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Analysis: Indonesia's auto fuel imports to face headwinds post elections

Singapore — Indonesia could see imports for road fuels such as gasoil and gasoline taper in the years ahead with the winner of Wednesday's general election likely injecting additional political impetus into the country's drive towards energy self-sufficiency.

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A topic fiercely debated between both presidential candidates -- incumbent President Joko Widodo, or Jokowi, and former military general Prabowo Subianto -- Indonesia's overall energy imports have been a major drag on the country's current account.

While market participants expect the decrease in energy imports to be gradual, campaign promises brought forth by both candidates firm the belief that the answer to the aforementioned topic lies in a growing preference and usage of biofuels across the country.

In September 2018, the Jokowi administration had already begun enforcing a 20% blended biodiesel, or B20, mandate, a ruling that saw the mandatory use of diesel containing 20% locally produced biofuel. Should Jokowi be re-elected for his second term, a move towards B100 -- with fuel made entirely from palm oil -- could even be a reality, as touted by the incumbent president.

On the opposition's end, Prabowo's campaign team has similarly favored the use of biodiesel, even proposing the cultivation of millions of hectares of land for palm sugar for energy production purposes.

"Indonesia has solid experience in funding and implementing the incremental mandates. B100 is a tall order, but there is infrastructure ready for this to happen. B30 is more likely to happen in the fourth-quarter of this year, hastening the implementation from 2020," owner and co-founder of Singapore-based Palm Oil Analytics Sathia Varqa said.

"B30 will likely add 9 million mt annually to biodiesel demand in the country," he added.

Since the B20 mandate was implemented in September 2018, domestic consumption of palm oil methyl ester, or PME, climbed to 1.517 million mt in February 2019, a sharp increase from 992,000 mt a year ago, according to data from the Indonesian Palm Oil Association or GAPKI.

REDUCED DEPENDENCE ON FUEL IMPORTS The growing appetite for biodiesel could spell trouble for regional gasoline and gasoil suppliers, who traditionally look towards Indonesia as a source of heavy demand in the region.

Indonesia is currently the largest buyer of gasoline in Asia, and gasoline as well as gasoil imports from the ex-OPEC member have been increasing year on year. Indonesia's gasoline imports grew 0.35 million mt year on year in 2018 and 1.2 million mt year on year in 2017, according to data from the government's Statistics Indonesia.

Similarly, gasoil imports were reported to have increased 0.19 million mt year on year in 2018 and 0.86 million mt in 2017.

"Indonesia's move towards biofuels is a very real one, which the market has to think about...with an administration seeking to reduce costs, and with gasoline prices being high, Indonesia could really push for more biofuels (instead of gasoline)," one Singapore-based market source said.

Several participants also drew comparison to when gasoil imports fell by almost 18% to 32.14 million barrels in 2014, from 39.03 million barrels in 2013, after the government mandated 10% biodiesel in the fuel.

"No doubt we're going to see less demand with the move [towards biodiesel]. There's going to be a lot more gasoil with expansions, new refineries ... not good news [for gasoil market]," a regional trader based in Singapore said.

Another industry source agreed, adding that although the gasoil market may not feel the immediate impact as it would take the country some time to live up to its biodiesel ambitions, it would be an event the market is "forced to deal with eventually".

UPCOMING REFINERY PROJECTS A number of upcoming refinery projects will also improve Indonesia's energy self-sufficiency and reduce overall imports in the long run.

Indonesia presently has plans for five major refinery projects, which will presumably come on line progressively from 2023 to 2026. These refineries are designed to produce fuel products adhering to Euro V standards.

Currently Indonesia has approximately 1 million b/d of crude processing Capacity, which is set to double to 2 million barrels per day by 2026, according to data from Indonesia's Committee for Acceleration of Priority Infrastructure Delivery, or KPPIP.

Overall, gasoline production capacity is set to increase by approximately 270,000 b/d by 2026, which is equivalent to around 1 million mt per month.

"In theory, if all these projects come into fruition, it essentially offsets most if not all of the gasoline import requirements for Indonesia. By 2026, nameplate gasoil production capacity will increase by 370,000 b/d, potentially creating surplus gasoil barrels for export," senior analyst at S&P Global Platts Analytics Anthony Tso said.

--Mark Tan, mark.tan@spglobal.com

--Su Yeen Cheong, suyeen.cheong@spglobal.com

--Donavan Lim, d.lim@spglobal.com

--Edited by Norazlina Juma'at, norazlina.jumaat@spglobal.com