Wednesday, April 16, 2014

Govt Urged to Reduce Energy Subsidy to Keep Its Budget Deficit Target

Jakarta. The Indonesian government must cut its energy subsidy this year if it wants to keep the budget deficit at less than 3 percent of the country’s gross domestic product, some economists said.

“Whether it’s by the administration of President Susilo Bambang Yudhoyono or the next government, the president must approve the plan to cut the fuel subsidy,” Fauzi Ichsan, the chief economist at Standard Chartered, said in Jakarta on Wednesday. “[Cutting the fuel subsidy] has now become a matter of abiding by the law,” he added, alluding to a regulation that mandates the budget shortfall must not exceed 3 percent of GDP.

The country’s budget deficit will definitely be at risk of surpassing the mandated rule of being 3 percent below GDP if the government lags in cutting the energy subsidy, according to Fauzi.

Indonesia set aside more than Rp 310 trillion ($27 billion) for subsidizing energy costs — both in electricity and fuel — to its citizens last year, above its original budget of Rp 299.8 trillion. Government has allocated Rp 282 trillion in energy subsidies this year. In the first two months this year government has spent Rp 19.6 trillion, or 6.9 percent, of the subsidy budget. 

Still, cars and motorcycle sales growth remain strong — growing 18 percent and 9.2 percent, respectively, on an annual basis in March — indicating rising demand for fuel consumption this year.

“The price of fuel in Indonesia is even cheaper than its less rich neighbors like Vietnam — and it’s even mostly used by the medium and upper class,” said Fauzi.

In June the nation raised the price of subsidized fuel by an average 33 percent to trim the subsidy.

Cutting the subsidy further, Fauzi said, will in turn provide room the country to set aside more funds to finance other purposes including more spending on the country’s infrastructure.

Indonesia’s poor infrastructure — from pot-holed roads to airports at overcapacity — has been named as one of the biggest stumbling blocks for prospective foreign investors. Infrastructure spending in Indonesia is expected to reach Rp 469.7 trillion this year, according to the Public Works Ministry.

“What’s certain is [a subsidy cut] will lower gas and oil imports, as well as the current account deficit. The pressure against the rupiah will also loosen and the government will give it ammunition to develop new projects,” he said.
The country’s current account balance fell $28.4 billion short at the end of last year, or 3.7 percent of GDP. The rupiah has gained 6.2 percent so far this year, after last year’s 26 percent decline.

Johanna Chua, head of head of Asia economic and market analysis at Citigroup, agreed with Fauzi’s assessment. 

“Fuel subsidy reform is inevitable,” she said in a statement on Wednesday.

Johanna said that the next president must choose a vice president who is capable to push for hard economic policies through legislators, and he also must select credible key economic ministers.

Jakarta Globe

Tuesday, April 15, 2014

Asian Airlines Are Hedging Big Part of Fuel Use

Singapore. Top Asian airlines are hedging a substantial portion of their jet fuel usage this year, a Reuters survey showed, signaling they expect prices of the fuel to be firm and indicating sustained pressure on their profit margins.

Jet fuel makes up at least 30 percent of most airlines’ overall operating costs and an effective hedging strategy is crucial as heightened competition forces carriers to cut fares and operate on thin margins.

While there should be sufficient supply of jet fuel in Asia this year to meet buoyant demand driven by healthy passenger traffic, airlines are unlikely to benefit from lower prices.

Jet fuel prices are market based — unlike diesel, kerosene and some other fuels which are subsidized in nations such as China, India and parts of Southeast Asia — and users pay rates that are closely linked to crude oil prices.

Geopolitical tensions are adding to the uncertain operating environment. Industry body International Air Transport Association (IATA) said last month that airlines globally expect to make $1 billion less profit this year than previously hoped, as the Ukraine crisis pushes up oil prices.

And research firm S&P Capital IQ said in a report last quarter that earnings of flag carriers, especially top-tier airlines, will be pressured by intense competition from low-cost carriers and relatively firm jet fuel prices, even as the Asian airline industry’s overall profits for 2014 rise.

Japan Airlines (JAL), Asia’s second-biggest airline by market value, is hedging about 40 percent of its fuel consumption in the 2014 financial year, similar to volumes seen in the previous year, a spokesman of the airline said.

“Hedging helps us to reduce the risk of volatile and potentially rising fuel costs in the long term. This hedging will be operated monthly,” the spokesman said in an e-mail.

ANA Holdings’ hedge ratio for its 2014 financial year is 45 percent, similar to the 2013 and 2012 financial years, said a spokesman for Japan’s largest carrier.

