For countries that rely heavily on
oil and gas as a major source of energy, such as Indonesia, the presence of oil
refineries is very important. The best way to obtain economically priced oil
and gas products is by self-processing crude oil, either produced by domestic
oil fields or imported from abroad, using our own oil refineries.
Oil refineries are industrial
facilities that process crude oil into usable petroleum products and other
products that serve as raw materials for petrochemical industries. Oil
refineries produce naphtha oil, gasoline, automotive diesel, kerosene and LPG.
Oil refineries are highly complex industrial facilities with numerous
supporting instruments and facilities.
The higher the quality of the
products, the more complex the process is, such as aviation kerosene and
aviation gasoline that are produced through strict standards and serve as jet
planes' fuel. Oil refinery activities include distillation, conversion,
treatment, formulation and blending. Oil refineries are one of the most
important parts of the downstream oil and gas industry (Leffler WL, 1984).
Thus far, Indonesia still relies on
oil and gas. Just this year, domestic fuel consumption reached 1.5 million
barrels per day (bpd), while our domestic production is just below 800,000 bpd.
To fulfill national demand, the state spends US$150 millionevery day,
equivalent to Rp 1.95 trillion, on importing fuel.
Based on an analysis by the Energy
and Mineral Resources Ministry, domestic fuel demand (not including biofuel) is
projected to increase 3.18 percent every year from 2006 to 2030. Gasoline and
diesel consumption are expected to grow 5.68 percent and 2.18 percent every
year, respectively, and kerosene consumption is expected to decrease 2.97
percent every year.
From the consumer side, the
transportation sector grows 5 percent per year on average and the agriculture,
construction and mining sectors grow 5.31 percent per year on average. The
increase is also influenced by population growth and industrial developments.
In order to fulfill demand, the government has accelerated domestic oil
refinery developments, both by developing new refineries and improving existing
ones.
Indonesia, with an area of 1,990,250
square kilometers and a population of 254.9 million people, is currently a net
oil importer due to its high dependence on oil. Indonesia only has seven oil
refineries throughout the country, namely the Pangkalan Brandan refinery with a
capacity of 5,000 bpd, which was closed in early 2007, the Dumai and SeiPakning
refineries (127,000 bpd and 50,000 bpd), Plaju refinery (145,000 bpd), Cilacap
refinery (548,000 bpd), Balikpapan refinery (266,000 bpd), Balongan refinery
(125,000 bpd), Cepu oil and gas training center and refinery in Central Java
(45,000 bpd) and the Sorong refinery in West Papua (10,000 bpd). This is not
enough. Many more refineries are still needed and surely it should not be only
the state's burden. Participation from the private sector is necessary.
The
government's position
Even if it is a little late, it is
only during Joko "Jokowi" Widodo's presidency that the government has
realized the importance of building oil refineries. We have seen several
serious efforts toward efficiently fulfilling domestic oil and gas demands,
such as the issuance of Presidential Regulation No. 146/2015 on refinery
development that places state-owned oil company PT Pertamina in charge of
developing oil refineries and monitoring progress.
Based on this regulation, refinery
development is now open to private companies through a cooperation that either
partly or wholly utilizes private resources upon considering the sharing of
risk among involved parties. Currently, the government is also deliberating a
regulation on "mini refineries" with a maximum capacity of 20,000
bpd.
The government has encouraged
foreign companies to invest in refinery development in Indonesia. For example,
in developing the Tuban refinery in East Java, the government through Pertamina
is partnering up with Rosneft, a Russian oil company and the largest raw oil
producer in the world,which has committed to a US$13-billion investment.
Hopefully, after the refinery is constructed, crude oil supply for the refinery
can also be ensured.
Indonesia's choice to open up and
encourage refinery development is understandable. The choice was made amid
difficult economic conditions with economic growth in the first quarter of this
year at 4.92 percent, just below 5 percent. Among the reasons is the decreasing
oil price globally that forced the government to revise its non-tax state
revenue (PNBP) from oil and gas in 2016's revised state budget from Rp 78.6
trillion to Rp 28.4 trillion. This is despite oil and gas always being a
mainstay in boosting gross domestic product.
Apart from that, economic slowdown in
China in the past three years has also affected Indonesia, as shown by the
collapse of the coal mining industry due to low demand and low prices and the
collapsing national shipping industry.
