Indonesia Kerosene to LPG Conversion Program

The Story Behind

Pre-Conference Workshop Clean Cooking FuelIstanbul, 16 - 17 June 2008

Wahyudin Akbar –VP Fuel Marketing West Java Areatimnas-konversi@pertamina.com

p. 2

Agenda

1. Kerosene to LPG Conversion Program

2. Jakarta Success Story

3. Improvements to be Made

p. 3

INDONESIA KEROSENE TO LPG CONVERSION PROGRAMTHE SHIFTING JOURNEY

Green area are targeted to finish on 2008, for about 20 million packages

On 2007, 4 million packages have delivered to Java Island

…. 2007 backwards

1,1

9,9

Kero LPG

• Kerosene is widely used by Indonesian Household (9.9 Million KL) and heavily subsidized by Govt. ( 4 billion USD/year).

• LPG only 10%, much expensive than subsidized kero at retail price.

2007 - 2009

2,75,8

Kero LPG

• Govt. Program: 42 Million LPG Conversion Packages will be distributed to eligible households.

• 4 Million KL of Kerosene will be withdrawn.

• Currently(June’08) 8 Million packages already distributed.

2010 onwards …

• LPG will be the main cooking

fuel with estimated total volume 3.5 Ton/year.

• 6 Million KL of Kerosene will be withdrawn.

3,5

3,9

Kero LPG

Orange and part of Yellow area will be converted on 2009 with 18 million packages will be deliver

p. 4

THE JOURNEY HAS NOT BEEN SO EASYWE ARE FACING DIFFERENT CONCERNS

2007 - 2009

2,75,8

Kero LPG

• 42 Million LPG Conversion Packages will be distributed to eligible households.

• 4 Million KL of Kerosene will be withdrawn.

• Currently(June’08) 8 Million packages already distributed.

…. Govt. concerns :

1. Reduce Subsidy by 33 % : IDR 20 trillion (~ 2.2 billion USD) annually after program completion

2. Reallocating Kerosene to better/more profitable use such as jet fuel

3. Cleaner energy

Household & Small Middle Enterprise (SME) concern…. 1. Comfortable usage2. Cheap energy3. Always available

Retailer’s concerns…. 1. Margin2. Less investment

Opposite Party

Student

Movement

Local media senior editors

Local business

community & trade

associations

p. 5

…. Govt. concerns :

1. Reduce Subsidy by 33 % : IDR 20 trillion (~ 2.2 billion USD) annually after program completion

2. Reallocating Kerosene to better/more profitable use such as jet fuel

3. Cleaner energy

1. Comfortable usage2. Cheap energy3. Always available

Retailer’s concerns…. 1. Margin2. Less investment

THE JOURNEY HAS NOT BEEN SO EASYTHE GAP POTENTIALLY MAKE THE PROGRAM GOES INTO FAILURE

The GapThe Gap

As single appointed public company to execute the program

Lack of resource & Infrastructure

capability

2nd largest contribution to

inflation

One of the biggest stake

Already feel comfortable

Many psychological barrier : Fear of

explosion, lack of experience, expensive

Less Margin and Financial Capability

Unstable condition during transition

period

Maintain the margin

Opposite Party

Student

Movement

Local media senior editors

Local business

community & trade

associations

Various interest to support or against

the Program

T

he Gap

The Gap

The Gap

The Gap

Various interest to keep kerosene

Household & Small Middle Enterprise (SME) concern….

p. 6

ACTION TAKEN TO MINIMIZE THE GAPTHE THREE MAIN VALUE CREATIONS

Distribution Process

2007 2008 2009

LPG Needed

64 1,144 2,706

Storage

10,000 MT (Eretan)

80,000 MT (Jabar & Jatim)

Pressurized:

30,000 MT

Refrigerated:

240,000 MT

(Jawa)

Filling

Station

- 29 121

Skid Tank

98 350 486

LPG Truck

355 1,491 2,034

Build our capabilities1 2

4 steps1. Survey : Determine area and

eligible household.2. Early Education: educate

people, agents and retailers.3. Distribution : Give one

packages for free including first initial gas

4. Kerosene withdrawal : withdraw kerosene gradually start 50 % allocation and will increase later.

Marketing Activities3

Free Initial Package 3 kg LPG

Govt. Leaders Endorsement

Socialization & Product Activation

Understanding stakeholdersEspecially end user through research and govt. through involvement.

