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Analysis: After investor departure, Balikpapan refinery suffers cost overrun, delays
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Second from the left is Pertamina's Processing Director Budi Santoso Syarif., And Deputy for the Coordination of Energy Management for Natural Resources and the Environment, Coordinating Ministry for Economic Affairs, Monty Girianna at Balikpapan BBM Terminal, (21/01/2020). The government is targeting by mid 2023 Refinery Refinery Pertamina Balikpapan V Unit (RU) can operate with a new capacity reaching 360 thousand barrels of oil per day. The refinery, which currently has a capacity of processing 260 thousand barrels of oil per day, is being upgraded through the Phase I Refinery Development Master Plan (RDMP) project (JP//Novi Adri/Adi)
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he expansion of the Balikpapan oil refinery in East Kalimantan belonging to state-owned oil and gas holding company Pertamina has suffered a massive 30 percent cost overrun and a further delay to its completion. The Balikpapan refinery expansion is one of the few progressing refinery expansion and development projects mandated by President Joko “Jokowi” Widodo to reduce dependency on fuel imports, and yet it has suffered delays.
A consortium of Balikpapan Refinery Development Master Plan (RDMP) expansion contractors – SK Engineering & Construction Co, Hyundai Engineering Co Ltd, PT Rekayasa Industri, and PT Pembangunan Perumahan – proposed in October last year a contract amendment to adjust for the emerging supplementary costs, totalling US$1.2 billion, and thus making the total project cost soar from $3.8 billion to $5 billion. The contractors argued that the cost overrun could not be avoided, mostly as a result of the COVID pandemic.
In response, Pertamina hired consultant Foster Wheeler to scrutinize the consortium's proposal for supplementary funding. Foster Wheeler could only confirm an additional cost of $64 million. Before that, Pertamina had hired another consultant Worley Parsons Limited, but its recommendations were frequently unheeded as PT Pertamina Kilang Internasional and subsidiary PT Pertamina Kilang Balikpapan could not reach a consensus.
To this date, Pertamina has not decided on how to address the cost overrun proposal, leaving the Balikpapan refinery expansion project in limbo. As of now, construction progress on the first phase of the Balikpapan project has reached 76.7 percent. Any hold-up to resolve the cost overrun would further delay the project and inflate costs.
The Balikpapan expansion project is aimed at boosting its fuel-processing capacity from 260,000 barrels per day (bpd) to 360,000 bpd. The project is divided into two phases, with the first phase costing $3.8 billion initially to be completed in 2021. However, the COVID pandemic delayed the project to 2024 or even 2025, with cost overruns of $1.2 billion.
The cost overrun is not the only problem for Pertamina in the Balikpapan RDMP project. Pertamina has to shoulder all the cost of the project by itself after its partner Mubadala of the United Arab Emirates withdrew. To finance the Balikpapan RDMP, Pertamina recently raised a syndicated loan totalling $3.1 billion from four export credit agencies and 22 commercial banks, and now it has to face another cost overrun.
The massive cost overrun surprised not only Pertamina but also politicians at the House of Representatives. House energy commission deputy chairman Eddy Soeparno said he learned only recently about the cost overrun and the commission would investigate the real underlying causes. He noted that the Balikpapan refinery has an important role in reducing Indonesia’s fuel import dependency. Currently, Indonesia imports around 35 percent of the country’s fuel consumption of 1.3 million bpd.
