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Indonesia is reopening discussions this week on the tax, financial and other incentives it will give investors and oil producers ready to help the country build additional refineries so that it can become self-sufficient and less reliant on oil product imports.

"We will meet with the oil and gas director general and the finance ministry to discuss an incentive package," Edi Setianto, Pertamina's processing director, told Platts last Friday in Jakarta. "Many investors are asking for incentives, such as tax holidays or land for free. In other countries, the government provides land for free for refinery construction, [and] they expect Indonesia's government will do the same."

Indonesia has seven oil refineries owned and operated by Pertamina, with a total capacity of 1.05 million b/d. That is not enough to meet refined products demand of 1.3 million b/d, and the company imports oil products on a term and spot basis to supplement its own production.

Indonesia has wanted to add another refinery at least since 1998, according to Evita Legowo, oil and gas director general at the Energy and Mines Ministry, but "until now we cannot have it."

"The [first] problem is that everybody knows that a refinery has a very limited margin," she said.

Previous incentive packages that have been offered to investors have not been attractive enough for them to go ahead with projects already on the drawing board.

"It looked like what they wanted before ... but after we discussed a lot, it looks like it's not enough anymore," Legowo said. "We will start to discuss again with the Ministry of Finance on how we can get more incentives."

Three different refinery projects are currently under consideration: one would more than double the capacity of Pertamina's existing capacity at Balongan to 325,000 b/d by adding a crude distillation unit at a cost of $5.2 billion; another is a $4.2 billion, 300,000 b/d refinery in Banten province in partnership with National Iranian Oil Refining and Distribution Co. and Malaysian Petrofield Refining Company; and a third is a $3 billion, 200,00 b/d refinery at Tuban, East Java.

Proposed completion dates for the refineries range from 2014 to 2016, but construction has not begun on any of them.

Most of the investors that have come forward to propose refineries have been Middle Eastern producers looking for outlets for their crude oil.

"We are not expecting that the crude oil as the feed will come from Indonesia. If we can also import it, that's fine, because we need the fuel," said Legowo.

Refineries have also been proposed in the past by India's Essar Oil and Libya's National Oil Corporation.

Pertamina's Setianto said potential investors in refineries have said the investment rate of return on a refinery and petrochemical complex in Indonesia is only 8%. "They want to have at least 14%, so they want incentive from the government" to achieve the higher return, he said.

Setianto said Friday that Saudi Aramco is one of the groups in talks with Pertamina on a new refinery for East Java and is "also asking for a larger incentive package."

Saudi Aramco "is very interested in an East Java refinery construction, but is seeking an incentive package. [If they don't get it], they may go to another country," he said.

Anita Nugraha
Platts