Korean Air Lines generally keeps its hedging volumes around 30 percent of its annual fuel consumption and this year is no exception, a spokesman said.
The spokesmen of JAL, ANA and Korean Air declined to divulge price details of their hedges.

Cathay, SIA

Consulting firm Energy Aspects estimates Asia’s overall availability of jet fuel at nearly 2.491 million barrels per day in the fourth quarter of 2014 versus demand of 2.412 million bpd. The last quarter of a year is typically the busiest for airlines due to holiday travel.

Brent crude has averaged $108 a barrel so far this year against 2013’s average of $109. And jet fuel has averaged $121.20 a barrel this year compared to $126.62 last year and $125.95 the year before.

Airlines may hedge a big portion of the fuel purchases during the times they believe oil prices will be firm but they’ll refrain from boosting hedging volumes substantially. A plunge in prices, though, will draw them out as they will seek to protect against future rises in prices.

Cathay Pacific Airways, which consumed 39.5 million barrels of fuel in 2013, did just that in April 2013 when it took advantage of a brief drop in fuel prices to extend fuel hedging into 2016, the Hong Kong airline disclosed with its earnings in March this year.

“We are currently about 25 percent covered for 2014 and the first half of 2015 at Brent prices of more than $94 to $95 a barrel, and about 11 percent for the second half of 2015 and the first half of 2016,” its spokesman said.

“Our hedging coverage changes over time and depends on different levels of Brent oil prices,” he said, adding that the airline’s hedging coverage ranges from 10 to 60 percent for the next 12 months.

Singapore Airlines, Asia’s biggest airline by market value, which hedges between 20 and 60 percent of its fuel requirements, went for the cap of 60 percent for the second half of its financial year that ended in March at $118 a barrel of jet fuel prices, a spokesman said.

The airline will provide guidance on its hedging strategy for the 2014 financial year when it releases annual results on May 8, the spokesman added.

Australia’s Qantas Airways, Garuda Indonesia, Malaysian Airline and Thai Airways did not comment on their hedging positions when contacted.

Chinese carriers, among the biggest in Asia by revenue, haven’t hedged their fuel buys for the past several years after suffering losses on their hedges from extreme oil price volatility in 2008, said Kelvin Lau, analyst at Daiwa Capital Markets.

China Eastern Airlines confirmed it is not undertaking fuel hedging currently. China Southern Airlines could not be reached for comment.


Govt to Pay More for Geothermal Power

Jakarta. The Energy and Mineral Resources Ministry plans to offer higher prices for electricity produced by geothermal power plants, in a move to attract more investors and make geothermal projects more bankable.

According to a regulation issued by the ministry in 2012, state utility firm, Perusahaan Listrik Negara must sign long-term contracts to pay independent geothermal power producers between 10 cents and 18.5 cents per kilowatt hour — a pro-renewable energy policy mechanism known as Feed-In Tariff.

Ridha Mulyana, the director general for new and renewable energy at the ministry, said that the government will reintroduce auctions for geothermal energy station opportunities.
Under the auction scheme, the government can pick out winners for such projects depending on the merits of proposals submitted to the government.

He also said that the ministry is finalizing the new regulation on geothermal energy pricing policy, expected to be out this month, but that the government had already calculated the new price range for geothermal energy.

“The electricity price from geothermal energy will range between 11.5 cents and 29 cents per KwH,” he said on Monday in Jakarta. The director general said that the new pricing policy was based on a recommendation from the World Bank.

“The World Bank recommended the price of geothermal energy should range between 12 cents to 30 cents per KwH.”
Ridha added that the new price range will be effective until 2025.

The government will permit contractors who recently won the right to build geothermal projects based on the old pricing scheme to “return” the projects to the government and participate in re-auctioning. Contractors who have already begun work can continue with their project and renegotiate for better price with PLN, Ridha added.

Indonesia is home to around 40 percent of the world’s geothermal potential, amounting to an estimated 27,000 megawatts — but as of 2013, geothermal energy only accounted for 2.89 percent of total installed capacity.

The government has set an ambitious target in which renewable energy must account for 23 percent of Indonesia’s energy mix, with geothermal alone expected to contribute 12 percent.

PLN estimates that Indonesia will need investment worth at least $77.3 billion to add another 13,000 megawatts of renewable energy to the country’s supply by 2021.

Geothermal projects have been slowed by forestry law which means geothermal power plants are banned in conservation areas.

The government is currently moving to revoke the ban in order to enable more renewable energy development.

