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Pertamina projects stall amid policy flip-flops, refinery blaze

Even though Pertamina has made assurances that the incident would not disrupt fuel supply and distribution, we cannot help but be concerned about the damage incurred on the downstream oil industry.

Vincent Lingga (The Jakarta Post)
Jakarta
Wed, March 31, 2021

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Pertamina projects stall amid policy flip-flops, refinery blaze

T

his is really bad news for energy, an extremely vital component of the economy. While Pertamina’s four refinery upgrade projects and two greenfield refinery projects launched in 2014 have been delayed by several years or even canceled, an inferno fire gutted the state-owned oil and gas giant’s newest refinery at Balongan, West Java, early Monday morning.

Even though Pertamina has made assurances that the incident would not disrupt fuel supply and distribution, we cannot help but be concerned about the damage incurred on the downstream oil industry.

Already Southeast Asia’s largest net importer of crude oil, gasoline and gasoil at an annual volume of almost 1 million barrels per day (bpd), Indonesia may have to import more refined fuel until the Balongan refinery resumes production at its 125,000 bpd full capacity.

Pertamina’s six old refineries, which have a combined capacity of 1 million bpd, are able to produce only 850,000 bpd of refined fuel, barely half of national demand. Importing more fuel means stronger pressures on the balance of payments and larger drain on the foreign exchange reserves.

The Balongan refinery, which came on stream in 1994, was the last plant Pertamina built. Many new greenfield and expansion projects that have been planned since then have suffered cancellations or prolonged delays due to the country’s notorious policy flip-flops and bureaucratic barriers.

After Joko “Jokowi” Widodo became president in late 2014, he enacted a 2015 decree designating four refinery upgrades and two greenfield refineries as national strategic projects. Scheduled for completion by 2025, these six projects worth US$45 billion in total investment would double Pertamina’s refining capacity to 2.1 million bpd.

Read also: West Java oil refinery blaze rages for a second day

Since then, the main parameter for assessing the performance of Pertamina’s board of directors has been progress on these six projects. This makes sense, given oil’s vital role in the national energy mix of the world’s largest archipelagic country and the highly volatile global oil prices. But most of these refinery projects have stalled, prompting the rapid succession of five Pertamina CEOs between 2014 and 2018.

But what the government seems unable to grasp or has simply ignored is that graft-tainted Pertamina, one of Indonesia’s largest state-owned enterprises, has always been vulnerable to political pressure from interest groups in government and the House of Representatives.

We believe that undue government intervention and pressure from politicians with vested interest are to blame for the regulatory uncertainties and bureaucratic headwinds that have forced investors to cancel their commitments or quit memorandums of understanding (MoUs) they had signed with Pertamina.

Bureaucratic and regulatory barriers are especially inimical to downstream oil investments because the refining margin is very narrow. Crude oil already accounts for up to 85 percent of value-added hydrocarbons, while the investments are long-term and range from $8 billion to $9 billion per unit. Investors therefore usually ask for an internal rate of return of at least 15 percent to secure their return on capital. Besides, building a refinery takes at least five years.

On paper, Indonesia should be commercially viable for investing in refineries, with its vast unexplored sedimentary basins that have large hydrocarbon potential, as well as its market of 270 million people and growing. But the country has been one of the least attractive to oil investors since the 2000s due to bureaucratic and regulatory barriers and policy uncertainty.

The climate of investing in Indonesia’s oil refineries has been on the decline since Indonesia became a net oil importer in 2004, and has only worsened due to government control of refined oil product prices.

Read also: Pertamina shuts down facility, fuel supply secure

It is no wonder that not a single refinery has been built since 1995, despite the long string of MoUs and other preliminary agreements with Middle Eastern companies, even during the current administration.

Pertamina in 2016 signed an MoU with Saudi Aramco to upgrade its $5.5 billion Cilacap refinery in Central Java to an annual capacity of 400,000 bpd. Aramco was also reportedly interested in the $10 billion Dumai and Balongan refinery upgrade projects, but no meaningful progress has been made.

Likewise, no progress has been forthcoming as regards Pertamina’s cooperation with China’s Sinopec, Japan’s JX Nippon Oil & Energy and Oman’s Overseas Oil & Gas on the Bontang greenfield refinery project, or its cooperation with a South Korean consortium on a refinery expansion project in Dumai, Riau.

The only notable progress to gain public attention is the $15 billion integrated refinery and petrochemical complex project in Tuban, East Java, managed by PRPP, a joint venture between Pertamina and Russia’s Rosneft Oil Company. The 300,000 bpd capacity greenfield refinery will also produce 1 million tons of ethylene and 1.3 million tons of aromatic hydrocarbon.

PRPP made headlines over the sudden emergence of hundreds of millionaires in Tuban in early February, when the joint venture paid the rupiah equivalent of millions of dollars to local villagers to acquire over 700 hectares of land for developing the integrated complex.

If President Jokowi is really serious about completing the badly needed refineries, he should personally protect the projects from the undue influence of interest groups and politically connected “entrepreneurs” who are trying to maintain their fuel-importing cash cows.

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Senior editor at The Jakarta Post

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