WORKING PAPER 2020-23 © 2020 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION OCTOBER 2020 The retail fuels market in Indonesia Authors: Yihao Xie and Marietta Harjono Keywords: Fuel quality, fuel prices, subsidies, vehicle emission standards Introduction Indonesia is the largest motor vehicle market in Southeast Asia and has a complex retail fuels market. Fuel pricing policies change somewhat often and there have not been the same advancements with fuel quality standards in recent years as there have been in other developing countries. This is the second in a series of working papers exploring how fuel and vehicle policies are interacting in Indonesia. Here we describe existing fuel pricing and subsidy mechanisms, and summarize the latest developments regarding fuel quality standards. Dirty fuels are a barrier to cleaner vehicles and they increase outdoor air pollution and greenhouse gas emissions. They harm public health and the climate. Today, fuels sold in Indonesia can have high levels of sulfur and other additives because fuel quality standards remain generally lax. Outdated fuel quality standards also hinder the advancement of vehicle emission standards, which must progress more or less in parallel with fuel standards for advanced emission control technologies to function properly. As reforms to fuel quality standards and to current pricing mechanisms would help shape the market in the direction of cleaner fuels, they are important for protecting public health and the environment in Indonesia. Market landscape Pertamina, the state-owned oil company, is the dominant player across the oil supply chain in Indonesia. Besides its upstream activities in oil production, refining, and imports, Pertamina is also the biggest retail supplier of gasoline and diesel fuels. It was a monopoly in the retail market until 2004, when the Indonesian government liberalized the downstream oil and gas retail market.1 Since then, other distributors in Indonesia have met with varying degrees of success. Malaysia’s national oil company, Petronas, arrived in 2005 and planned to build more than 450 gas stations across www.theicct.org the country.2 Additionally, in 2009, retailers other than Pertamina were permitted to sell subsidized fuels. For example, Petronas was given permission to sell subsidized [email protected] research octane number (RON) 88 gasoline, and a private Indonesian company, PT twitter @theicct AKR Corporindo Tbk (AKR), was allowed to sell subsidized diesel in a few regions.3 1 Regulation No. 36/2004 on Oil and Gas Downstream Business, the Republic of Indonesia, October 14, 2004, https://www.pwc.com/id/en/energy-utilities-mining/assets/gr36-2004.pdf 2 Bloomberg, “Petronas to open first station in Indonesia,” The Star, December 22, 2005, https://www.thestar. com.my/business/business-news/2005/12/22/petronas-to-open-first-station-in-indonesia/. 3 Reuters, “Indonesia picks Petronas to end fuel supply monopoly,” The Star, December 29, 2009, https://www. thestar.com.my/business/business-news/2009/12/29/indonesia-picks-petronas-to-end-fuel-supply-monopoly. Petronas failed to gain a foothold and eventually ceased Indonesian operations in 2013.4 AKR is still a distributor in the market. Today, Pertamina’s supply network includes more than 5,500 retail fuel stations across the country.5 Other vendors operate a much smaller number of stations (Table 1). Table 1. Non-Pertamina fuel retailers in Indonesia Number of gas Vendor name stations as of 2019 Market entry year Notes ExxonMobil 5a Unknown — Shell 111b 2005 — Total 18c 2009 — An Indonesian logistics and supply chain company that trades AKR 130d 2010 in petroleum and chemicals and is partnering with BP on a joint venture (see below). Vivo 6 2017 A subsidiary of the Dutch-Swiss oil trading company Vitol. Partner with PT AKR on a joint venture that operates under BP 15e 2017 the name BP AKR Fuels Retail. Plans to expand to around 350 retail locations in Indonesia in the next decade.f a Directorate General of Oil and Gas, Ministry of Energy and Mineral Resources of Indonesia, “Daftar penyalur BBM badan usaha non Pertamina,” February 2019, https://migas.esdm.go.id/uploads/uploads/daftar-penyalur-2019/penyalur-bbm-non-pertamina-februari-2019.pdf b “Ekspansi SPBU Shell: Shell jalin kerja sama dengan KADIN Jawa Barat,” Shell Indonesia, March 6, 2020, https://www.shell.co.id/in_id/ruang-media/ news-and-media-releases/tahun-2020/shell-spbu-expansion-shell-cooperates-with-west-java-chamber-of-commerce-and-industry.html. c “Lokasi SPBU,” TOTAL Indonesia, accessed May 22, 2020, https://www.id.total.com/id/spbu/lokasi-spbu. d “Home – PT AKR Corporindo Tbk,” AKR Corporindo Retail, accessed April 1, 2020, https://retail.akr.co.id/. e “BP – AKR Retail | PT AKR Corporindo Tbk,” PT AKR Corporindo Tbk, accessed May 7, 2020, https://www.akr.co.id/akr-retail-petroleum f Ridwan, “Perluas ekspansi, AKR-BP buka SPBU BP di