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Indonesia downstream prospects could brighten

Hydrocarbon Engineering,

According to Business Monitor International (BMI), President Joko Widodo (Jokowi) of Indonesia has taken significant steps to reform the country’s oil and gas regulatory environment. The replacement of the board of directors of national oil company (NOC) Pertamina is targeted at removing entrenched interest within the dominant player of Indonesia’s oil and gas sector, a positive indication that the President is looking to undertake more comprehensive reforms of the industry.

Between the upstream and downstream segments, however, the latter is set to benefit from the first fruits of President Jokowi’s reforms. Various officials from the Energy Ministry and the reorganized Pertamina have come out to give concrete proposals for restructuring the country’s downstream.

  • Oil storage expansion: Presidential advisor Ari Soemerno expressed that the country is looking at US$ 2.44 billion investment to expand Indonesia’s oil storage capacity. The Jokowi administration is targeting a minimum of 9.4 million bbls of new fuel storage capacity by 2019, thereby extending its operational reserves to 30 days from the current 18 – 23 days.
  • Long term refined oil contracts: Indonesia is also looking at procuring more long term supply contracts for both crude and refined oil. This will move the country away from reliance on spot procurement of these goods, which had been undertaken by Petral, to provide greater price stability. China National Offshore Oil Corporation (CNC) and Saudi Aramco are among the companies Indonesia is in talks with for these supplies.
  • Wider foreign participation in the downstream value chain: Pertamina’s newly appointed director of refining, trading and marketing Ahmed Bambang disclosed that the firm will ‘go forward’ with foreign joint venture offers for refineries that had been stalled by disagreements over tax allowances and uncertainty over permits. In fact, the director went a step further by proclaiming that this partnership is extended into the realm of marketing. This will end Pertamina’s monopoly in the Indonesian downstream segment.

Indonesia’s refining shortfall and growing reliance on imported refined oil products have seen the state, under former president Susilo Bambang Yudhoyono, make overtures to improve the downstream environment. However, these plans have languished due to prolonged negotiations that broke down over the state’s reluctance to relax investment terms for potential investors.

This reluctance has been attributed to the dominance of the ‘oil mafia’ with Indonesia, prominent members within the oil industry and the government sector, who have profited particularly through Pertamina’s trading arm Tetral and the opaque spot purchases it made for Indonesia. President Widodo’s quest to reduce these individuals’ influence over the sector, through administrative changes in Pertamina, comprehensive audit of Petral, and an overhaul of both SKKMigas and BPHMigas – the upstream and downstream regulator of Indonesia respectively – is an encouraging sign of a commitment to remove elements standing in way of reforms.

In particular, if changes in Petral are successfully pushed through to reduce its shadow over the country’s downstream supplies, it will greatly boost the commercial viability of other Jokowi proposals in the downstream.

Improving Indonesia’s refining chances

This creates vast opportunities throughout Indonesia’s downstream value chain, which has been nearly monopolized by Pertamina to date. The move to invite foreign participation in the marketing of fuels is particularly significant, given that Indonesia is one of the world’s fastest growing retail markets for refined oil. Although the proposed reform suggests that foreign participation is limited to a joint venture, it nonetheless opens the door for foreign companies to enter Indonesia, particularly at a time when downstream businesses are being hit by a competitive and oversupplied market in developed countries.

The offer of marketing opportunities may sweeten the deal for foreign investment into Indonesia’s refining sector. While growing domestic consumption provides a steady market for domestically refined oil products, BMI has noted that the expected growth in refining capacity in South East Asia between 2014 and 2020, on top of expansions elsewhere in China, India and the Middle East, will challenge the economics of new refining projects in Indonesia. By allowing investors to expand the avenues for return through marketing, this could swing their interest in favour of Indonesia, which is seeking at least US$ 25 billion in new investment into the refining sector.

BMI have upgraded their downstream risk/reward index for Indonesia to reflect an improved environment for refining investment. While a competitive regional environment will still squeeze profit margins, an opportunity to participate in marketing in a fast growing fuels market improves investment prospects.

Adapted from a report by Emma McAleavey.

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