Biodiesel fuel B20 for energy security

Marwan Batubara
Indonesian Resources Studies (IRESS)

IO – The obligation of the petroleum fuel business entities to sell a mixture of 20% biodiesel fuel with 80% petroleum diesel fuel (B20), both for subsidized and non-subsidized petroleum diesel fuel users, has been enacted for more than a month. This requirement is valid from 1 September 2018, according to Presidential Regulation Number 66/2018 and Minister of Energy and Mineral Resources Regulation No.41/2018, which among others includes a prohibition on the sale of pure petroleum diesel fuel (B0), with sanctions and fines, along with cancellation of permits for violators, a Palm Coconut Plantation Fund Management Agency (Badan Pengelola Dana Plantation Kelapa Sawit – “BPDPKS”) incentives, a guarantee of Fatty Acid Methyl Ester (“FAME”) quality according to the Indonesian Government’s National Standards (Standar Nasional Indonesia – “SNI”), and the establishment of customer care for handling the public’s complaints.

As of the end of September 2018, the only 65% of the B20 program hit its target (431,681 kiloliters). This is unfortunate, as the Ministry of Energy and Mineral Resources relies on this program as a means to reduce oil and petroleum imports, which have triggered deficits in the petroleum and natural gas balance and the current account deficit (CAD), in turn arousing negative sentiment that weakens the Rupiah against the USD. The Government targets a reduction of 4 million kiloliters (kl) in petroleum diesel fuel imports for a savings of about USD 2.3 billion for 2018 through the B20 program.

With only 65% of the target achieved, the overall intent of saving foreign currency will not be achieved and the Rupiah exchange rate will continue to weaken – especially in view of external factors that affect exchange rates. In fact, even though the USD median exchange rate in August 2018 was still Rp 14,500.00, the average median exchange rate of the USD in the first week of October 2018 already hit Rp 15,182.00. In order to mitigate CAD and strengthen the Rupiah, the Government must be consistent in implementing the four primary policies that it has set: optimizing the B20 program, purchasing crude oil from contractors, optimizing domestic products and services, and requiring domestic letters of credit.

The B20 policy is the starting point for optimizing the use of vegetable oil for fuel (bahan bakar nabati – “BBN”). The final objective of the program is to achieve B100 (100% biodiesel fuel use) for national energy security purposes, according to Government Regulation No. 79/2014 concerning National Energy Policy (Kebijakan Energi Nasional – “KEN”). If national petroleum and natural gas production continues to decline, the development of new renewable energy (energi baru terbarukan – “EBT”), which is mainly supported by BBN (biodiesel fuel/CPO and bioethanol) will slow down even more. Do not be surprised if later Indonesia suffers from an energy crisis, which in turn might cause an economic crisis. Therefore, the B20 program, as well as the B”X” program, with higher biodiesel fuel content requirement, must be implemented consistently and sustainably, with improvements as follows:

