Looking Ahead: Indonesia faces uncertain future as it becomes net importer
The year 2003 has seen one member of OPEC cease to be a net exporter of crude oil. Indonesia now consumes about 0.2 mn bpd more than it produces. Oil production fell by more than 10% between 2002 and 2003 to 1.0 mn bpd and is unlikely to rise in the near future. Despite this, Indonesia has not been asked to leave the 11-nation petroleum exporters’ club. The government meanwhile plans to revive oil production with foreign help, though its more immediate problem is to tackle a shortage of refinery capacity.
As well as experiencing a general deficit of oil products, Indonesia suffers from a particular shortage of light and middle distillate. Its own crude oil output consists mainly of sweet, waxy crudes, yielding high quantities of atmospheric residue. Indonesian refineries, on the other hand, do not have sufficient upgrading capacity to convert enough of the residue to lighter products to meet domestic demand; hence the country needs to import about 0.3 mn bpd of gasoline and middle distillate. Some of these imports are offset by exports of low sulphur waxy residue (LSWR) and naphtha, but the country’s product trade remains in deficit. Indonesia also imports light crude oil from Africa and elsewhere in order to enable it to produce more light refined products in domestic refineries.
Indonesia has eight refineries, with a combined distillation capacity of 1 mn bpd. These range in size from two 5,000bpd topping plants to the 348,000bpd Cilacap refinery in central Java. The refining system is short of cracking and reforming capacity and also includes three small refineries, at Cepu, Pangakalan Brandan and Sungai Pakning, with no upgrading units at all.
Refining is solely undertaken at present by the national oil company, Pertamina {http://www.pertamina.com/}, which also has a monopoly on the distribution of refined products. The company itself has suffered from years of political interference in its operations and now lacks the resources to extend and modernize its downstream operations.
The government is now trying to attract foreign capital to the downstream sector by liberalizing the domestic market. Refining has already been opened up to foreign investors and Pertamina’s distribution monopoly is due to end in 2004. In order to make refining more attractive, the government is to remove price controls on domestic refined products in stages from 2005.
At first sight, Indonesia appears to be an attractive place for downstream investment. With a population of over 230 mn and economic growth of over 3% a year since 2000, Indonesia is one of Asia’s more attractive oil markets. Four foreign joint-venture refineries have been proposed and several companies, including Malaysia’s national oil company, Petronas,, together with US majors Caltex and ConocoPhillips, have expressed interest in gasoline retailing.
The refining ventures, however, are mainly designed to supply export markets. Two involve the import of crude oil from Saudi Arabia and the export of the products primarily to China. There is a further proposal for a refinery in Sulawesi to process crude from Kuwait, though part of the output could be sold within Indonesia. . A fourth scheme, involving the building of a refinery in Java to process crude from a new oil field at Cepu has run into problems over both the upstream and downstream parts of the scheme. Local politicians want the field developed more rapidly than the field’s developer, Exxon Mobil, has planned. They also want an enhanced role for Pertamina. The refinery may also be delayed as a result of the withdrawal of Pertamina’s Saudi Arabian partner, Hi-Tech International, after it failed to raise the finance necessary to fund its share of the joint-venture.
Pertamina says it will proceed with the building of the 100,000bpd refinery regardless, but the state oil company’s ability to finance the project is open to some doubt. There is considerable uncertainty, in fact, about the company’s whole future. There has been pressure since the fall of President Suharto in 1998 to end all Pertamina’s state privileges and to break up the company into smaller, more specialized units. Under Suharto, some of Pertamina’s operations were run almost as Suharto family fiefdoms. Once Suharto was overthrown, the new government came under pressure to restructure or even abolish Pertamina.
Pertamina has already seen its upstream role diminished and the government has hinted it wants to privatize the state company’s LNG export terminals. Changes in the upstream sector, which involved Pertamina’s losing the right to award exploration licences, have led to the entry of several new exploration and production companies. A recent licensing round attracted bids from a number of large Asian firms including PetroVietnam, PetroChina and Petronas, along with several much smaller ones, including some new companies, such as Medco and Pearl Holdings, which are beginning to challenge the former dominance of Pertamina in the upstream sector.
© Blackwell Publishing Ltd, 2003