Tubagus Haryono, BPH Migas
Release Date: 2007-09-13
The 2001 Oil & Gas Law created two new entities and established a division between upstream and downstream activities in Indonesia. Upstream matters became the domain of BP Migas, while BPH Migas was given the responsibility of most downstream activities. These include primarily the control and supervision of fuel oil and gas distribution, as well as of the gas transmission done through pipelines.How would you describe BPH Migas’ role in the fuel oil downstream sector?
BPH Migas’s role with regards to fuel oil is to supervise and ensure its correct distribution in Indonesia. Fuel oil is divided into two categories: the so-called Public Service Obligation (PSO) oil which is subsidized by the government, and the non-PSO oil which operates under market prices. PSO oil is strictly regulated by the government in terms of establishing prices and imposing quotas to limit its access to certain sectors only. BPH Migas is responsible for monitoring and supervising so that PSO oil is distributed according to regulations all throughout the Archipelago.
The final regulations relative to the liberalisation of downstream activities in fuel oil came into effect very recently, in early2006. How has the situation evolved since that moment in terms of more companies competing in the distribution and sales of fuel oil in Indonesia?
Under existing laws and regulations, there are two possibilities for a company to be granted the right to distribute PSO oil in Indonesia: through tender or by direct appointment. The scheme that is used will depend on the readiness of companies to comply with the government’s conditions for PSO oil distribution rights, which notably include the obligation to service 2 of Indonesia’s 4 trading zones. This is done because the government wants to ensure that all areas of the country are well supplied with fuel oil, an issue of particular importance taking into account the fact that Java alone consumes 62% of the country’s total, followed by Sumatra with 20% and the rest of the country combined with only 18%. Currently, after approaching several other important players such as Shell, Petronas and Total, it seems that Pertamina is still the only company with the necessary infrastructure and distribution network to conform to this condition.
Another obstacle to developing competition in PSO oil market is the annual nature of the tendering process, which does not allow for long-term certainty since a right to distribute can change from one year to the next. This is a result of the laws relative to the national budget, but the government acknowledges the difficulties this matter generates for companies interested in competing on the PSO oil market and is therefore looking into possible solutions. A team has been established to deal with this issue, consisting of officials from Migas, the Ministry of Finance and BPH Migas.
There are several other requirements for PSO oil distribution, such as maintaining a certain level of stocks in order to guarantee coverage, and keeping the reserves and storage facilities within Indonesia’s borders. Finally, one of the main selection criteria will of course be the differential between the company selling price and the government-established PSO oil price, called the alpha.
Regarding non-PSO oil, companies are free to compete at market conditions as long as they obtain the required licence from the Ministry of Energy. BPH Migas is ready to provide information to those interested in this sector and invites them to come invest in Indonesia. We believe that towards the future, government policy should encourage non-PSO oil consumption in Indonesia in order to lower the cost of PSO oil subsidies assumed by the state.
How does BPH Migas determine the attribution of the ‘special rights’ for gas transmission and distribution?
One of BPH Migas’ main responsibilities is to encourage the domestic use of gas in Indonesia. We are also in charge of attributing the ‘special rights’ for gas transmission through a tender process. The company awarded the rights will have a virtual monopoly over a certain portion of a pipeline in a given area of distribution.
Initially, BPH Migas informs the interested parties on the areas we wish to connect and about the capacity that we expect to be delivered through the pipeline. Then, the companies get back to us on their technical suggestions as far as pipeline diameter, length and the proposed path. They also provide BPH Migas with a detailed investment plan, as well as their expected profit margins. Based on these different criteria, BPH Migas chooses the company most suited to develop the pipeline project under tender.
Which are some of the current and upcoming projects that will contribute to better integrate Indonesia’s scattered pipeline system?
BPH Migas has already tendered for 3 sectors in Indonesia: from Girsik (East Java) to Sumaran (Central Java), from Sumaran to Cirebon (West Java), and also a pipeline to link East Kalimantan and East Java. In addition, in October 2007 we are tendering for a new pipeline that will connect Cirebon to Bukasi (Sumatra). Through these projects the aim is to integrate existing pipelines and gas producing areas across the Archipelago, creating a ‘backbone’ that begins in East Kalimantan, across Java, and up to Sumatra and eventually Singapore.
Which are some of the most important and dynamic companies in downstream gas activities in Indonesia?
The biggest players in downstream activities in Indonesia include PGN, Bakrie, Pertamina, and Rekayasa Industri. In addition, there are several small distribution companies such as Sadico, Odira, Energasindo, Igas, among others.
Migas director Luluk Sumiarso has said recently that it is necessary to strip BPH Migas of its power to hold tenders for the development and operation of gas pipelines, in order to avoid a conflict of interest with your role as supervisor. When and how will this change take place?
There are currently discussions within the government about the possibility of making certain changes on who has the right to conduct the tenders for ‘special rights’. All I can say now is that BPH Migas has been carrying out tenders in accordance to existing regulations.
In your view, how necessary is it to switch over to gas for domestic energy demands, in light of the record-high oil prices and the resulting level of subsidies granted by the government?
Indonesia’s fuel oil subsidy system, destined for the most part to households and transportation, is one of the most expensive in the world and has become a great burden on the government’s budget. With a stagnant refining capacity that only produces 70% of our domestic oil fuel needs, the country has to import the rest at the record-high market prices we have been seeing lately. As a result, estimations indicate that in 2008 the government will have to allocate around 4.5 billion dollars for fuel subsidies.
Considering the heavy subsidies the government is paying and the perspectives of sustained high oil prices, it makes perfect sense to increase gas production and consumption for the domestic market. In addition, the price of gas in Indonesia has also been increasing, which makes it a good opportunity for companies to further exploit their gas reserves for the local demand. With a production of 8.4 billion cubic feet per day and 57% of Indonesia’s gas being exported, there is still a lot of room to grow in this regards. Moreover, BPH Migas is encouraging the exploration of marginal gas fields. The development of our pipeline projects will bring new life to areas formerly considered too small and spread out to be economic by themselves.
What is the final message would you like to send to OGFJ’s readers about opportunities in Indonesia’s downstream industry?
Indonesia is encouraging the utilization of our vast gas resources for domestic use, but we face a lack of necessary infrastructure to get it from the production sites to the consumers. We invite foreign partners to come invest in the many opportunities in this sector.
| Company: | BPH Migas |
| Position: | Chairman |
| Country: | Indonesia |