(EnergyAsia, December 26 2014, Friday) — Indonesia’s two-month-old government has enlisted international energy firms to help state-owned Pertamina expand and upgrade its refining and oil storage facilities to support the country’s long-term economic growth.
Early this month, Pertamina signed separate memoranda of understanding with Saudi Aramco, China’s Sinopec and Japan’s JX Nippon Oil & Energy worth a total of US$25 billion to upgrade and double the total capacity of five Indonesian refineries over the next four years. Saudi Aramco will focus on the refineries in Dumai on Sumatra Island, Cilacap in Central Java and Balongan in West Java, while Sinopec will help with upgrade of the Plaju refinery in South Sumatra and JX Nippon will work on the Balikpapan refinery in East Kalimantan.
Over the next six months, the three companies will study the feasibility of their respective projects before deciding whether to proceed, said Pertamina CEO Dwi Soetjipto. Their combined investments could more than double the refineries’ capacity to 1.68 million b/d from more than 800,000 b/d today, and help the government slash Indonesia’s costly oil product imports.
With the plant expansions and upgrades, Pertamina expects to boost domestic gasoline output from 190,000 b/d in 2012 to 630,000 b/d by 2025, and more than double diesel supply from 320,000 b/d to 770,000 b/d over the same period.
Law firm Latham & Watkins said it advised Pertamina on the signing of the memoranda for the upgrade and expansion of the refineries.
Elected as President in July, Joko Widodo, or Jokowi as he’s popularly known by, is targeting the country’s inefficient energy sector as key to reforming Indonesia’s underachieving economy.
One of Asia’s largest crude oil producers, Indonesia has seen its spending on imported fuels surge sharply over the past two decades as it lacks the refining capacity to meet its rising domestic consumption. Except for a brief period in the early 1990s, attempts by previous administrations to attract investors to build, expand and upgrade refineries in Indonesia have largely failed.
Shortly after taking office in October, Mr Jokowi fulfilled an election promise to eliminate the country’s costly fuel subsidies by immediately raising domestic gasoline and diesel prices by 31% and 36% respectively. According to the finance ministry, the reduced subsidies will enable the government to save 120 trillion rupiah in 2015 that it can spend on infrastructure development.
Jakarta’s refusal to raise domestic fuel prices, among the lowest in Asia, has long deterred oil companies from investing in costly refinery projects in Indonesia.
Mr Jokowi followed that up by sacking the Pertamina board and ordering a comprehensive audit of its trading subsidiary, Pertamina Energy Trading Limited (Petral), which has a major role in handling fuel imports into the country.
The moves are aimed also at weeding out corrupt practices that have long plagued Indonesia’s system of importing and distributing oil.
The Jokowi administration has also set a target to expand the country’s fuel storage capacity by 40% to 9.4 million barrels over the next five years.
With the near 50% collapse in global oil prices the past six months, Indonesia’s resource-dependent economy will need these reforms to be implemented as quickly and smoothly as possible to ward of a financial and economic crisis in coming years. Despite the efforts of previous governments to diversify the country’s economic base, Indonesia remains dependent on oil, gas and coal exports for much of its export earnings.
In the near term, however, there’s a small silver lining to the recent weakness in oil prices, according to Ken Koyama, chief economist and managing director at the Institute of Energy Economics, Japan (IEEJ).
“In FY2013, Indonesia logged a trade deficit of some 45 trillion rupiah, net oil and gas imports worth some 152 trillion rupiah and a budget deficit of about 45 trillion rupiah, indicating that oil price drops would make contributions to cutting them. After cutting oil subsidies recently, Indonesia could reduce costs further thanks to the oil price falls,” he wrote in an IEEJ report.