Tax holiday for new refinery projects

Investors are asking for tax incentives to build oil refineries in Indonesia. Minister of Energy Purnomo Yusgiantoro supported the idea saying the country needs new refineries to meet at least 70% of national fuel demand.

While no details of kind of tax incentives demanded, I suspect that would be in the form of tax holiday for five to 10 years as deliberated by Tax Law for certain projects. But I am not sure whether such incentive would help the country attract investors given countless of problems in the oil and gas sector, including the declining crude oil production from 1.4 million bpd in 1997 to about 1 million bpd as of today.

In fact, no new refineries were built in the last decade while domestic fuel consumption increased by 6% to 7% per year in average despite efforts to lure in investors. State-owned company Pertamina is the only company with oil refinery business in Indonesia with seven plants at combined capacity of around 1 million barrel per day.

Some of these plants are too old to keep up the demand as most of them built in early 1970s and 80s. It is predicted Pertamina's refineries could only produce 800,000 bpd at the maximum, leaving the gap of around 500,000 bpd as demand already reached 1.3 million bpd.

The refinery in South Sumatra, for example, has maximum output of 145,000 bpd, far below its installed capacity of 180,000 bpd. Major refineries in Cilacap (Central Java) and Balikpapan (East Kalimantan) were also built in 1970s. Unexpected shutdown at one of these refineries easily disrupt Indonesia's fuel supply.

That's why in the early 90s, Soeharto regime awarded dozen of licenses to investors in the oil refining business but none of them materialized. So far only one refinery project could be considered 'most likely' to be built. The project is planned by Pertamina with China's Sinopec with capacity to process 150,000 barrel to 200,000 barrel per day of crude oil. The project is located in Tuban, East Java. Iran will supply the crude as Indonesia's crude oil production is in decline.

There are hopes that the giant Cepu oilfield, adjacent to Tuban area, with capability to pump out 170,000 bpd would be the future crude supplier for Tuban refinery. But doubts linger on the immediate start-up of the project as negotiation between Pertamina and ExxonMobil is not settled yet. Most likely the first drop of oil from Cepu would be the end of 2008 the earliest.

Elnusa, Pertamina's subsidiary, is also planning to build a 300,000 bpd refinery in Java. The company is reportedly talk to three local tycoon, Salim, Djoko Tjandra, and Prayogo as possible partner in the giant project.

Early last month, local company PT Intanjaya Agromedia Abadi (who own this company? Director of Intanjaya is HS Mappasule) signed a memorandum of understanding with Texas-based International Global Technologies (using Google, no information about this company) to build a 400,000 bpd refinery in Parepare, Sulawesi Island. Both companies claimed to start the construction of the project by early 2006.

The Parepare oil refinery in South Sulawesi was initially licensed nine years ago, but development stalled during the 1997-98 economic crisis. The companies established a joint venture called PT Kilang Minyak Intan Nusantara (KMIN) which also planned to build a huge refinery in Batam Island.

No refinery projects heard from major oil companies like Shell, Exxon or Chevron mainly because of limited access to retail fuel market. Pertamina maintained its retail and distribution monopoly for petroleum products, until July 2004 when the first licenses for a foreign firm to retail petroleum products are due to be awarded to BP and Petronas of Malaysia. Shell opened its first gas station in Karawaci, near Jakarta recently to be followed by Petronas next month. But both companies would only sell un-subsidized fuels.

The government is still promising to open the sector to full competition by 2005, although progress has been very slow to date as reflected by uncertainty over when government would scrap the fuel subsidy policy. Should Tuban refinery would go on stream by 2008, the gap between local supply and demand that should be imported, would go up to 700,000 bpd. That would surely put a lot of pressure on the national economy and its weak rupiah currency.

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