Can Govt Cut Subsidies for Refineries?

By webadmin on 04:03 pm Jun 09, 2012
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ID/Retno Ayuningtyas

The government is studying the possibility of gradually shifting its energy subsidy spending in the future for investment in oil refineries, part of its bid to help secure domestic demand for gasoline.

“We are studying this to see if it would be better to continue the energy subsidy policy we have now or if it would be better to go in another direction,” said Bambang Brodjonegoro, the acting head of fiscal policy of the Finance Ministry, said in a discussion on Wednesday.

Bambang pointed to state oil and gas company Pertamina, which has only six refineries with a total processing capacity of one million barrels per day. The company produces 32.6 million kiloliters of gasoline per year.

However, the state-owned company is only able to meet 45 percent of domestic demand for premium gas and just 10.2 million kiloliters per year for diesel oil.

Building a refinery has reportedly never been easy for Indonesia.

The biggest problem with building a refinery is securing financing, which is expensive. Also, the amount of time an investor must wait to get any return is long, which is typical for most large infrastructure projects.

In December, a senior executive at Pertamina said the cost to build a new refinery in Tuban, East Java, with cooperation from a Saudi Arabian oil company was about Rp 80 trillion ($8.6 billion).

That amount is about one-third of Indonesia’s spending limit on energy subsidies — Rp 260 trillion.

“Indonesia has been spending lavishly for energy subsidies, but if it can find a way to cut back in some areas, the country would eventually be able to afford to build its own refineries and produce its own crude oil,” Bambang said.

He said he believed that if the government could limit subsidies on energy prices to just Rp 100 trillion and use half of the rest for building infrastructure, Indonesia would be able to have a new refinery with an adequate capacity.

Bambang, however, did not touch on the consequences of cutting energy subsidies. The government had proposed raising the price of low-octane gasoline from Rp 4,500 to Rp 6,000 in an effort to cut subsidy spending.

However, the proposal met with widespread protests across the nation, demanding that the government abandon the move. House of Representatives lawmakers eventually opted to reject the plan and set stringent conditions that would allow the government to increase the fuel price without having to secure approval from legislators.

Pri Agung Rakhmanto, executive director of the Reforminer Institute, said that the government should accelerate the building of new refineries, and if it opted to self-finance those projects, Pertamina should be appointed to conduct the construction.