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Jakarta Post
The Jakarta Post
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Govt to rebuff incentive proposal for oil refineries

  • Amahl S. Azwar

    The Jakarta Post

Jakarta | Mon, May 20, 2013 | 10:15 am

The government will likely reject fiscal incentives proposed by foreign investors to kick off the construction of new fuel processing plants despite the lack of capacity of existing domestic refineries to process crude oil.

The Finance Ministry'€™s fiscal agency chief Bambang Brodjonegoro said in Jakarta over the weekend that his office would recommend the government build its own refineries rather than providing unrealistically huge incentives for
foreign firms to do so.

'€œWe strongly deem the incentive package currently proposed is just too much,'€ he said on the sidelines of the 37th Indonesian Petroleum Association (IPA) convention, biggest annual oil and gas conference to date.

The executive was commenting on the incentives requested by Kuwait Petroleum and Saudi Aramco over refinery projects in collaboration with state-owned oil and gas company PT Pertamina.

As previously reported, Pertamina has chosen Kuwait Petroleum as its partner to build a refinery with a fuel production capacity of 300,000 barrels per day (bpd), which will be will be built in Balongan, West Java, near Pertamina'€™s existing refinery.

In 2011, the two firms signed a memorandum of understanding (MoU) to build the refinery. The crude oil would be provided by Kuwait Petroleum.

In addition, Pertamina has selected giant Saudi Aramco to construct another fuel processing plant with a production capacity of 300,000 bpd of fuel, which is projected to be located either in Tuban, East Java or in Bontang, East Kalimantan.

Both refineries, requiring a combined investment of around US$20 billion, are expected to boost refined fuel supplies in the country after the two begin operations in 2018.

However, in relation to the projects, both Kuwait Petroleum and Saudi Aramco have reportedly demanded a tax holiday for up to 30 years in addition to an incentive of a price premium 15 percent above the benchmark provided by Mean of Platts Singapore (MOPS) for the crude oil supplied to the refineries.

The Saudi and Kuwaiti companies also demand exemption of import duty.

At the same time, they oppose the appointment of other companies to supply crude to the refineries.

Oil and gas players generally reckon the sizeable investment to build refineries would not meet their desired internal
rate of return (IRR) of a minimum of 12 percent, with the current rate of return of investment in the refinery business being less than 10 percent.

Commenting on this, Bambang, the architect of the ministry'€™s fiscal policy, said that his agency would not give the incentives the foreign firms had been requesting and that '€œif they do not change their position then it will be difficult for us to approve the request.'€

He said their request for a 30-year tax holiday was unrealistically high as the existing tax breaks given by the government lasted only up to 10 years. '€œTherefore, we are pushing to build our own refinery,'€ he said. '€œIt is better for us to build one refinery instead of nothing.'€

Last year, President Susilo Bambang Yudhoyono said in a Cabinet meeting that Indonesia would need at least three additional refineries to ensure future energy security.

Indonesia has not built new refineries since 1994, when president Soeharto established Pertamina'€™s refinery in Balongan, West Java.

The firm'€™s other refineries are located in Balikpapan, East Kalimantan; Cilacap, Central Java; Dumai, Riau; Kasim, West Papua; and Plaju, South Sumatra.

The six refineries Pertamina operates in Indonesia are only capable of producing between 600,000 and 700,000 bpd of refined fuel '€” some 50 to 60 percent of daily consumption, according to a Jakarta-based energy think tank ReforMiner Institute.

Separately, Deputy Energy and Mineral Resources Minister Susilo Siswoutomo said that his office would hold discussions with the officials from the Finance Ministry and Pertamina to ensure that Indonesia would be able to build three refineries, each with a production capacity of 300,000 bpd in the next years.

In addition, he said, the government has plans to build a refinery financed with state budget in South Sumatra with the crude oil being supplied by Iraq.

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