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International Herald Tribune: Shell and Petronas stall in Indonesia

Apr 13th, 2006
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Shell and Petronas stall in Indonesia

By Peter Gelling International Herald Tribune
THURSDAY, APRIL 13, 2006

 

JAKARTA The more than 50 million cars, trucks, busses and motorbikes overwhelming Indonesia's urban streets have long held the interest of foreign gasoline companies.

 

So when the government deregulated the consumer market in 2001, companies like Royal Dutch Shell and Petroliam Nasional, Malaysia's state oil and gas company, quickly set plans in motion, and in the past few months opened Indonesia's first foreign-owned gas stations in Jakarta.

 

The stations opened with much fanfare, with talk of hundreds more in Indonesia. But the companies have not met their sales expectations and the government's decision to prohibit foreign operators from selling subsidized fuel, which accounts for more than 90 percent of the market, has stalled expansion.

 

Shell and Petronas, as the state company is called, knew they would be denied access to the subsidy sector when they applied for licenses, but were given indications by the government that the block would be lifted by 2005.

 

“It could mean we don't invest much more,” Bob Moran, chairman of Shell Indonesia, said of the inability to sell subsidized fuel.

 

For more than 30 years, the government has used state funds to defray fuel costs. Before President Susilo Bambang Yudhoyono cut fuel subsidies last year, they had accounted for more than a quarter of the national budget. But the policy is widely supported by Indonesians, who are accustomed to paying some of the lowest prices in the world.

 

The number of motor vehicles in Indonesia has increased by an average of 20 percent a year over the last five years. Indonesia's potential, said Moran, is on par with India and China. Indonesia, he said, is becoming an important market for his company, which also has outlets in Malaysia, India, China and Singapore.

 

“We have thus moved relatively quickly here to start up our retail fuels business, despite the risks still associated with the regulatory environment,” he said.

 

Shell has opened three stations in Jakarta and plans to open several more before the end of year. Petronas opened its first station in March and is aiming for as many as 20 outlets by in 2007.

 

Most Indonesians still rely on Pertamina, Indonesia's state-owned fuel company, the sole provider of subsidized fuel. Fuel is a major expense for the more than 110 million Indonesians living on less than $2 a day.

 

Analysts said it is unlikely that services like ATMs, convenience stores and fast-food restaurants, or even guarantees of quality, will attract these customers to Shell or Petronas, whose specially formulated fuels are more expensive.

 

The big, brightly lit foreign-owned stations draw motorists from all over Jakarta, some driving more than an hour. When the stations first opened, cars waited in long lines to sample the new brand. But company officials said current customers are a wealthy minority and if they want their businesses to grow, Indonesia must continue to open up the market.

 

“At the moment, we cannot gain access to 90 percent of the demand,” Moran said.

 

The government deregulated the industry to move toward a more open market and encourage foreign investment. Subagyo Nafrizal Sikumbang, director of Bph Migas, Indonesia's market regulator, said the government was still committed to a level playing field and that opening up subsidized fuel was “just a matter of time.”

 

But how much time is unclear. The government extended Pertamina's monopoly on subsidized fuel for another year.

 

Moran said Shell was committed to invest in Indonesia, but large- scale investment would depend on the establishment of a “properly functioning, market-based system” in Indonesia.

 

“The distribution of subsidized fuels,” he said, “is a critical issue that needs to be addressed by the government.”

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