Jakarta Globe

Fragile Europe Weakens U.S. Push for Russia Sanctions

The U.S. readiness to impose new economic sanctions on Russia over Ukraine is offset by the European Union’s reluctance to introduce stronger measures that could threaten its already fragile economic recovery.
While the Obama administration said yesterday that it’s prepared to ramp up sanctions, possibly to target specific sectors of the Russian economy such as financial services and energy, the EU limited its decision to expanding an existing list of individuals under asset freezes and travel bans.
U.S. officials concede that squeezing Russia’s economy is the only realistic weapon the U.S. and its European allies have to respond to the clashes between pro-Russian separatists and Ukrainian authorities. Without European support, though, U.S. sanctions will have little effect on Russian President Vladimir Putin’s ambitions in Ukraine, said Simon Mandel, vice president for emerging Europe equity sales at Auerbach Grayson & Co.
"The level of trade between the U.S. and Russia directly is quite limited,” Mandel said in a phone interview. “Whatever sanctions the U.S. comes out with, unless the Chinese government or the EU are willing to support them, they will still have a minimal impact on the Russian government.”
“It will have a meaningful impact in terms of the perception, and that will, I think, come as a detriment to the market generally,” said Mandel, who’s based in New York. “But in some of the fundamental impact, I think that would be quite limited.”

EU Meeting

EU foreign ministers agreed yesterday in Luxembourg to add new names to a list of people facing sanctions following Putin’s annexation of Crimea last month.
A wider EU blacklist may hit “other entities” deemed to be involved in destabilizing Ukraine in addition to individuals, Irish Deputy Prime Minister Eamon Gilmore said. EU leaders may meet next week to decide on new sanctions against Russia, according to French Foreign Minister Laurent Fabius.
The U.S. is weighing further measures under executive orders signed by U.S. President Barack Obama to “allow for all kinds of different sanctions,” White House Press Secretary Jay Carney told reporters in Washington yesterday before a call between the American and Russian presidents.

Energy, Mining

The administration is considering measures targeting individuals, as well as “certain sectors of the Russian economy such as financial services, energy, metals and mining, engineering and defense,” U.S. State Department spokeswoman Jen Psaki said yesterday.
Any meaningful sanctions by the U.S. “over the long-term would be lining up the European allies at a very fragile time for some very significant economic risk of their own,” said Sean Kay, a professor of international relations at Ohio Wesleyan University who specializes in Europe.
“They have signaled strongly that they don’t want to have to go down a further road of sanctions, but if Russia were to take overt actions in eastern Ukraine, they’d be prepared to do that,” Kay said in a phone interview.
Russia is vulnerable to economic pressure, data compiled by Bloomberg indicate. More than half the revenue of the 50 firms that make up the benchmark Micex stock index comes from outside Russia -- almost 56 percent, compared with slightly less than half five years ago.

Lukoil’s Revenue

Energy giant OAO Lukoil, the No. 4 company on the Micex top 50 list, gets more than 81 percent of its revenue from foreign sources. The Moscow-based company produces more than 16 percent of Russia’s oil, almost 17 percent of its oil refining and paid the Russian government $39.3 billion in taxes in 2012.
Even so, investors have deposited $721 million in Russia-focused exchange-traded funds since early March, according to data compiled by Bloomberg.
Still, doubts now may be taking root amid the continuing unrest and the threat of additional sanctions: The ruble declined to a three-week low yesterday, the Micex retreated 1.3 percent and Brent crude oil advanced to a five-week high.
The EU already has blacklisted 51 Russian and Ukrainian political and military figures. Its challenge now is how to inflict stiffer punishments without harming Europe’s economy, such as by provoking Russia to cut off gas and oil deliveries.
U.K. Prime Minister David Cameron discussed Ukraine yesterday with German ChancellorAngela Merkel, and the two agreed that the EU foreign ministers should discuss “how work on potential further sanctions can be accelerated,” Cameron’s spokesman, Jean-Christophe Gray, told reporters in London.

EU Divided

While the German government has been coordinating the next phase of sanctions behind the scenes, there’s growing dissent among EU governments about the nature of additional sanctions and when they should be imposed, said a high-ranking German official who asked not to be named, citing government policy.
Lithuanian Foreign Minister Linas Linkevicius urged striking at Russia’s banking and financial system, tactics the U.S. and EU have used to isolate Iran over its suspected nuclear weapons program. In the Ukraine crisis, the U.S. already has sanctioned St. Petersburg-based Bank Rossiya, owned by close associates of Putin.
Linkevicius voiced frustration with the consensus-based decision-making that forces the 28-nation EU to move at the pace of its slowest member. “We shouldn’t focus too much on washing dishes when the house is on fire,” he said.
Countries farther from the EU’s eastern borders are in less of a hurry than those such as Lithuania and Poland that were under Soviet domination for five decades. Greek Finance Minister Evangelos Venizelos called for diplomacy, and Luxembourg Foreign Minister Jean Asselbornsaid Russia has sanctioned itself, citing the ruble’s drop and jitters among foreign investors.
“The serious risk for Russia in that is that the oligarchs will feel pain, its economy would feel pain and crucially they would lose the vital gas sales they need to sustain their economy and financing of their debt,” said Kay, the Ohio Wesleyan professor.