Incentive and loan scheme for retailersIncrease margin, cylinder consignment, provide loan through CSR

p. 7

Agenda

1. Kerosene to LPG Conversion Program

2. Jakarta Success Story

3. Improvements to be Made

p. 8

JAKARTA AS LANDMARK OF INDONESIA

• Kerosene allocation for Jakarta was very high 3.200 KL/day (Top 5). Targeted 2.1 million HH and SME.

• On May 2007, the program started with many refusal actions. Demonstrations arose everywhere due to asymmetry information.

• While the distribution of the initial packages were running, the kerosene price hike up to 150 % as 2nd largest contribution to inflation during kerosene withdrawal period.

BEFORE CONVERSION POST CONVERSION

Distribution & Kerosene Withdrawal Process

Build our capabilities1

2

Marketing Activities3

• End of April 2008 Distribution is completed. 2nd week of May 2008 all the kerosene allocation in Jakarta have been withdrawn.

• LPG Refill up to 6% HH & SME/day at the 1st week of June 2008 and getting increase.

• For about 200 kerosene outlet are converted to LPG outlet.

• Pertamina sell non-subsidized Kerosene on 2 and 5 liters bottle at Pertamina Gas Station.

• The situation in Jakarta are very conducive, and the people are pleased to use LPG .

What we do

p. 9

RECENT SURVEY* SHOWS LPG ADMITTED SIGNIFICANTLY AS BETTER FUEL

Post Conversion survey Household Mobile SME Fixed SME

99%

1%

0%

much more economical

more economical

Not sure

100%

0%

0%

muchcleaner

cleaner

Not sure

99%

1%

0%

much more practical

more practical

Not sure

95%

5%

0%

much faster

faster

Not sure

0,0%

0,0%

100%

4,1%

0,0%

96%

2,0%

0,0%

98%

2,0%

0,0%

98%

4,1%

0,0%

96%

0,0%

0,0%

100%

2,0%

0,0%

98%

2,0%

0,0%

98%

Fast

Easy to use

Cleanliness

Economical

Fast

Easy to use

Cleanliness

Economical

0% 5%

95%

Yes No I Doubt

Agree / Support to the Program

We also gain more support to accomplish this program

* Survey is conducted in Jakarta, June 1-2, 2008 involving 200 respondents, 100 HH, 50 Mobile SME, 50 Fixed SME two weeks after all kerosene withdrawn in Jakarta

p. 10

Agenda

1. Kerosene to LPG Conversion Program

2. Jakarta Success Story

3. Improvements to be Made

p. 11

KEY LEARNING & RECOMMENDATIONS…

Institutional Environment

Issues in Market

Creation

Inflation stabilization

– Starting this program, Indonesia Govt. appoint directly capable public company/institutions who have capability to execute the program and avoid too much bureaucracy. They will perform as intermediary between Govt. and related target.

– Understand your stakeholder e.g. involve related govt. both central and local to support the program.

– If you are Regulator, support the executor with clear regulation.

– If you are an executor, build your own capability first to raise your confidence.– Create your landmark by choosing narrow area but give the most significant

impact for quick win.– Understanding your target. Overcome their obstacles such as give them initial

package for free to end user.– Communicate the program effectively using early education and an integrated

Marketing Communication.

– Withdraw current fuel (e.g. kerosene) gradually but faster to make the pain only in short period.

– Still provide current fuel available but unsubsidized.

Issues1

2

3

Financing scheme for

retailers– Make the cylinder as the warranty to be offset by their margin.– Financing could use CSR.

.

4

Details

p. 12

NEXT STEP…

Roll Out Plan

Educate traditional

kerosene stove

Understanding SME

– We will roll out this model of value creation in another area that has significant impact.

– We intermediate high tech stove producer to educate traditional kerosene stove and give them new machine (through CSR) to produce gas stove.

– We provide different stove for different kind of SME in upscale production

Initiative1

3

4

Understanding the lowest level

income household

– Build community kitchen, Yogyakarta as the pilot project– Build mobile filling station to serve lower volume purchasing e.g. 0.5 kg.

.

2

Details

Regular stove

High pressure

Bigger Stove

p. 13

Thank you…