Indonesia’s state-run energy firm Pertamina signed Memorandums of Understanding (MOUs) with three global oil refinery operators – Saudi Aramco, Japan’s JX Nippon Oil & Energy and China Petroleum and Chemical Corp (Sinopec) – to upgrade Indonesia’s aging oil refineries on Wednesday, reports Reuters.
Under the plans established by the MOUs, Saudi Aramco will help upgrade three refineries: Dumai refinery in Riau, the Cilacap refinery in Central Java and the Balongan refinery in West Java. Sinopec will be responsible for upgrades to the Plaju refinery in South Sumatra and JX Nippon will upgrade the Balikpapan refinery in East Kalimantan.
The $25 billion investments from the three oil majors are expected to double Pertamina’s total refinery capacity to 1,680 MBOPD from the current capacity of 820 MBOPD. Pertamina estimates that gasoline production will increase by 330% to 630 MBOPD from 190 MBOPD, diesel production by 240% to 770 MBOPD from 320 MBOPD and avtur (aircraft fuel) output of 120 MBOPD from 50 MBOPD, reports the Jakarta Post.
Following the MOUs signing, Pertamina and its partners will work on the projects and conduct feasibility studies, which are expected to be completed within six months. Additional reviews will focus on financing and business structures. Iriawan Yulianto, Pertamina senior VP for refinery business development, said that the target for completion of the projects will be three to four years. The Cilacap, Balongan and Balikpapan refineries are expected to be upgraded earlier than the other two refineries.
Under the upgrading plans, Pertamina aims to increase the refineries’ Nelson Complexity Index (NCI), which measures the conversion capacity of a refinery to its distillation capacity, to between 8 and 9 from the current level of 5. It also aims to increase the refineries’ sulfur handling limit to around 2% from the current 0.4%, meaning that the refineries will be able to process sour crude oil.
The upgrade comes as part of Indonesian President Joko Widodo’s initiative to reform energy policy, curb corruption and meet the country’s growing demand.
The refineries are currently running at below optimum capacity due to age and a limited ability to process complex crude oil, forcing the country to import a huge amount of oil-based fuels and related products. According to the Energy Information Administration, Indonesia consumed more than 1,600 MBOPD in 2013 – 36% of which was imported. Indonesia’s energy minister has said the ageing infrastructure costs the country 10 trillion rupiah ($811 million) a year because global fuel prices are cheaper than fronting the processing costs. Indonesia has struggled to attract investment to its refining sector and its newest facility is 20 years old. Now, Indonesia is offering partnerships in marketing and other areas, as well as offering to provide land in Bontang, East Kalimantan, and other incentives such as a 15-year tax holiday for the construction of the facilities in order to sweeten the deal with potential investors, according to Bloomberg Businessweek.
Michio Ikeda, executive VP of Tokyo-based JX Nippon, said Indonesia was attractive because its demand for oil products is increasing at up to 5% a year. Pertamina has said that it will keep crude supply agreements separate from the refinery investments in order to retain flexibility to find the lowest energy costs.
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