Indonesia's refinery buildup to hit Asia's oil product exporters: Fuel for Thought

Backed by top oil producers Saudi Arabia and Russia, Indonesia's refining sector development has finally picked up pace and this does not bode well for Asia's oil product exporters.

Indonesia is the region's largest gasoline and gasoil importer. The country has been notorious for planning a spate of refining projects over the last two decades with no result. Indonesia last built a new refinery in 1994.

But momentum has picked up since late 2015 when President Joko Widodo signed a decree declaring the upgrade and expansion of the refining industry a top national priority. The decree ensures refining projects enjoy benefits such as preferential tax rates and easy access to land.

The decree has given Indonesia's state-owned energy company Pertamina the ammunition it needs to go all out and get partners for refining projects.

Pertamina and Saudi Aramco in May this year awarded the engineering and project management services contract for the upgrade of the Cilacap refinery, Indonesia's largest.

The Cilacap upgrade will hike its total nameplate processing capacity to 370,000 b/d from 348,000 b/d by late 2022. The two companies are also in talks to upgrade and expand the 170,000 b/d Dumai refinery and 125,000 b/d Balongan refinery but details are still to be finalized.

Pertamina is, meanwhile, pursuing a revamp and expansion of the 260,000 b/d Balikpapan refinery and plans to boost its capacity by 100,000 b/d by late 2019.

The state-owned company has also joined hands with Russian state oil giant Rosneft to build a 300,000 b/d greenfield refinery in Tuban, East Java. This refinery is expected to be ready by end-2021.

For Saudi Arabia and Russia, the refinery deals with Indonesia give a boost to their market share at a time of intense competition. Aramco is expected to supply 260,000-270,000 b/d of crude to the refurbished Cilacap refinery and Rosneft will supply 45% of the crude to the Tuban refinery.

In addition to Tuban, Indonesia is planning another 300,000 b/d greenfield refinery in Bontang, and is seeking partners for this project.

Based on current data on refining projects, Indonesia's refining capacity will go up from 1.02 million b/d to 1.75 million b/d in the next 10 years, excluding possible expansions at Dumai and Balongan.

According to the Pertamina CEO Dwi Soetjipto, the company is targeting capacity of 2.3 million b/d by 2025, including domestic plants and stakes in overseas projects.

Though the country has a refining capacity of over 1 million b/d, the fact that these plants are several years old makes it impossible for PERTAMINA to operate them at full hilt, leaving a big gap between supply and demand.

The refineries operate at around 800,000 b/d, and Indonesia imports another 800,000 b/d of oil products to meet full demand.

Based on Pertamina's projection of 3%-4% annual growth in oil demand, the company expects the country to become self-sufficient in refined products once all the projects are onstream, and may even have surplus products available for export if oil-to-gas conversion proceeds in the transport sector.

So where does that leave exporters?

Exporters of gasoline have already lost some of their market after Indonesia brought online in October last year a residue fluid catalytic cracker at the Cilacap refinery and restarted a 98,000 b/d condensate splitter at the TPPI petrochemical complex.

And things are only likely to get tougher.

According to latest data from Statistics Indonesia, the country imported 7.04 million mt of gasoline over January-July 2016, down nearly 19% from 8.65 million mt in the same period last year.

Gasoil imports have fallen 8.4% year on year to 2.54 million mt. Gasoline and gasoil account for 70% of Indonesia's total oil product imports.

China exported 578,393 mt of gasoline to Indonesia in the first eight months of 2016, down nearly 29% year on year. South Korea exported 11.74 million barrels of oil products to Indonesia in the first eight months of 2016, down 47% from 22.06 million barrels in the same 2015 period.

Pertamina is certainly not worrying about excess refining capacity in the region. For Soetjipto, Indonesia's refining capacity target is a strategic move.

His logic is straightforward. Indonesia is a big demand center and by having its own refineries, Pertamina has control over products supply.

"When we import, that is controlled by others. We have no control over crude supply -- why not have as much control as possible over products supply?"