Indonesia's Pertamina to Build $4 Billion Refinery in West Java

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Researched by Industrial Info Resources (Sugar Land, Texas)--Government-controlled PT Perusahaan Tambang Minyak Negara (Pertamina) (Jakarta, Indonesia) has announced plans to build a refinery with an estimated investment of $4 billion to $5 billion in the coastal city of Bojonegara in Banten province in West Java. The facility will have a processing capacity of about 300,000 barrels per day (BBL/d).

The refinery complex will be built as a joint venture, which will include PT Pertamina, Petrofield (M) Sdn Bhd (Kuala Lumpur, Malaysia) and National Iranian Oil Refining and Distribution Company (NIORDC) (Tehran, Iran). Petrofield holds a stake of 20%, while NIORDC and Pertamina hold stakes of 40% each. Recently, STX Corporation (SEO:011810) (Gyeongsangnam-Do, South Korea) announced that it also would be part of the group. Industry sources say that difficulties in securing funds for the project led to STX being included in the venture. STX has reportedly demanded a 40% share in the project and is pushing for the cost to be reduced to $3 billion. NIORDC will supply crude oil feed for the refinery from Iran. The facility, scheduled for completion by 2012, will process 50% heavy crude and 50% very heavy crude oil.

Although Indonesia has rich reserves of oil, it is one of Asia's leading energy importers because it lacks refineries. Indonesia is exploring options to indigenously produce, meet domestic energy demand and reduce imports. Pertamina, which operates seven refineries in the country, is also under pressure to boost its oil output. The company aims to increase its oil production from present levels of 156,000 BBL/d to 171,000 BBL/d this year.

Pertamina is also planning to set up at least three refineries in the next three to five years. The plan includes development of two new refineries and augmentation of an existing facility. The new projects will be a 200,000-BBL/d refinery at Tuban in East Java and another refinery at Bojonegara. Construction of the Tuban refinery is slated to begin after completion of the Bojonegara project. The capacity of the firm's 125,000-BBL/d Balongan refinery in West Java is expected to be enhanced. Pertamina's long-term strategy is to augment the production capacity from its then nine refineries to 700,000 BBL/d.

In a related development, Pertamina has received loans of $400 million from foreign banks and $300 million from domestic financial institutions and banks to fund its capital-expenditure projects. A consortium of international banks, including The Bank of Tokyo-Mitsubishi UFJ Limited (Tokyo, Japan), Citigroup Incorporated (NYSE:C) (New York, New York), and Sumitomo Mitsui Banking Corporation (Tokyo), has extended the $400 million loan with a maturity period of three years. Citigroup is the lead arranger for this loan. PT Bank Mandiri (JAK:BMRI) (Jakarta) is the lead arranger for the $300 million loan from domestic sources. PT Bank Mandiri sanctioned $125 million, while PT Bank Central Asia (JAK:BBCA) (Jakarta) and PT Bank Rakyat Indonesia (JAK:BBRI) (Jakarta) provided $50 million each to Pertamina. PT Bank Negara Indonesia (JAK:BBNI) (Jakarta) sanctioned $75 million.

Pertamina has envisaged an expenditure outlay of $2.2 billion for brownfield and greenfield projects for the fiscal year 2009. Of this, about 45% of the funds will be used for downstream activities, while the remainder will be for upstream activities, which will include development of the northwest Java block and the Cepu block oil projects. Pertamina owns a 45% stake in Cepu, while regional authorities and Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas) hold 10% and 45% stakes, respectively. The Cepu block has oil reserves of about 600 million barrels. When operational, it is expected to become the largest oil project in Indonesia. Pertamina invested around $1.7 billion on projects in the last fiscal year.

Industry experts say that although Indonesia signed agreements with China and Iran to build refineries as early as 2005, very little progress was made thereafter. One of the bottlenecks is the lack of encouragement from the government and incentives for foreign investors to build refining complexes in the country. One of the proposed perquisites is to allow new refineries to sell their products in the local market at international market rates. In October 2008, the government announced several incentives on oil investments, including income tax waivers, to make the sector more attractive and viable for foreign investors.

Sources indicate that while these incentives are not adequate, the move by the government is in the right direction. In a recent development, Kuwait Oil Company (Ahmadi, Kuwait), Petroliam Nasional Berhad (Petronas) (Kuala Lumpur, Malaysia), and Saudi Aramco (Dhahran, Saudi Arabia) have expressed interest in building refineries in Indonesia. This is good news for Indonesia, which meets at least 30% of its demand through imports. In 2007, Indonesia produced around 226.1 million barrels of oil domestically and imported around 137.6 million barrels. In 2008, local production marginally increased to 227.2 million barrels, while fuel imports rose to 142.1 million barrels.

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