Business competition is not something new in the development of oil and gas sector, this sector even has close relationship with competition, particularly by the issuance of competition law. It is started by the establishment of Standar Oil Company in 1870 by John D. Rockefeller who incorporated oil and gas shareholders in the form of “trust” and became the largest company through large economy scale. This type of monopoly has triggered the formation of other trusts which also committed monopoly acts. Those trusts formed constitute a medium which eliminates competition among business players. This situation encouraged the issuance of anti-trust law in the form of Sherman Antitrust Act (1890) as a competition law which prohibits any form of anti-competitive practices.

In its development, after going through some prosecutions, the Standard Oil Trust was then divided and created a lot of new companies run their business in separate industrial segments (unbundling). This development also influences various structural changes in oil and gas sector in some countries, including Indonesia.

Oil and gas competition policy in Indonesia

Competition policy in Indonesia is marked by the ratification of Law No. 22 year 2001 concerning Oil and Natural gas which supersedes Law No. 8 year 1971, where the role of private sector in this industry started to develop, and Pertamina no longer became the only business player in this sector. This change was not only triggered by various efficiency reasons, but it also constitutes an effort to maximize oil and gas management which contributes to the prosperity of the whole people, as maximum as possible.

In the upstream side, the direction of competition policy has opened bigger opportunities for business players. It is due to the high-technology nature of the upstream industry as well as requiring high level of capital. Moreover, by the decrease of national oil and gas production, new investments in the downstream side of oil and gas sector are increasingly needed.  Similarly in the downstream side, it is expected that the opening of downstream market will be able to provide various options and quality improvement that, in turn, will make the upstream side more efficient.

However, this paradigm change was not immediately accepted, it was evidenced by the effort to revise Law No. 22/2001, as it was considered as too liberal and did not align with the state’s interest. This opinion difference was resolved by the issuance of Constitutional Court Decree on Law of Oil and Gas by revoking articles which became necessary basis to apply business competition mechanism.

The revocation has indirectly deflected the direction of competition policy in oil and gas sector, where at one hand the government decided to open a market, while, at the same time, the government took over the price control function which eliminated the competition in this sector. In the other hand, although the government reserves the right to determine policy direction that protects the citizen, however business uncertainty has to be secured in order to provide opportunity for potential business players who want to participate in this sector.

Impact of oil and gas competition policy
The deflection of policy direction on oil and gas competition influences downstream and upstream business climates in this sector. In the upstream business, the amendment of oil and gas policy contained in the Law No. 22 year 2001 is considered as lack of added value either for national oil and gas industry or state revenue.  Law of Oil and Gas No. 22/2001 is still considered as failed to create more attractive upstream business climate due to more bureaucratic investment process, tax imposition before production process is performed, as well as contradiction with Production Sharing Contract principle.

In the downstream side, the change of policy direction has increased the number of downstream business player, thus increased various available options, created competitive price as well as better customer service. As the illustration, in July 2006, the distribution of unsubsidized fuel oil experience competition between Pertamina, Shell and Petronas relating to their competitive prices.

In addition to price factor, the competition also occurred in the form of service quality provided by Petronas and Shell, such as car cleaning service, mini market as well as comfortable and transparent Gas Station, where this concept was then followed by Pertamina as their effort in competition.

This circumstance is almost unseen nowadays in Subsidized Fuel Oil due to significant price difference between Subsidized Fuel Oil and Unsubsidized Fuel Oil as a result of world oil price increase, besides the fact that Unsubsidized Fuel Oil is deemed uninteresting considering that subsidized fuel oil dominates 70% fuel oil market in Indonesia.

Another interesting thing is also obvious in LPG sub-sector, where almost no new business player enter the market. As commonly known, LPG is produced by oil refinery or gas refinery, whose main components are propane gas (C3H8) and liquefied butane (C4H10). In its processing industry, there are two large groups for LPG processing market, namely LPG processing output by oil and gas refinery PSC (Production Sharing Contractor) (to be distributed for export) and domestic market which is fully managed by PT. Pertamina (either those imported, self produced, or those derive from PSC). Consequently, competition does not exist with regard to processed LPG supply to the market. In addition, the subsidy issue provided for PT. Pertamina in processing 12 kg LPG also makes new business player reluctant to enter the market.

Particularly for LPG, the policy taken by the government is considered as inefficient for long term application. It is due to the fact that since the LPG policy is introduced, the segmentation of LPG market is intended for middle-high consumers considering that LPG resources are getting limited. However, the issuance of energy conversion policy from kerosene to LPG automatically arise energy dependency on import side. Therefore, it is not surprising that the trend of LPG import tends to increase these days.

Pricing Issue by Business Player

According to the aforementioned Constitution Court decree, there is an opinion which states that the pricing of Fuel Oil and the price decrease shall be stipulated by the Government. However, the fact indicates that the Government only stipulates the pricing of Fuel Oil which is categorized as subsidized Fuel Oil intended for non-industrial consumers such as Premium, Diesel Oil and Kerosene. Meanwhile, for non-subsidized Fuel Oil (such as aviation turbine fuel, industrial diesel oil and high octane Fuel Oil), the pricing is determined by market mechanism. While for LPG products, the pricing is determined by Pertamina.

In this case, it is obvious that there is an inconsistency relating to regulation of oil and natural gas pricing. Referring to Law No. 22 Year 2001, fuel oil is expressly defined as fuel derives from and/or processed from Petroleum. Meanwhile, natural gas is defined as natural process output in the form of hydrocarbon in atmospheric temperature and pressure conditions in gas phase obtained from Oil and Natural Gas extraction. Based on the above definitions and in line with the Constitutional Court Decree which assigns the pricing authority to the Government, all fuel oil and natural gas pricing shall be determined by the Government.

Conclusion

The change of policy direction toward competition in oil and gas industry has encouraged business players to be more efficient and improved either in operating or marketing aspect. Basically, competition is not something to be worried of, as it encourages business players to be improved in order to enhance the performance of oil and gas industry.

The KPPU itself supports every measures arranged by the government within this industry, although the factual condition indicates that the existing policy has not fully encouraged the competition that may impacts business climate in oil and gas sector. Therefore, the KPPU encourages the government to arrange more tangible measures relating to the stages to develop oil and gas industry by taking business competition into account as one of instruments in ensuring business opportunity for every business player and creating market efficiency in general. Harmonization between the involved entities in the oil and gas industry policy is still deemed necessary in order to issue better policy and in turn will enhance people’s welfare.