Growing opportunities in the refining sector-
In a bid to become self-sufficient in oil production and achieve energy security, the Indonesian government has opened up the downstream oil sector for greater participation by private companies. Moreover, the country has recently rejoined the Organization of the Petroleum Exporting Countries as its 13th member after a gap of seven years. This move is expected to provide a boost to the refining sector in the country and at the same time provide ample opportunities to interested companies.
In time for reforms
At present, the downstream sector and the retail market in Indonesia are dominated by the state oil and gas company PT Pertamina. The company is the operator of six refineries in the country, namely, Dumai, Cilacap, Balongan, Plaju, Balikpapan, and Kasim. In addition, Pertamina owns the majority of the filling stations nationwide and is responsible for the distribution of subsidised fuel through these. In contrast, private companies such as Shell and Total have a relatively small share of the market.
Although Indonesia has six refineries with a combined capacity to generate 1.04 million barrels per day (bpd) of oil, these do not operate at full capacity because they are old and actual production stands at 820,000 bpd. This has made Indonesia, Southeast Asia’s largest importer of gasoil and gasoline, importing about 9 million to 10 million barrels of gasoline and 2.5-3.5 million barrels of gasoil per month. Moreover, according to estimates, gasoline demand is projected to grow by 8 per cent and diesel demand by 5 per cent during the period 2015-25. Against this, the present refining capacity is grossly inadequate to meet the growing demand. In addition, the government’s plan to impose strict product quality specifications in the next five to ten years will further widen the demand-supply gap. Faced with these issues, the government has started to expedite measures to increase the domestic supply of crude and petroleum products.
Augmenting present and future capacities
As a result of this policy move, Pertamina has formed strategic partnerships with Saudi Aramco, Sinopec and JX Nippon Oil to augment the capacity of five refineries.
This move is a part of Pertamina’s two plans – the refining development master plan (RDMP) and grassroot refinery (GRR) plan. Under the RDMP, initiatives aimed at increasing the capacity of existing refineries will be undertaken. After the completion of this plan, the company expects capacity in the five refineries to equal the capacity of two new refineries. For execution purposes, the RDMP will be implemented in two phases – upgradation of the Balongan, Cilacap, and Balikpapan refineries will be done in Phase I and that of the Dumai and Plaju refineries in Phase II. On the other hand, the GRR plan aims to develop two new refineries in the country.
The partnerships of Pertamina with Saudi Aramco, Sinopec and JX Nippon Oil are part of the RDMP. According to the latest reports, the largest number of refineries has been allotted to Saudi Aramco, which had been actively advocating greater private participation in the downstream sector of Indonesia in the past year. Pertamina will work with Saudi Aramco to develop and evaluate the investment option for the 170,000 bpd Dumai refinery in central Sumatra, the 348,000 bpd Cilacap refinery in Central Java, and the integrated 125,000 bpd Balongan refinery and petrochemical complex in West Java.
On the other hand, Sinopec and JX Nippon have been selected for the Plaju and Balikpapan refineries respectively. The various projects under this partnership are expected to entail an investment of $25 billion over 10 years.
Upon successful execution, the projects are expected to raise the refineries’ capacity from 1.04 million bpd to 1.68 million bpd. Product-wise, gasoline production is estimated to increase from 190,000 bpd to 630,000 bpd, diesel production from 320,000 bpd to 770,000 bpd and aviation fuel production from 50,000 bpd to 120,000 bpd when the final phase of the project is completed in 2025. Further, the proposal involves augmenting the capacities of the refineries to process greater sour crude to meet Euro IV product quality specifications and produce basic petrochemicals and lubricant base oils. The upgraded refineries will also have sulphur handling capacity up to 2 per cent with a complexity level of 8-9 Nelson Complexity Index (NCI).
Pertamina and the three companies plan to form joint teams to evaluate the feasibility of the projects, and develop the marketing and financing plans to support the huge investment involved. Once the necessary approvals are received, the front-end engineering and design for the refinery projects is expected to start by 2015-16. Following this, the final investment decision on the projects is expected to be made by the first quarter of financial year 2017-18.
The company has been very prudent in devising its long-term plans. Being well informed about the age of the refineries and the ensuing constraints on their refining capacity, the plan to develop two new refineries is likely to fulfil the growing demand for fuel products in the long run. According to the GRR plan proposal, the new refineries are being built keeping in mind the demand from West and East Indonesia. The refineries are planned to be built in Bontang on a public-private partnership basis and in Tuban on a business-to-business basis. The new refineries will produce about 300,000 bpd of gasoil and will be equipped to handle sulphur content up to 2 per cent, with a complexity level of 10-12 NCI and crude quality of Euro IV-V.
The way forward
These attempts aside, to make the sector more market driven, the government abolished the fuel subsidy in January 2015. Under the new system, pump prices will reflect the internationally determined cost of crude oil and a subsidy of 1,000 rupiah per litre will be provided on diesel consumed by public transport operators and some communities such as fishermen.
This step is expected to bring huge respite to the government by reducing the fiscal burden and move investor sentiment in a positive direction. As a result of the reduction in the subsidy bill, government’s resources will be freed up for more productive investment. This, in turn, will help improve investor confidence.
Going forward, the recent move of the Indonesian government to allow greater private sector participation is likely to reduce the country’s dependence on imports. On the flip side, this will adversely affect refineries in South Korea, Singapore, Taiwan, and Thailand, which export their surplus product to Indonesia. In addition, from a purely economic viewpoint, the move is likely to reduce refining margins in the region but the possibility of achieving energy security has probably prompted the country to go ahead with the strategy. The incremental expansion is likely to do more good than harm.
The success of these projects, however, depends heavily on the policy environment and how far the government is able to deregulate the markets. Moreover, maintaining the economic viability of the projects depends upon the incentives provided by the government.
