Indonesian oil refiner makes $48 billion bet to double capacity

Indonesia is accelerating plans to almost double its oil refining capacity, ignoring a temporary slump in demand triggered by the coronavirus pandemic, as the former OPEC member seeks to cut reliance on fuel products imports.

PT Pertamina will spend $48 billion over the next seven years to increase processing capacity to 1.8 million barrels per day from 1 million currently. The expansion, which also includes building 8.6 million metric tons of petrochemicals capacity, will help the country halt refined products imports, according to the state-owned company.

Indonesia’s reliance on imports is now more than 50% of its annual demand because of years of underinvestment in building refining capacity. The national oil company plans to expand existing refineries and build a new one which can produce cleaner fuels including Euro V standard gasoline and green fuel from palm oil that may help cut annual imports worth $9 billion.

If Pertamina failed to act now, or further delay its plan to add refining capacity, the nation may become fully dependent on imports, President Director Nicke Widyawati told parliament last week. There’s an urgency to upgrade existing refineries that mostly produce fuels meeting Euro II emission standards because of the need to switch to cleaner fuels to cut pollution, she said.

Additionally, fossil fuel demand is forecast to continue growing until at least 2030, before consumers start using more renewable energy, Widyawati said. To meet the demand for renewables and biofuels, Pertamina is setting up green refineries, which will use palm oil as a raw material to produce fuels.

“We are also integrating some refineries with petrochemical plants, so when demand for fuel declines, we can switch production,” Widyawati told the parliament.

Still, sourcing capital for the expansion, some of the largest capital projects in Indonesia’s history, may become a huge challenge for Pertamina and prompt it to work with multiple partners, according to industry consultant Wood Mackenzie.

Global Partners

“The other challenge is that oil production is fast declining in Indonesia and hence a need to partner with a crude supplier to secure long term crude supply,” Wood Mackenzie’s Research Director Sushant Gupta said. “These investments are also coming at a time when the global refinery industry is expected to see a refinery capacity surplus in the medium term and weak margins.”

Russia’s Rosneft PJSC, Abu Dhabi National Oil Co., Mubadala Investment Co. and Taiwan’s CPC Corp. are among oil companies in talks with Pertamina for the refinery and petrochemical projects, which on completion will also allow Indonesia to export fuel products to countries including Australia and New Zealand.

Indonesia, which quit the Organization of the Petroleum Exporting Countries in 2016, has had some success in reducing fuel products imports. It halted aviation fuel and diesel imports last year, helped by increased local output and higher blending of palm oil with diesel to power vehicles and industrial generator sets.

Shrinking Output

Indonesia’s goal of becoming self-sufficient in energy supply can’t be met by expanding refining capacity alone, Woodmac’s Gupta said. The country’s crude oil output has declined to about 700,000 barrels per day from a high of 926,000 barrels in 2008, according to official data, underlining the need for long-term crude supply partnership.

While the government has a target to restore crude output to 1 million barrels per day by 2030 by squeezing out more from existing fields and hunting for large discoveries, it may be a daunting task. It may have more chances of boosting output through overseas acquisitions, according to Andrew Harwood, research director for Asia Pacific upstream oil & gas at Woodmac.

“In the current price environment, there is limited capital available for investing in exploration and enhancing recovery from mature fields in Indonesia,” Harwood said. “Therefore, Pertamina is more likely to look at additional overseas acquisitions to improve its oil production outlook.”

With a growing middle-class population and rising fuel demand driven by swelling car sales, Indonesia may still face a shortage of fuel products even after expanding its own production capacity, according to Woodmac. The country may see a shortfall of about 450,000 barrels per day of transport fuels such as gasoline, jet fuel and diesel in 2027, making it one of the largest deficit markets globally, the consultant estimates.

“We believe Indonesia will have to strike a balance between building its own refineries and importing products from global markets,” Gupta said.