Oil and gas giant Pertamina will have to stand on its own feet in anticipating potential losses caused by a new government policy to set fuel prices in the country’s easternmost areas on par with those in Java.
The new policy will allow people in Papua and West Papua to buy Premium gasoline for Rp 6,450 (49 US cents) per liter, diesel for Rp 5,150 per liter and kerosene for Rp 2,500 per liter.
Fuel in the underdeveloped regions was sold for Rp 50,000 to Rp 100,000 per liter before the government launched the one-price policy earlier this week.
Coordinating Maritime Affairs Minister Luhut Pandjaitan said on Friday that the government would not provide additional subsidies to Pertamina to cover fuel transportation and distribution costs to the two provinces.
The statement came despite public knowledge that the huge price gap will burden Pertamina with an additional annual spending of Rp 800 billion. Most of the costs will come from air transportation by its distributors located in eight regencies in Papua and West Papua.
“We will not subsidize it and Pertamina will have to figure it out themselves. It will not affect our state budget,” Luhut told reporters on Friday.
Rp 94.4 trillion was allocated in the revised 2016 state budget for fuel and LPG subsidies. The government has proposed allocating Rp 92.2 trillion in next year’s draft state budget.
Experts and analysts have voiced criticism of the new policy, as they consider the program unsustainable in the long run because it will increase local demand and dependence on fossil fuels, and put a greater burden on Pertamina.
Furthermore, the policy has been dubbed unusual as the government has long planned to reduce sales of subsidized fuels to save money.
However, Pertamina insists that the new policy will not greatly affect its finances. Pertamina finance director Arief Budiman said the company’s finances would remain stable as it could cross-subsidize from the company’s other businesses to cover any potential losses.
Even so, the company may still feel the weight of the program. Last year, Pertamina’s revenue dropped significantly by 40.3 percent to $41.76 billion from $70 billion in 2014.
It attributed the plunge to falling oil prices. Last year the prices of both West Texas Intermediate (WTI) and Brent Crude sank to their lowest levels of around $30 per barrel.
Although Luhut claimed that the government was not planning to give additional fuel subsidies, he said the government expected to evaluate the one-price policy every year.
Meanwhile, state-owned electricity company PLN was hopeful that the slashed fuel prices would bring lower transportation costs as well. Most power plants in the region are fuelled by diesel and although PLN has bought fuel at prices akin to those in Java, transportation and distribution costs remain high.
“The new price cut will not affect us so much, but we do hope that this means transportation and distribution services will cost much less as the depot where we pick up our diesel tends to be far from our power plants,” said PLN corporate communications head I Made Suprateka.