Tangerang) | - | 1 in Dover Chemical, Banten |
| 4 | PT. AKR Corporindo | - | 5 | 9 (Lampung, Medan, Tonasa, Tanjung Perak in Surabaya, Semarang, Jakarta, Ciwandan, Stagen, Benoa Bali ) |
| 5 | PT. Shell Indonesia |
33 ( 25 in Jakarta, 6 in Tangerang, 1 in Depok, 1 in Bogor) | - | 3 (1 in Gresik, Surabaya, 1 in Handa Terminal, Medan and 1 in Merak, Banten) also 2 under construction in E. Kalimantan and Pulau Laut, S.Kalimantan, respectively |