Camouflaged Gunmen

“There are a lot of incentives to see this de-escalate, but the danger is that there could be an inadvertent escalation of danger or crisis that causes miscalculations,” Kay said.
“The best thing that can be done right now is some significant diplomatic engagements that would try to find off-ramps, that would both reassure Ukraine about its sovereignty and also find innovative ways or creative ways to make sure that the Russians in eastern Ukraine are also satisfied with the existing state of affairs,” Kay said.
EU foreign-policy chief Catherine Ashton said after the meeting in Luxembourg yesterday that she’ll attend an April 17 meeting in Geneva with diplomats from Ukraine, Russia and the U.S to seek a diplomatic solution to the crisis.
Ashton said the point of the Geneva meeting -- shadowed by speculation that Russian Foreign Minister Sergei Lavrov may not appear -- is “to begin the conversation about how do we de-escalate the situation.”

Monday, April 14, 2014

Oil Output at Indonesia’s Pertamina Rises 4% in First 3 Months

Jakarta. Pertamina, the state energy company, announced on Monday that average oil production increased 4 percent in the first three months of this year, compared with the same period last year.

Muhamad Husen, Pertamina’s upstream director, said average oil production reached 196,000 barrels per day in the first three months. The company produced around 189,000 bpd a year ago. Meanwhile output of natural gas in the first four months was 1,568 million metric standard cubic feet per day, a slight increase from last year’s 1,518 mmscfd.

Husen said that Pertamina experienced disruptions in several of its main fields. “Bad weather affected production in PHE West Madura Offshore, Pertamina-Petrochina East Java and Pertamina EP Cepu,” Husen said.
Pertamina EP was the largest contributor of hydrocarbon production among Pertamina’s subsidiaries, followed by Pertamina Hulu Energi and Pertamina EP Cepu.

Separately, Pertamina Hulu Energi’s coporate secretary Wahidin Nurluzia said the subsidiary produced 68,000 bpd of oil and 502 mmscfd of natural gas during the period. “Output of oil and natural gas climbed 19.3 percent and 7.5 percent [respectively] compared to last year,” he said.

Pertamina has more than 600 upstream projects in its work program this year — with $3.75 billion of allocated funding, higher than last year’s $3.02 billion, and around 48 percent of the company’s $7.8 billion capital expenditure program this year.

Pertamina has set a production target of 280,200 bpd of oil, including 59,500 bpd from its recently acquired blocks, and 1,568 mmscfd of natural gas this year. The company reported an 11 percent rise in net income to $3.07 billion last year compared with a year earlier, it said in late February.

Revenue rose slightly to $71.1 billion from $70.9 billion, a year earlier. Profit at Pertamina is forecast to hit $6.67 billion on revenues of $79 billion this year.

Pertamina is in expansion mode. Last year, it acquired participating interests abroad, including a $1.75 billion deal for assets in Algeria. The company’s president commissioner Sugiharto said the company would focus on mergers and acquisition as its growth strategy for at least the next five years. Pertamina also plans expansion of its downstream oil and gas business.

Jakarta Globe

Total Cuts Angolan Oil Project Costs by a Fifth to $16 Billion

Total SA (FP), Europe’s third-largest oil company, cut the cost of its Kaombo project off Angola by about a fifth to $16 billion as it decided to proceed with the development.
The company and partners including Exxon Mobil Corp. (XOM) and Galp Energia SGPC SA made a final investment decision to build the project due to start pumping oil in 2017, Total said today in a statement. It will be able to produce 230,000 barrels of oil equivalent a day.
“While continuing our commitment to develop the Angolan oil industry, Total has significantly optimized the project’s design and contracting strategy in recent months,” Yves-Louis Darricarrere, head of production, said in the statement. “Kaombo illustrates both the group’s capital discipline and objective to reduce” capital expenditure.
The development of Kaombo and Total’s plan to start pumping from Angola’s CLOV fields may help the country overtake Nigeria as Africa’s largest crude producer. International oil companies have been reducing investment plans to cuts costs, expand free cash flow and win investor confidence with bigger payouts.
Kaombo proves oil companies “are able to cut capital expenditure by delaying projects and redesigning development plans,” Oswald Clint, a Sanford C. Bernstein & Co. analyst in London, said in a report. “We have seen a sharp increase in the number of projects being canceled or deferred equating to a reduction of $170 billion total capital expenditure” since the start of last year.
The Total-led venture plans to develop 650 million barrels off reserves located in Block 32 about 260 kilometers (162 miles) off Luanda. Angola’s state-owned Sonangol EP and China Petrochemical Group are also partners.
All “projects in Total’s production targets are now under construction,” Bertrand Hodee, an analyst at Raymond James in Paris, said in a report. “Kaombo was the only project not yet under construction built into Total’s target” of 3 million barrels of oil equivalent a day capacity by 2017.

