The government will be forced to dig deeper into its pockets for fuel subsidy allocations after a House of Representatives’ commission agreed Wednesday to give state oil and gas firm PT Pertamina greater cuts for distributing subsidized fuels.
With a higher distribution cost, the overall fuel subsidy will stand at more than Rp 32 trillion (around US$2.6 billion) as initially predicted, although the exact figure is still the subject of further discussions, said Energy and Mineral Resources Ministry’s director general for oil and has Evita H. Legowo, late on Wednesday.
The new system will adopt a fixed payment for Pertamina.
Previously, the payment, known as alpha, was calculated as a percentage of MOPS (Mean of Platts Singapore daily oil price traded). Initially, the alpha for 2009 was set at 8 percent of MOPS.
"But, with the current lower crude price, it would be very difficult for Pertamina to set a margin with such low alpha level," Evita said.
Under the new mechanism, Pertamina will be allocated a fixed figure within a range of Rp 563.57 per liter and Rp 571.89 per liter. The range is based on the Indonesian Crude Price (ICP) between US$45 and $60 a barrel.
The figures are actually no greater than the Rp 570 to Rp 685 per liter range set last year for the company, but in terms of percentages they are in fact higher.
Crude oil prices in 2008 are expected to soar well beyond this year's estimate value of $45 to $60 a barrel.
The government currently subsidizes Premium gasoline, diesel, kerosene and liquefied petroleum gas (LPG).
Wednesday’s hearing also saw an agreement drawn up to subsidize biofuels, which are mixed in subsidized Premium gasoline and diesel, with a maximum cap of Rp 1,000 per liter.
Indonesia has the capacity to produce 2.9 million kiloliters of biodiesel per year and 215,000 kiloliters of bioethanol per year, with more than 200,000 kiloliters of bioethanol and biodiesel to be blended into subsidized fuels this year alone.
Biofuel producers have repeatedly complained they are running at a loss from selling their blends to Pertamina, because the prices are set in accordance with the fossil fuel prices, which are currently lower.
Evita however said that between November 2008 to January 2009 the biofuel price was on average higher by Rp 610.08 a liter than fossil fuel prices.
"The subsidy will further help us maintain the sustainability of biofuels in our energy mix," Evita said. As a result, the overall total fuel subsidy will be pushed to more than Rp 33 trillion.
"However, the subsidy will only be provided when the biofuel prices are higher than fossil fuel prices. Theoretically, the subsidy could be lower than current levels if biofuel prices drop."