Indonesia's Pertamina Seeks Foreign Investments to Boost Domestic Refining Capacity

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Researched by Industrial Info Resources (Sugar Land, Texas)--In its bid to increase domestic refining capacity and reduce fuel imports, Indonesia is seeking investments from international firms. Recently, Kuwait Petroleum Corporation (KPC) (Safat, Kuwait) announced plans to invest $8 billion to $9 billion on a greenfield 300,000-barrel-per-day (BBL/d) refinery at Balongan in Java Island. Confirming the investment proposal, Industries Minister M.S. Hidayat said that state-controlled energy utility Perusahaan Tambang Minyak Negara (PT Pertamina) (Jakarta, Indonesia) is expected to sign a memorandum of understanding with KPC by the end of July.

As part of the agreement, a joint venture company will be established and KPC will supply fuel for the Balongan project at discounted rates. The refinery output will be used for domestic consumption. PT Pertamina will hold a majority stake in the joint venture company.

PT Pertamina's decision to build refineries in Indonesia through international joint ventures comes after the company's unsuccessful attempts to construct refineries on its own in West and East Java. Rising capital and construction costs posed difficult hurdles. PT Pertamina is also exploring the possibility of forming joint ventures to increase the capacities of the existing refineries at Balongan, Dumai and Balikpapan. In association with Saudi Aramco (Dhahran, Saudi Arabia), the company is also building refineries in Tuba and Banten in East Java. PT Pertamina has announced plans to issue bonds for $1.5 billion in September to finance its upstream activities.

In its efforts to attract foreign investments in the refining sector, PT Pertamina is also seeking tax incentives and other benefits from the government. According to Gita Wirjawan, the chairperson of Indonesia Investment Coordinating Board (BKPM) (Jakarta, Indonesia), the board is studying the tax benefits proposal submitted by PT Pertamina. BKPM is considering a 10- to 11-year tax rebate and corporate tax waiver for the Bolangan project. Wirjawan also pointed out that KPC was seeking a 14.7% internal rate of return, which could be very costly for PT Pertamina. BKPM will hold talks with the government before finalizing the incentive schemes. Commenting on the tax benefits sought by international companies, Karen Agustiawan, the president and director of PT Pertamina, said that investors are seeking incentives and tax holidays similar to those offered by neighboring Malaysia and Vietnam.

Presently, Indonesia operates nine refineries with a combined capacity of 1 million barrels per day. The cumulative refining output accounts for only 70% of the total national demand. The remainder is imported. Indonesia last built a refinery in 1995. State Enterprises Minister Mustafa Abubakar said that enormous investments in the country's refining sector would have to be supported by foreign investments and partnerships.

In a related development, Indonesia has decided to curb supply of subsidized fuel supplies in the country, as it is adversely impacting refining margins. Evita Legowo, the director general of Oil and Gas in the Energy Ministry termed this move as necessary since the cost of supplying subsidized fuel was exceeding budget. However, fuel supply for motorcycles and public transportation will continue to be subsidized. In 2010, subsidized diesel and gasoline consumption are forecast to increase to 13.1 million kiloliters and 23.2 million kiloliters, against a budget of 11.2 kiloliters and 21.4 million kiloliters, respectively. In July alone, PT Pertamina is likely to import 7 million barrels of gasoline and 5.5 million barrels of diesel.

According to the Indonesia Oil and Gas Report for the third quarter of 2010, published by Business Monitor International (London, England), in 2010-2014, Indonesia's gross domestic product is forecast to grow 5.3% annually. By 2014, oil consumption is likely to grow 2% to 2.5% annually.

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