One Fuel Price Policy Indonesia, Higher Operational Costs Pertamina
In order to realize Indonesian President Joko Widodo's recently announced "One Fuel Price policy", state-owned oil and gas company Pertamina will need to invest about IDR 380 billion (approx. USD $29 million) in additional infrastructure. Last week Widodo announced, when visiting Papua in the far east of Indonesia, that fuel prices are to become the same across the entire archipelago. Due to weak infrastructure and poor distribution channels, prices of gasoline and diesel are about ten times as expensive in Papua compared to Java.
Ahmad Bambang, Vice President Director of Pertamina, stated that the company will need to invest in new depots, new diesel distribution agents as well as five special airplanes to carry fuel to the remote areas in Papua. Together, this will require about IDR 380 billion worth of investment. Bambang added that this is actually a small price to pay. But what does make the new policy expensive is Pertamina's rising operational costs. Bambang estimates that annual operational costs may rise by IDR 900 billion (approx. USD $69 million).
It is unclear whether the One Fuel Price policy will lead to a lower dividend payout to Pertamina's shareholder (the central government). In 2017 Pertamina is expected to pay IDR 4.1 trillion in dividend (government target), up from an estimated IDR 3.8 trillion in 2016. In the first half of 2016, Pertamina recorded USD $1.83 billion in net profit, up 221 percent (y/y) from USD $570 million in the same period one year earlier. This jump in net profit was attributed to the company's efficiency programs.
Through Energy Ministry Regulation No. 7174/2016 fuel prices have to be the same throughout the country. This would mean that - under the current prices - premium gasoline has to be sold at IDR 6,450 (approx. USD $0.49) per liter, while diesel and kerosene are priced at IDR 5,150 and IDR 2,500 per liter, respectively. The program implies that fuel prices will fall drastically in Papua, hence boosting purchasing power in one of the poorest regions of Indonesia. This should boost the local economy. It was reported in local media that, per Monday (24/10), in eight districts in Papua fuel prices have already declined to the target price.
Pertamina is Indonesia's largest state-owned enterprise (SOE) in terms of revenue and net income with activities in the nation's upstream and downstream oil and gas sectors.