Nevertheless, in developing the
nation's refineries, we must still observe aspects of basic regulations and
supply sustainability. In the aspect of basic regulations, oil and gas are
vital commodities that control the lives of people at large. As such,
processing should be seen as a production that is vital to the state which
controls the lives of people at large and must be managed by the state.
Despite the development of
refineries currently being opened to private companies and import requirements
being eased by Trade Minister Regulation No. 3/M-DAG/PER/1-2015, the government
must uphold the main principle that the control and utilization of oil and gas
should be under the state's authority and not surrendered to market mechanisms.
One way to implement this "state control" is a mechanism of
controlling production yields and share ownership that puts the state or
state-owned companies as majority shareholders.
In another respect, the refinery
industry is highly dependent on the supply of crude oil. Therefore, it is
important for Indonesia to establish partnerships with oil-and-gas-producing
countries, such as Iran, which has abundant oil reserves and has just been
freed from an economic embargo by the West, to supply oil and invest in
building refineries in Indonesia. This will ensure the sustainability of the crude
oil supply in the long run, apart from obtaining crude oil at lower prices
without the involvement of Singapore-based traders who have been nothing but
parasites in oil and gas procurement.
Experience
of privately owned refineries
It is not easy for private entities
to develop refineries in Indonesia. Apart from the high investment costs, it is
also because of the complex regulations and obstacles posed by the oil and gas
mafia which have always enjoyed the state's oil and gas procurement scheme
through imports. Besides, to ensure long-term sustainability of production,
refinery development must also face the major problem of uncertain supplies of
raw materials.
An example is the refinery of PT
Trans Pacific Petrochemical Indotama (TPPI) in Tuban, which is now mired in a
corruption case. Considering the complexities pictured above, TPPI's initiative
to develop an integrated petrochemical complex comprised of an olefin refinery
and an aromatic refinery in 1995 was a brave move amidoil and gas management policies
and mining controls monopolized by Pertamina. The state must have an interest
in the private company's move and must show on which side it stands.
TPPI's refinery needs raw materials
in the form of domestic condensate. Condensate is a byproduct of domestic gas
fields. Back then, the project was developed at a cost of $800 million ($377
million from the company's funds, $248 million from JGC and $175 million from
Stone & Webster). Despite the refinery being constructed using loans, there
were no state funds involved and the refinery was constructed and producing.
The situation saw a turn-around
during the 1998 financial crisis that resulted in the issuance of a new oil and
gas law, Law No.22/2001, which stripped Pertamina of its mining control and
handed it to BP Migas, and thus the majority of TPPI's shares were also taken
over by the state. Afterwards, TPPI became a casualty in the cold war between
Pertamina and BP Migas.
TPPI can only obtain raw material
condensates from BP Migas as the ruler of the upstream industry, while it can
only sell its processed product to BPH Migas/Pertamina as the ruler of the
downstream industry and the holder of the public service obligation (PSO)
mandate from the state.
Despite the state owning a majority
of TPPI's shares (Tuban Petro/the Finance Ministry owning 59.5 percent and
Pertamina with 15 percent) - and even the government and Pertamina placing
their people in TPPI's management, adding to the government's efforts to
converge businesspeople, downstream rulers and upstream rulers at a meeting at
the Vice Presidential Palace on May 21, 2008, so that the state could benefit
from the strategic and huge-capacity refinery - these numerous rescue efforts
still failed because of different perspectives in the absence of raw materials
and difficulties in marketing.
The TPPI case serves as a lesson for
private companies that developing refineries in Indonesia without real
protection from the state will only be an exercise in futility, as refinery
development is a long-term investment that produces commodities under state
control. Apart from facing financial risk, there is also political risk and the
risk of regulation changes. Therefore, even after the state has offered to
facilitate and provide incentives to private refinery investors, these
investors should still be watchful.
The private sector needs a real
commitment from the state in the form of obtaining raw materials supply or a
license to self-import under state supervision, and a guaranteed market. If
not, privately owned refineries will only be meaningless mega construction
projects, despite their presence beinggreatly needed by the state.
by Junaidi Albab Setiawan
source Kompas, Friday, June 24, 2016
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