Shell positioning for entry in Indonesia subsidized fuels market

Posted by Royal Dutch Shell Plc.com at May 29th, 2007

Jakarta (Platts): 29 May 2007

Malaysia’s Petronas and Royal Dutch Shell plan to set up gas stations outside the main Indonesian island of Java this year, a move that could pave the way for their entry into the country’s huge subsidized fuel market.

The two companies, the only foreign players in the Indonesian downstream sector that has long been dominated by state-owned Pertamina, set up retail outlets and began selling high-octane gasoline in late 2005. So far the two have limited themselves to selling 92 and 95 RON gasoline, as the prices of these products are market-determined. Lower-octane gasoline, as also gasoil and kerosene, are all heavily subsidized by the Indonesian government.

Following the country’s downstream deregulation, the government appointed Pertamina to be responsible for the distribution of subsidized fuel, as it is the only company with the necessary infrastructure to do so. The government compensates Pertamina for selling fuel below cost according to an agreed formula that guarantees it a certain margin on the sales. Foreign companies interested in selling subsidized fuels have been assured they will be compensated by the government on the basis of a 14.1% premium on international market rates.

The government has initially approved a 14.1% premium for 2006-2007. It is aimed at covering the company’s distribution costs, taxes and freight, plus afford it a marketing margin. The rate is to be revised annually.

However, to qualify for subsidized fuel distribution, the new entrants need to have at least two gas stations, in two different geographical areas. For this purpose, the vast archipelago has been carved out into four regions: Java; Sumatra; Kalimantan, Sulawesi, Maluku and Papua; West Nusa Tenggara Barat and East Nusa Tenggara.

Shell and Petronas’ plans to open gas stations outside Java is a “positive signal for our investment [climate],” said downstream director at the Oil and Gas Directorate General, Erie Soedarmo. Shell currently has ten gas stations in Indonesia, and plans to open 400 by 2010. The major has expressed interest in selling subsidized fuels, official sources said.

Petronas’ intentions regarding entry into the subsidized fuels market are not known, but the company has plans to grow its current network of six retail outlets to 557 by 2011.

Pertamina’s obligation to supply subsidized fuel all over the country extends to the end of this year. After that, upstream regulator BPHMigas has said a company would be appointed to sell subsidized fuels, provided it meets the condition of having retail infrastructure in at least two commercial areas in the country.

–Anita Nugraha, newsdesk@platts.com