Indonesia Allows Private Investors to Build Oil Refineries

Indonesia's oil industry is a problematic industry. After crude oil production had peaked in the mid-1990s during Suharto's New Order regime, output rapidly declined in the next two decades due to a lack of exploration (implying the country became increasingly dependent on oil production from mature fields as well as crude imports). Sliding investment in oil exploration is usually attributed to weak government management, the high degree of bureaucracy (it is a costly and lengthy process to obtain all permits for exploration and production), as well as a high degree of legal uncertainty. Moreover, when it involves mining (and thus it involves the government) there also exists a high degree of corruption. All in all, in combination with rising domestic oil demand, it has led to a rising oil balance deficit.

Meanwhile, Indonesia's total oil refinery capacity has barely changed over the past two decades, indicating that there has been limited investment in the country's oil refinery capacity, resulting in a growing need for refined fuel imports. Considering fuel demand in Indonesia is set to rise rapidly in the years ahead, authorities really need to boost domestic refinery capacity in order to prevent major pressure on Indonesia's trade balance. Indonesia's fuel demand may rise by an average annual rate of 2.7 percent to 2.28 million bpd in 2025. Last year, Indonesia imported around half of the 1.6 million barrels of fuel it consumed daily.

Per 2016, all refineries combined (in Indonesia) can only process around one million barrels of oil per day (bpd). Pertamina operates six refineries, with the latest plant having been built in 1997. Although the state-owned firm has plans to build two new oil refineries and upgrade three existing ones in the years ahead, progress has been slower than expected. In fact, Pertamina needs foreign partners to realize these ambitions. For example, to upgrade its Cilacap oil refinery (Central Java), Pertamina has to cooperate with Saudi Arabian oil company Saudi Armaco in order to inject the required capital and expertise into the project.

Pertamina's Oil Refinery Capacity:

Refinery	Location	Capacity (1000 bpd)	Established
UP II Dumai	Riau (Sumatra)	170.0	1971
UP III Plaju	South Sumatra	133.7	1970
UP IV Cilacap	Central Java	348.0	1976
UP V Balikpapan	East Kalimantan	260.0	1950
UP VI Balongan	West Java	125.0	1994
UP VII Kasim	West Papua	10.0	1997
Combined Total		1,046.7

^{Source: Investor Daily}

Through new Energy and Mineral Resources Ministry Regulation No. 35/2016, the Indonesian government now allows private investors to establish oil refineries in Indonesia without cooperating with Pertamina provided the investor uses technology that is approved by the Indonesian government and prioritizes meeting domestic demand (over exporting the product abroad). The new regulation also allows foreign companies in Indonesia to directly import crude oil for the domestic production of fuel. Moreover, producers are free to sell the final product to any off-taker/distributor (hence it is not mandatory to sell the product to Pertamina).

Although it is unlikely to see big, short-term developments after the implementation of this new regulation, the move is considered a step in the right direction.

Indonesia Crude Oil Production 2009-2016:

Year	Production
2016	834,000 bpd¹
2015	786,000 bpd
2014	794,000 bpd
2013	826,000 bpd
2012	860,000 bpd
2011	900,000 bpd
2010	945,000 bpd
2009	949,000 bpd

^{¹ oil production January-June 2016
Source: SKKMigas}

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