kawasan industri Jababeka,” industry.co.id, December 21, 2018, https://www.industry.co.id/ read/46678/perluas-ekspansi-akr-bp-buka-spbu-bp-di-kawasan-industri-jababeka. Motor fuel quality grades and specifications The Government of Indonesia’s fuel specifications establish four grades of gasoline and two grades of diesel (Table 2). Table 2. Retail fuel grades and specifications in Indonesia as of August 2020 Gasoline Diesel Minimum research 88 90 91 95+ Minimum cetane number (CN) 48 51 octane number (RON) Sulfur Sulfur (maximum parts per 500 50 2,500 500 (maximum ppm) million, ppm) Benzene Not Polycyclic aromatic hydrocarbons, 5 Not regulated (maximum % volume) regulated PAHs (maximum % volume) Aromatics Not Total contamination (mg/kg) Not regulated 50 40 (maximum % volume) regulated Biodiesel content (%) 30 30 The government has, at times, regressed fuel quality standards. In 1999, the Directorate General of Oil and Gas of the Ministry of Energy and Mineral Resources (MEMR) required that by 2003, Indonesia’s gasoline and diesel fuel meet the specifications for Euro 2/ II emission standards, which call for unleaded gasoline and a limit of 500 ppm sulfur content in both gasoline and diesel. However, this target was not achieved and in 2006, the Directorate General of Oil and Gas at MEMR relaxed the maximum sulfur content for CN 48 diesel to 3,500 ppm. In 2013, regulation SK 933/2013 removed leaded gasoline 4 Pingit Aria, Rosalina, and Fery Firmansyah, “Pertamina buys 9 Petronas fuel stations,” Tempo.co, April 4, 2013, https://en.tempo.co/read/471245/pertamina-buys-9-petronas-fuel-stations. 5 Energia Weekly, Pertamina Digital Media, January 28, 2019, https://www.pertamina.com/Media/File/Energia- 04-28-Jan-2019.pdf 2 ICCT WORKING PAPER 2020-23 | THE RETAIL FUELS MARKET IN INDONESIA from the list of approved fuel specifications and retained the 500 ppm Euro 2/II-level sulfur limit, but delayed implementation of even the 3,500 ppm sulfur limit for CN 48 diesel to 2015. More recently, though, there has been some progress toward improving fuel quality standards. Regulation SK 978/2013 introduced progressively stricter fuel sulfur limit targets for CN 48: 3,000 ppm by 2016, 2,500 ppm by 2017, 500 ppm by 2021, and 50 ppm by 2025. However, the current popularity of the dirtiest fuels raises questions about how well this timeline is harmonized with proposed vehicle emission standards. Four-wheeled vehicles, both light and heavy duty, and fueled by diesel and gasoline, have been subject to Euro 2/II emission standards since 2005. In 2017, the Ministry of Environment and Forestry (MoEF) adopted Euro 4/IV vehicle emission standards and they have applied to new gasoline vehicles since September 2018. But MoEF recently delayed the implementation for Euro 4/IV diesel emission standards by one year, to April 2022, citing the impact of COVID-19.6 Euro 4/IV standards require 50 ppm sulfur fuels, and those will not be mandated for all fuel specifications until three years later, in 2025, according to the government’s timeline. Although Pertamina’s domestic refinery upgrades in its Refinery Development Master Plan (RDMP) and Grass Root Refinery (GRR) projects will deliver higher quality fuel suitable for Euro 4/IV standards, they are still far from completion.7 If there is not a sufficient supply of 50 ppm sulfur fuels, investments in Euro 4/IV engines will not be effective and vehicle manufacturers and owners will face technical challenges. Thus, if Pertamina seeks to increase the supply of 50 ppm fuels in the near term, it might need to rely on imports. Consumption of gasoline and diesel at the pump While Indonesia’s Directorate General of Oil and Gas sets four grades of gasoline and two grades of diesel in its fuel standards, as was outlined in Table 2, the MEMR Handbook of Energy and Economic Statistics reports consumption statistics for gasoline in two RON value categories that are not in alignment with the standards; additionally, one of the two grades of diesel is not in alignment.8 This means that fuel retailers sell products that fall outside of government specifications. A few examples of distributors and their product labels are provided in Table 3.9 6 Wawan Priyanto, “Penerapan Standar Emisi Euro 4 Mesin Diesel Ditunda hingga 2022,” Tempo.co, June 27, 2020, https://otomotif.tempo.co/read/1358384/penerapan-standar-emisi-euro-4-mesin-diesel-ditunda- hingga-2022. 7 Norman Harsono, “Pertamina’s clean fuel goals remain far as deadline looms,” The Jakarta Post, July 11, 2020, https://www.thejakartapost.com/paper/2020/07/10/pertaminas-clean-fuel-goals- remain-far-as-deadline-looms.html. 8 Ministry of Energy and Mineral Resources of Indonesia, “Handbook of Energy & Economic Statistics of Indonesia 2018 (Final Edition),” (January 2019), https://www.esdm.go.id/assets/media/content/content- handbook-of-energy-and-economic-statistics-of-indonesia-2018-final-edition.pdf.