Indonesia to ramp up refining capacity

Dec 02 2016

Without sufficient advances in domestic refineries, Indonesia could be on track to become one of the world’s largest product importers.

The upgrading of Indonesia’s refining industry has been one of the government’s top priorities for nearly two years.

The largest population in South Asia is heavily dependent on imported fuel to meet domestic demand. Estimates suggest that about half of Indonesia’s fuel consumption is processed by domestic refineries, a recent report from Gibson suggests.

Furthermore, data highlights oil demand could reach close to 2.3 mill barrels per day by 2025. The scale of upgrade required by the refining industry is further highlighted by the fact that total refinery capacity is roughly the same today as 15 years ago. The last new refinery was built in 1994.

State owned Pertamina has been tasked with finding partners for refining projects throughout the country. Numerous refineries have been earmarked as candidates for investment and upgrade; Cilacap (348,000 b/d), Balikapapan (260,000 b/d), Balongan (125,000 b/d) and Dumai (125,000 b/d).

In addition to these existing refineries, the government also aims to begin construction of the Bontang refinery in East Kalimantan (235,000 b/d) and Tuban refinery in East Java (300,000 b/d). 

Several countries and corporations have been approached over these projects and new government regulations have enabled private companies to build and operate domestic refineries. For example, the Bontang refinery was offered to Iran after it showed a willingness to invest $8.4 bill, however, with costs expected to be closer to $14-15 bill, a completion date has not been confirmed.

Russia’s Rosneft has agreed to develop the Tuban refinery through a $13.8 bill deal, the refinery should be operational by 2022. Furthermore, Saudi Aramco has committed to invest in the Cilacap refinery to the tune of $5.5 bill, aiming to modernise the plant, while increasing refining capacity to 370,000 barrels per day, with a completion date in 2022. In addition, Pertamina has signalled it would be prepared to solely revamp the Balikpapan refinery, after initial investors JX dropped out, boosting capacity to 360,000 barrels per day by 2019. 

Indonesia’s refineries offer an exciting prospect to foreign investors as shown by the scale of investment already committed, Gibson said. Despite a notorious record of failed planning projects, the likelihood of these materialising has increased, in part due to the incentives offered by the government.

Besides this, one of the most enticing propositions for investment is finding a secured destination for crude output. It would appear Saudi Arabia, Iran and Russia are making big plays to secure a foothold in the Indonesian domestic fuel market. This should prove beneficial to dirty tanker owners, as more crude will be moved into Indonesian refineries. However, the possible negative effects for product tanker owners in the future counter balance those gains.

Despite this, in the short-term product imports will grow ahead of capacity additions as any upgrades or new refineries will take time to build and become operational. Nevertheless, investment in Indonesia’s refining industry will be to meet domestic demand and will naturally impact on import demand in the future, Gibson concluded.


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