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Indonesia's Pertamina signs agreements on refinery upgrades

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Indonesia's Pertamina signs agreements on refinery upgrades


Indonesia's state-owned Pertamina Wednesday signed agreements with threetop oil refiners -- Saudi Aramco, Sinopec and JX Nippon Oil and Energy -- tohelp it upgrade and expand its existing refineries, a plan which if successfulcould make the country mostly self-reliant in oil products and deal a severeblow to Asia's export-oriented refineries.

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Indonesia is the region's largest importer of gasoil and gasoline. Ittypically imports 9-10 million barrels of gasoline and 2.5-3.5 million barrelsof gasoil every month. With an oil demand growth potential of 6% per yeargoing forward, the country has been seen as a big target market for the SouthKorean, Indian and Singapore refiners.

South Korea, for instance, has boosted oil product exports to Indonesiaby 11.7% to 26.74 million barrels in the first 10 months of 2014, according toofficial data.

"All the South Korean, Singapore, Taiwanese and even Thai refiners arefocused on sending their excess products to Indonesia. Of course, if Indonesiabuilds its own refineries and then stops a lot of its imports, it will hurtthese refiners...It will depress regional refining margins and it will bedepressing for other refineries in the region," Jeff Brown, president at FactsGlobal Energy, said recently.

The projects, which are estimated to cost $25 billion over 10 years, areexpected to raise the refineries' capacity from 1.04 million b/d to 1.68million b/d, and improve the environment through production of fuels that meetEuro-IV specifications for sulfur standards, Pertamina said in a statementWednesday.

Though Pertamina's refineries have a capacity of 1.04 million b/d, theyare very old and typically run at 820,000 b/d.


In particular following the upgrade, gasoline production will increasefrom 190,000 b/d to 630,000 b/d; diesel production will increase from 320,000b/d to 770,000 b/d and aviation fuel production will increase from 50,000 b/dto 120,000 b/d when the final phase of the project is expected to be completedin 2025, the company said.

Pertamina will work with Saudi Aramco to develop and evaluate theinvestment option for the 170,000 b/d Dumai refinery in central Sumatra, the348,000 b/d Cilacap refinery in central Java, and the integrated 125,000 b/dBalongan refinery and petrochemical complex in West Java.

Sinopec has been selected for the 133,700 b/d Plaju refinery in SouthSumatra and JX for the 260,000 b/d Balikpapan refinery in east Kalimantan,Pertamina's processing director Rahmat Hardadi said.

"We will speed up to complete Balongan, Cilacap and Balikpapan refineriesin four years," Hardadi said.

Pertamina and the strategic partners plan to form joint teams to evaluatethe feasibility of the projects, and the further development of the marketingand financing plans required to support the investment case.

The partners have targeted to launch front-end engineering and design forthe refinery projects by 2015-2016, subject to the necessary approvals,according to the statement. Final investment decisions on the projects will bemade in the first quarter of 2017, and engineering, procurement andconstruction contracts will be awarded over 2018-2021, the statement said.

Pertamina would actively start seeking crude supply to support the revampand upgrade plan, Hardadi said, adding that crude procurement is separate fromthe upgrade project.

The project is a step to ensure that Indonesia has sufficient refiningcapacity to meet growth in domestic fuel and petrochemical product demand. Theprojects' strategic partners will gain access to the fast growing Indonesianpetroleum and petrochemical market, Pertamina said.


FGE's Brown said that if one looked at the pure economics of refiningmargins, Indonesia does not need to expand or build refineries. But, this is apolitical decision and is driven from the point of view of energy security.

"I think they are going in the right direction in the sense that they aretalking about incremental expansion. The economics of that can be moreattractive than of building a grassroots refinery," he said.

Indonesia has been wanting to add another refinery since 1998. The lastmajor refinery in the country was the 125,000 b/d Balongan plant that wasbuilt in West Java in 1994.

The country has held several talks with Asian and Middle East nationaloil companies to invest in a new refining project in the vast archipelago butnone have materialized, mainly due to a lack of adequate fiscal incentives.

According to Richard Gorry, director at JBC Asia, Indonesian refineriesneed massive upgrades and it is one country where a new greenfield refinery isactually justified given the extent to which it relies on imports. But how farthis will materialize depends on how good the new government is at cleaning upcorruption and deregulating the market, he said.

"The biggest issue in Indonesia has been political risk. If that can beeliminated and investors don't have to worry that they will be working in aregulated environment and will be dealing with corruption, we could see thingsprogressing there," he said.

"If you put it in a historical context -- there have been many agreementssigned in the past. But anybody with a commercial interest has never reallymade serious investments there. But what has changed in Indonesia is that theyhave a new government there and a new regime and this creates opportunities,"Gorry said.

--Mriganka Jaipuriyar,

--Anita Nugraha,

--Edited by James Leech,

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