  • Firstly, the B20 program should not be implemented simply for economic purposes and the interest of the CPO industry, but should be based on energy security needs. These three issues should be handled in an integrated and sustainable manner. Experience shows that in 2016 and in early 2018, when CPO prices dropped to their lowest point (about USD 414.00/ton), the Government aggressively promoted the B10, B20, and B30 programs. The purpose was to increase CPO demand, and CPO prices, with it. It is true that this method raised State income. However, when CPO prices recovered, the promotion of these B”X” programs was sidelined. There seems to be no comprehensive and sustainable efforts to increase the use of CPO as energy. This shows that the Government prioritizes the interest of the national palm coconut industry over that of national energy security.
  • Second, the implementation of the B20 program should be followed with B30, B40, etc. programs all the way to B100, within a well-planned, accelerated time frame according to a thorough, credible road map. The Government needs to set targets for fulfilling the B100 program, for example within the next 5-6 years. Therefore, the energy mix target would be achieved, decreased petroleum and natural gas production will be compensated for and substituted by BBN/EBT, and the CAD and weakening of the Rupiah exchange rate triggered by the huge amount of petroleum and natural gas imports can be mitigated.
  • Third, in line with the above Second Point, the Government must ensure the smooth continuation of the B20 to B100 programs, without letting the interests of the palm coconut sector affect them. Such obstacles may occur when CPO prices increase significantly, so that palm coconut producers prefer (with the Government’s blessing) to export CPO instead of selling it domestically, in order to support energy security. Therefore, the same as what applies to the petroleum and natural gas sector, the Government must be strict and implement specific domestic market obligation (DMO) volumes and prices for CPO, i.e. specifically for energy (biodiesel fuel/FAME).
  • Fourth, the Government must ensure the continuation of the incentive in order to cover the difference between the Market Price Index (Harga Indeks Pasar – “HIP”) for BBN biodiesel fuel, which is frequently higher than petroleum diesel fuel HIP, to prevent the biodiesel fuel (B20) price from rising. As per applicable regulations, the incentive to cover the HIP difference should be taken from export levies collected by BPDPKS at USD 50.00/ton). The Government must ensure that Pertamina, which is both a State-owned enterprise (Badan Usaha Milik Negara – “BUMN”) as well as the biggest B20 biodiesel fuel supplier (about 2.5 million kiloliters as of December 2018) need not bear the HIP difference. The Government must prevent the recurrence of the tens of trillions of Rupiah in losses suffered by Pertamina because it had been forced to implement the 2017 Public Service Obligation (PSO) petroleum diesel fuel and gasoline, which should have been funded by the State Budget. Due to a limitation of BPDPKS funds, the Government should also allocate subsidies for the B”X” program in the State Budget.
  • Fifth, in relation to the above Fourth Point, the BPDPKS funds used for biodiesel fuel HIP/petroleum diesel fuel HIP difference incentive must be balanced with funds used for the initial purpose of its collection by BPDPKS. As stated in Article 11 of Presidential Regulation No.66/2018, BPDPKS mainly collects funds for developing human resources, funding for research and development, promotion of plantations, revitalization of plantations, and construction of plantation structures and facilities. If the funds for the incentive B20 program far exceed viable amounts, palm coconut plantations will have delayed development, decreased production, and non-sustainable EBT development.
  • Sixth, the Government must stop deviant uses of subsidized petroleum diesel fuel/B20 PSO in mining, plantation, agriculture, industry, etc. – sectors that have been continuing, especially when the difference between subsidized and non-subsidized petroleum fuel prices increase. This deviation caused a continued increase in the subsidized petroleum fuel quota, and increased the subsidy burdens of both the State and BUMNs. Therefore, we need to correct monitoring from authority, which hitherto actually ensures the continuation of the violation. Legal sanctions must be increased and implemented consistently. If we can determine sanctions against violators of the B20 program, why can’t the Government set them for this kind of worse violation? Or is it deliberate neglect?
  • Seventh, the Government needs to implement special CPO prices for BBN biodiesel fuel (B20, B30, etc.) programs, as what applies to the setting of a maximum coal price at USD 70.00/ton for 6,332 calorie coal sold to the State’s Electric Company (Perusahaan Listrik Negara – “PLN”). The Government can set specific DMO volumes and maximum prices for the national biodiesel fuel program with due consideration of various related aspects, such as fair profit for palm coconut enterprises, business continuation, amount of tax, etc. The setting of a maximum price is relevant for protecting both the consumer and energy security from the volatility of global CPO prices. After all, Indonesia is the world’s largest CPO producer, so it would be more natural if we prioritize domestic interest. The Government must be present and perform its role of regulating, controlling, and monitoring palm coconut enterprises for both public and energy security interests.
  • Eighth, the Government must ensure that the biodiesel fuel supply from CPO producers to Pertamina is sustainable. Pertamina, as the bearer of the Constitution’s mandate that supports national energy security, must also be appointed as the sole aggregator and blender that mixes petroleum diesel fuel with FAME. After all, the failure of total achievement of the B20 target until the end of September 2018 was caused by the failure of BBN enterprises to supply FAME in the amount agreed with the Directorate General of New, Renewable, and Conserved Energy (Direktorat Jenderal Energi Baru, Terbarukan, dan Konservasi – “Ditjen EBTKE”).

Ditjen EBTKE target for B20 program in 2018 was about 2.7 kiloliters of FAME, with foreign currency savings of about USD 1 billion-USD 2.3 billion. In 2019, the B20 program target is about 6 million kiloliters, in order to be able to save about USD 3.5 billion in foreign currency. With only 65% of the target achieved in September 2018, due to unoptimized Government participation, the foreign currency savings target of about USD 2.3 billion until the end of 2018 would be difficult to achieve. The same thing will also occur in 2019 if the Government remains inconsistent and/or fails to perform its duties.

If the B20 program had been consistently implemented according to the plans made in 2008 (Ministry of Energy and Mineral Resources’ Regulation No.32/2008), the Rupiah exchange rate to USD would not have been as weak as it is now, and national economic conditions would have been better. Despite this failure, we hope that in the future, the Government will consistently implement the B20 policy and seriously implement more progressive programs towards B100. We should not be implementing these policies due to macro-economic factors or the interests of CPO enterprises, but more because of the most important and relevant energy security issues. Furthermore, because this issue is related to the livelihood of the many, the Government must be present as the highest autonomous ruler, and Pertamina must also have its place as the manager of the nation’s biodiesel fuel suppliers, as well as acting as the dominant biodiesel fuel supplier.