Thursday, July 25, 2024 | 19:02 WIB

Refinery Development for Energy Security and Oil and Gas Downstreaming

Jakarta, IO – Indonesia’s fuel consumption continues to rise every year. In the last decade, it has increased from around 1.1 million barrels per day to 1.5 million barrels per day. 

The increasing national fuel consumption also results in bigger national fuel imports. Data from the State-Owned Enterprise (SOE) Ministry shows Indonesia’s fuel imports increasing from 140.5 million barrels in 2018 to 145.2 million barrels in 2022. In this period, the proportion of fuel imports used to meet national fuel demand was rather high, at 31.8%. 

One of the factors causing the recent increase in fuel imports is the imbalance between the enlargement of national refinery capacity and the increase in fuel consumption. Data from the Ministry of Energy and Mineral Resources shows that national refinery capacity only increased by around 361.6 thousand barrels per day (kbpd) from 1984 to 2022. Meanwhile, in the same period, national oil consumption has increased to around 1,295 kbpd. 

National Refinery Development Policy 

On close observation, the government’s measures for identifying and resolving problems of national fuel imports seem to be quite clear. At the macro policy level, the government has established a policy of revitalizing and developing national refinery capacity, which has been implemented through the Refinery Development Master Plan (RDMP) and Grass Root Refinery (GRR) projects. 

Through these projects, the Government targets increasing national refinery capacity from 1.151 million barrels per day in 2022 to 1.425 million barrels per day by 2028.

Several national refineries are involved in the RDMP project, including the Balongan refinery, with a target of increasing by 25 kbpd from a capacity of 125 kbpd to 150 kbpd. 

Next, the Balikpapan refinery has a target of increasing capacity from 260 kbpd to 360 kbpd by 2024. The RDMP project will also include the Cilacap, Plaju and Dumai refineries, scheduled to be completed in 2026. 

Meanwhile, the refinery construction depicted in the GRR project is the new refinery in Tuban, scheduled to commence operations in 2028. The Tuban GRR project is expected to have a capacity of up to 300 kbpd. The Tuban refinery is also targeted to produce 4,701 kilotons per annum of petrochemical products, or equivalent to 30% of the current national petrochemical product demand. 

The macro plan for refinery development above is expected to not only control national fuel imports, but according to the Government’s calculations the RDMP and GRR projects will also have a multiplier effect on the national economy.

The Tuban GRR project, for example, has the potential to bring an additional national investment of USD 13.5 billion, or equivalent to IDR 205.05 trillion. The project is also projected to absorb 20,000 workers during construction and 2,500 when it starts operating. 

Komaidi Notonegoro
Komaidi Notonegoro, Executive Director of the ReforMiner Institute.

In addition to short-term impacts, the completion of the RDMP and GRR project plays a strategic role in supporting the government in expanding downstream in the oil and gas sector over the long term. According to data from the Ministry of Investment/ BKPM, the Government plans to expand the oil and gas downstreaming program to be implemented from 2025 to 2040. 

The program targets a total investment of IDR 1,053 trillion, with IDR 314.71 trillion allocated for petroleum downstreaming and IDR 771.70 trillion for natural gas downstreaming. 

The oil and gas downstreaming programs can positively impact Indonesia’s monetary sector performance and the stability of the Indonesian Rupiah exchange rate. The implementation of oil and gas downstreaming is projected to save the use of foreign exchange income for imports of around USD 73.30 billion, or equivalent to IDR 1,134 trillion. 

National Refinery Development Challenges 

Attempts to complete the RDMP and GRR projects require a conducive investment climate, which is important to ensure that business entities involved in the revitalization and development of refineries can fulfill the agreed commitments. 

Various studies, including those from the U.S. Energy Information Administration, convey that the refinery industry is capital-intensive and has a complex operating system. The decision to develop the refinery industry is also influenced by several factors, such as the environment, land availability, market certainty and oil price volatility as it influences the main raw material. 

At the global level, the cost structure of oil refinery construction is generally influenced by construction and infrastructure activities as well as transportation and logistics, contributing more than 60% of the total investment in refinery construction. Meanwhile, the other 30% includes land provision, security and environmental requirements. 

A common practice in several countries is for governments to provide special approaches to support the development of the refinery industry in their countries. To compensate for relatively small profit margins, governments often provide investment and tax incentives so that the refinery industry can remain competitive. 

In some cases, the governments in some countries take the role of direct implementers in the construction of refineries, so that they can protect broader interests, such as maintaining energy security and creating strategic petroleum reserves. 

After construction is completed, the refineries can be directly managed by the government or other parties, such as the SOEs or the private sector, that represent the interests of the government. 

Government Involvement 

Lesson from the refinery development business concept at the global level: It can be concluded that government intervention plays an important role in the success of refinery development in a country. 

To develop national refinery capacity and expedite the completion of the RDMP and GRR project targets, the Indonesian Government has several options to consider. 

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First, the Government can take a progressive stance by providing development support, using funds allocated from the reduction in the fuel subsidy budget. 

Second, the government can take a moderate stance by providing guarantees and fiscal and non-fiscal incentives to investors who are exploring cooperation with state-owned oil and gas corporation Pertamina. 

In this case, Government intervention is a factor that should allow the smooth implementation and realization of the national refinery projects.