December 10, 2014
Indonesia is seeking money from Saudi Arabia to Japan for a $25 billion upgrade of aging refineries as President Joko Widodo’s effort to cut subsidies prompts the state-owned oil company to boost output.
PT Pertamina is in talks with Tokyo-based JX Nippon Oil & Energy Corp. to refurbish its Balikpapan refinery and may turn the plant into a joint venture, according to a statement yesterday. Saudi Arabian Oil Co., the country’s largest crude supplier, may revamp three other domestic plants and China Petroleum & Chemical Corp. also signed a memorandum of understanding.
The move is part of a broader strategy by Widodo, known as Jokowi, to overhaul the country’s energy industry and reduce costly imports that have led to a current-account deficit weighing on the rupiah. The refinery effort comes even as regional profit margins are forecast to remain weak at $6 a barrel through 2015 as processing capacity exceeds demand, according to Moody’s Corp.
“We need to have new refineries and additional storage to strengthen national energy security,” said Rudy Radjab, president director of PT Kreasindo Resources Indonesia, a private refining investor. “Fuel demand is growing by 5 to 10 percent a year and if we leave it that way, we will succumb to import dependence.”
Indonesia’s fuel deficit is forecast to rise 5.3 percent from this year to 640,000 barrels a day in 2015, according to August data from the Ministry of Energy and Mineral Resources. Asia will add more than 1.8 million barrels a day of refining capacity next year exceeding demand growth of about 700,000 barrels a day, Moody’s analysts Philipp L. Lotter and Vikas Halan wrote in an e-mailed presentation Nov. 27.
Fuel Subsidy
Indonesia hasn’t had a successful refinery venture in decades, with the last project built in the mid-1990s. Since then, companies including China Petroleum & Chemical, Mitsui & Co., Kuwait Petroleum Corp. and Saudi Aramco have discussed projects that haven’t materialized.
Pertamina has said it would need to build an additional five to eight refineries to meet domestic demand forecast by 2025. Jokowi dismissed Pertamina’s board and appointed a new chief executive and directors as part of an effort to bring reform and transparency to the industry.
The potential refinery expansions and upgrades with overseas partners announced yesterday represent investment of about $25 billion over the next ten years, Pertamina said yesterday.
Double Capacity
The upgrades boost plant efficiency and will double crude distillation capacity to 1.68 million barrels a day from 820,000 barrels a day, according to the Pertamina statement. Gasoline output will more than triple to 630,000 barrels a day.
Most new refineries operate with profit margins around 10 percent and the government must offer stronger incentives including land to build new plants, Iriawan Yulianto, a senior vice president at Pertamina, said Dec. 3. Tax incentives can determine whether a project succeeds or fails, according to PT Kreasindo Resources’ Radjab.
Profits from processing crude at a complex refinery in Singapore, a benchmark for Asian margins, are forecast to average $4.95 a barrel in the next three years compared to $4.33 a barrel in 2014, said Ehsan Ul-Haq, a senior market consultant at KBC Energy Economics in Walton-on-Thames, England.
Energy Security
Most oil majors and private companies are selling refineries as it doesn’t make economic sense to build new facilities, according to Singapore-based Facts Global Energy President Jeff Brown. Governments may be politically motivated to build refining capacity to ensure security of refined products, he said.
The Indonesian government is offering to provide land in Bontang, East Kalimantan, and incentives such as a 15-year tax holiday for the construction of an oil refinery, Coordinating Minister for the Economy Sofyan Djalil said Dec. 3.
Indonesia raised the price of subsidized gasoline to 8,500 rupiah ($0.70) a liter from 6,500 rupiah Nov. 18, and diesel was boosted to 7,500 rupiah a liter from 5,500 rupiah. Widodo acted on an election pledge to reduce state energy subsidies less than a month after taking office, seeking to free up funds for development plans.
(An earlier version of this story corrected the name of the company Saudi Arabian Oil Co.)
original source: http://www.businessweek.com/news/2014-12-10/indonesia-looks-overseas-in-25-billion-refinery-overhaul