The new formulas are for Solar, a subsidized diesel fuel sold by state energy holding company Pertamina; Premium, a subsidized low octant gasoline; and a subsidized 3-kilogram type of LPG.

Deputy Energy and Mineral Resources Minister Arcandra Tahar said the new formulas accounted for adjustments to production costs, distributor margins and transportation costs.

“We looked into the distribution costs, margins for fuel distributors, storage costs and procurement costs, and we found that the costs could be reduced to make [the process] more efficient,” he told journalists recently.

The formulas were issued earlier this April under energy and mineral resources ministerial decrees No. 61/2019 on the 3-kg price ceiling and No. 62 on fuel price formulas for Solar and Premium.

The new price formulas are based on a certain percentage of the relevant market reference price (HIP), plus the total production cost of the fuels. The HIP for Solar and Premium are based on the Mean of Platts Singapore (MOPS).

The price of Solar under the previous formula was set at 102.38 percent of the HIP plus a production cost of Rp 900 per liter (6 US cents).

With the new formula, the price of Solar is set at 95 percent of the HIP, plus a production cost of Rp 802 per liter. Under the previous formula, the government’s subsidy for Solar was Rp 2,060 per liter, while under the new formula, the subsidy could be reduced to Rp 1,507 per liter, Arcandra said.

“I can’t say that the subsidy will be decreased, but I’m assured that it will allow for more efficiency,” he added.

Meanwhile, the price of Premium gasoline under the new formula is 96.46 percent of the HIP plus a production cost of Rp 821 per liter, compared to the previous 103.92 percent of the HIP plus a production cost of Rp 830 per litter.

The new formulas for Solar and Premium will be used to calculate the total amount of fuel subsidies since January 2018 that the government has to reimburse to Pertamina, which is the sole distributor of the subsidized fuels.

For 3-kg LPG, the new formula is slightly different as the percentage increased slightly from 103.64 to 103.85 percent. The HIP for the formula was based on the Saudi Aramco contract price, Arcandra said.

“We moved some components that were previously in the fixed cost to the variable cost, such as the import cost through shipping that couldn’t be fixed in terms of distance […],” he said.

Therefore, the new formula for 3-kg LPG is lower than the previous formula in terms of cost per metric ton and production cost, having changed from $84 per metric ton and Rp 1,950 per kg to $50.11 per metric ton and 1,879 per kg respectively.

“With the new formula, the market price of 3-kg LPG is now at Rp 29,400, while the subsidized price is at Rp 18,000. Hence, with the formula, we could reduce the subsidy to Rp 11,400 per 3 kg or 3,800 per kg,” Arcandra said. Last year, the government’s subsidy for LPG was Rp 6,443 per kg.

The formula will be used to calculate the subsidy for 3-kg LPG distribution, which is projected to reach 6.97 million tons, an 8 percent increase from the previous year.

A researcher at Jakarta-based research group ReforMiner Institute, Pri Agung Rakhmanto, said on Sunday that the new formulas should not result in financial losses to Pertamina, the main distributor of the fuels.

He said the government should ensure that the new price formulas reflect any developments in prices in the international market.

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