Speculators Boost Bullish Oil Wagers on OPEC Output Drop

A drop in OPEC production came just as refineries began looking for supply, helping boost bullish speculative bets on crude last week by the most since July.
The group, which pumps about 40 percent of the world’s oil, reduced output to the lowest for March since 2011 as a standoff between the Libyan government and rebels kept exports near the lowest level since Muammar Qaddafi was driven from office.
Output from the Organization of Petroleum Exporting Countries fell for the fifth time in seven months, according to a Bloomberg News survey. The International Energy Agency, which advises oil-consuming countries, said April 11 that OPEC will have to pump more crude after a “steep drop” last month. Refiners in the U.S. and Europe are looking for oil after retooling to make gasoline, as motorists prepare to take to the highways with warmer weather.
“The barrels that weren’t produced in March won’t be on hand when refiners are increasing gasoline output in the months ahead,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Supplies will get tighter as refiners come out of maintenance.”
Speculative bets on rising prices for West Texas Intermediate, the U.S. benchmark, are the highest for this time of year since 2006, U.S. Commodity Futures Trading Commission data show. Futures advanced 2.8 percent to $102.56 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. WTI gained 8 cents to $103.82 a barrel at 11:06 a.m.


OPEC production fell by 890,000 barrels a day to 29.6 million in March, the Paris-based IEA said in its monthly oil market report. The group will need to pump 30.6 million barrels a day in the second half to meet demand, the agency estimated.
Global consumption is projected to rise 1.4 percent this year to an average 92.7 million barrels a day, led by gains in Asia, according to the IEA. Chinese consumption is forecast to climb 3.4 percent to 10.5 million barrels a day.
Libyan output fell by 100,000 barrels to 250,000, the 10th drop in 12 months, the Bloomberg survey showed. The North African country pumped 1.59 million in January 2011 before the uprising that led to the ouster and death of Muammar Qaddafi. Iraqi production fell 50,000 barrels a day to 3.35 million, according to data compiled by Bloomberg, as pipeline attacks halted exports from northern fields. Production surged to 3.4 million barrels a day in February, the highest level since 2000.

Libyan Shipments

Libya was set to raise oil shipments this week as a tanker was booked to load crude from one of four ports seized last year by rebels. State-run National Oil Corp. lifted force majeure on the Hariga terminal on April 10, according to a statement on its website. Vienna-based oil company OMV AG provisionally booked a tanker to load as much as a million barrels from the port next week, according to two traders with knowledge of the matter.
Saudi Arabian production slipped 285,000 barrels a day to 9.57 million in March, the IEA said. The desert kingdom will probably pump more crude this month as refineries end maintenance programs and domestic demand increases, the agency said. Saudi output gained 100,000 barrels a day to 9.75 million last month, Bloomberg said in a separate survey of companies, producers and analysts.
Hedge funds and other money managers boosted net-long positions in WTI by 30,135, or 10 percent, to 331,056 futures and options in the week ended April 8, the CFTC reported. Long positions rose 4.8 percent, while shorts fell 37 percent, the most since March 2011.

Rising Positions

“Long positions climbed to the fifth-highest level on record,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “They reached a record March 4, slipped back and are now run it back up toward the high. There’s nothing to stop more players to come in.”
Money managers’ bullish wagers on U.S. ultra low sulfur diesel decreased 29 percent to 15,065. The fuel rose 4.66 cents, or 1.6 percent, to $2.9344 a gallon in the report week and gained 2.64 cents to $2.9596 today.
Net-long wagers on four U.S. natural gas contracts climbed 1.5 percent to 418,218. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract.
Natural gas futures rose 6 percent to $4.534 per million British thermal units on Nymex during the report week. They fell 7 cents to $4.55 today.
“We’re vulnerable,” Evans said. “Much of the drop in OPEC production was incidental, with us following the situation in Libya in real time. The Saudis are trying to manage supply at a weak demand period and not manipulate prices."