Indonesia asks Kuwait to slash diesel supplies

SINGAPORE - Asia’s top diesel importer Indonesia has asked Kuwait to cut second-quarter term supplies by nearly 80 percent, as an economic downturn and increasing use of alternative fuel erode demand, industry sources said on Thursday.

State-run energy firm Pertamina sought to reduce term supplies from Kuwait Petroleum Corp (KPC) to 1.2 million barrels from 5.4 million barrels, even as the Middle East producer agreed to let Indonesia resell some committed volumes, they said.

“Such a request is under evaluation and study by KPC,� said a KPC official who declined to be named due to company policy.

Lower demand from major buyer Indonesia may force KPC to export its hefty diesel output to other Middle Eastern buyers at steeper discount levels, traders said, further weighing down a market struggling with rising refining capacity across Asia and lower demand from the transport, industrial and power sectors.

Sources said Pertamina had yet to unload 600,000 barrels of term diesel for February arrival from Kuwait at West Java’s Balongan port due to swelling stockplies.

“The vessel carrying the February supplies is still waiting at Balongan port, waiting to be discharged while March shipments are on the way,� said one source.

Pertamina was scheduled to receive 1.2 million barrels of diesel from Kuwait each month during February and March.

KPC has also allowed Pertamina to discharge 2.4 million barrels of term diesel supplies for February and March deliveries outside Indonesia, due to brimming tanks in the country.

“KPC has granted this option, however, such grant was never exercised,� one industry source said.

Pertamina will be able to sell the cargoes in the Singapore market, Asia’s oil trading hub. But another source based in Indonesia, said: “The cargoes are not sold yet.�

With Indonesia cutting down on imports, the profit margin of processing Middle East Dubai crude into gas oil (diesel) in Singapore, or crack spread, tumbled to the weakest level in more than five years at below $6.00 a barrel.

“Gas oil demand is very weak in Indonesia because of the general health of the economy. Yet Pertamina’s refineries are running quite high so supplies are still coming through,� said another source.

The central bank has lowered Indonesia’s 2009 growth forecast to 4 percent from 4-5 percent, prompting it to cut interest rate by half a percentage point on Wednesday, and said it has room for more reductions to support the economy by stoking consumer demand.

Alternative fuels

The country is increasingly turning to alternative fuels for power generation such as gas and coal.The price of pipeline gas is below $6.00/mmbtu, compared with $7.90/mmbtu for diesel.

The completion of the South Sumatra-West Java gas pipeline in the second half of last year, helps to transport supplies from gas-rich South Sumatra to the huge demand centre West Java.

This enables Indonesia’s monopoly power supplier PT Perusahaan Listrik Negara to secure more gas supply, said Ibnu Bramono, a consultant with FACTS Global Energy. “They can now reduce their diesel consumption in the power sector significantly,� he said.

“The combined-cycle gas power plants have better efficiency in generating electricity than diesel-fired ones, so in terms of gigawatt hour of electricity generated, using gas at the current price is much cheaper than using diesel even when diesel price is at US$46/barrel.

As global diesel demand wanes, Kuwait which had seen its Asian market share dwindle after its term deal with Vietnam was terminated some years ago, may be forced to export a steady 10.8 million tonnes this year to countries like Bangladesh, Pakistan and others in the Middle East at lower prices.

KPC has already sold some 500,000 barrels of prompt diesel -- originally bound for Indonesia -- to Saudi Arabia, at steep discounts, traders had said.