Jakarta is stepping up efforts to revise its formula for pricing crude oil after the recent sharp volatility in the value of Indonesia's key export crude grades, though it may take at least several months to implement any changes, market participants said Wednesday.
Indonesia may use a new reference for its ICP formula in the second half of 2016 in a bid to align the ICP price closer with the market price, a government official said.
"The final decision will be taken by the minister, but based on the assessment that we made, Indonesia may use the Dated Brent plus 'alpha' in the new ICP formula," said Maizar Rahman, a member of the government's ICP expert team and Indonesia's former OPEC governor. "The implementation date is also subject to the minister's approval," he added.
Regional traders said the sharp volatility in the value of Indonesia's benchmark Minas crude in the past two months could have prompted Indonesian authorities to consider taking immediate action.
"[The value of] Minas crude rose by close $10/b in a matter of weeks. That's not something you should see very often but sadly it does happen quite regularly in Indonesia," said a Singapore-based sweet crude trader.
In early June, Indonesian upstream regulator SKK Migas set the Indonesian Crude Price for Minas crude lifted in May at $49.46/b, up $12.21/b from April, raising a few eyebrows in the Asia Pacific market.
Regional traders said strong buying interest for Minas crude during the Platts Market on Close assessment process in Singapore during May likely boosted the price differential for Minas.
Trading firm Glencore bid aggressively for a 100,000-barrel cargo of Minas crude throughout May.
At end April, S&P Global Platts assessed Minas at a discount of $7.10/b to front-month ICE Brent futures, but following weeks of strong bids by Glencore, the value of the crude rose to a premium of $3.53/b to the front-month Brent futures contract on May 27, the highest since June 6, 2014, when it hit a premium of $4.60/b.
OPPOSITION LIKELY TO ANY IMMINENT CHANGE
Many industry participants said that no matter what the Indonesian government's final decision was, it could take at least two to six months to implement any changes to the pricing formula.
The government is still discussing various options for the new ICP formula, including maintaining the current system, oil and gas director general at the Energy and Mines Ministry IGN Wiratmaja Puja said on a website Wednesday.
Regional traders said major Indonesian field equity holders and most term lifters of Indonesian grades would likely oppose any revision of the current pricing mechanism in the near term. "I can't see any changes put into practice in the next two to six months at least because [Indonesian crude] cargoes for loading in June and July have already been traded... there are players currently exposed to ICP pricing," said a North Asian crude trader.
"They [equity holders and term lifters] may also have long-term hedged positions in the market, so it's not the decision to be made by the Indonesian government alone," the trader added.
Traders said the Indonesian government may also have to consult with various industry participants within and outside Asia as a number of suppliers and refiners have long been utilizing monthly ICPs as a main pricing reference for their crude and products sales.
"Some of the products bought and sold are linked to the ICP pricing formula... any abrupt change will cause a bit of chaos and confusion," said an oil products trader with a Pakistani refining company.
The current ICP formula uses a 50:50 ratio of spot market price assessments for all Indonesia crude grades published by Platts and RIM Intelligence. This has been in place since July 2007.
Indonesia settles its monthly ICPs retroactively, based on an average of Platts and RIM crude assessments published during the month.
