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May 30, 2013
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Is there a refinery in Batam’s future?
THE RECENT NEWS that Azerbaijan, a major supplier of oil to Indonesia, is planning to build a US $4.8-billion oil refinery in Batam is just the latest in a string of similar announcements that have been made in recent years – with little investment actually happening. Two other partnerships also have laid out plans for Batam refineries, including a 300,000-barrel-per-day (bpd) facility at Tanjung Sauh.
In addition, China’s Sinopec, Asia’s top refiner, has begun work on an $850-million oil storage terminal – Southeast Asia’s largest – on 360 hectares of land in Batam's Free Trade Zone. A refinery and petrochemical project are being considered in the second phase of the development.
Given that similar announcements in the past never materialized, there is some skepticism that the current news will pan out.
“My cynicism may be tiresome, but I would not be get-ting too carried away with these so-called plans,” says Gary Dean of Okusi Associates, a business consulting firm based in Singapore, and with offices in Batam and Jakarta. “I’ve lost count of the number of petrochemical plants that have been ‘planned’ by well-dressed gentlemen from third-tier countries who’ve jetted into Jakarta for a few days.”
The Batam activity is part of an apparent major effort by the Indonesian government to make the country self-sufficient in its energy production. According to Energy and Minerals Resources minister Jero Wacik, the government had plans to build two 300,000 bpd refineries in East Kalimantan and a third in Palembang, South Sumatra. The East Kalimantan projects were expected to be completed by 2019, while a 300,000-bpd refinery in Palembang was expected to start construction this year.
Two of those projects, however, have been bogged down as the result of failed negotiations between the Indonesian government and state oil and gas firm Pertamina and two would-be investment partners, Saudi Aramco and Kuwait Petroleum. Those discussions apparently broke down because incentives requested by the foreign investors could not be met.
Recently, Finance Ministry’s fiscal agency chief Bambang Brodjonegoro said the government will likely reject fiscal incentives proposed by those foreign investors, despite the lack of capacity of existing domestic refineries to process crude oil. He said    
Pertamina’s six refineries, which have a combined capacity of 1 million barrels of crude oil per day, include this facility in Cilacap, Central Java. (Reuters)
his office would recommend the govern-ment build its own refineries rather than providing unrealistically huge incentives for foreign firms to do so. 
Both Kuwait Petroleum and Saudi Aramco have reportedly demanded a tax holiday for up to 30 years, in addition to a price premium for the crude oil supplied to the refineries. The companies also demanded exemption of import duty.
Pertamina chose Kuwait Petroleum as its partner to build a refinery with a fuel production capacity of 300,000 barrels per day (bpd), which would be built in Balongan, West Java, near Pertamina’s existing refinery. The crude oil would be provided by Kuwait Petroleum.
In addition, Pertamina selected Saudi Aramco to construct another fuel-processing plant with a production capacity of 300,000 bpd of fuel, which was projected to be located either in Tuban, East Java, or in Bontang, East Kalimantan.
Those two refineries require a combined investment of around US$20 billion, and were expected to begin operations in 2018. 
Bambang said that his agency would not give the incentives the foreign firms had been requesting and that “if they do not change their position, then it will be difficult for us to approve the request.”
He said their request for a 30-year tax holiday was unrealistically high, as the existing tax breaks given by the government lasted only up to 10 years.
“Therefore, we are pushing to build our own refinery,” he said. “It is better for us to build one refinery instead of nothing.”
Evita Legowo, who is in charge of oil and gas exchanges at the ministry, agreed. She said the government decided to build the new refinery itself because the demands of investors could not be met.
“If there are any investors interested in contributing capital, they are welcome to do so, as long as they follow our rules,” Legowo said. She added that Rp 90 trillion was a huge sum and therefore the construction needed to take place in phases.
If the Kuwait Petroleum and Saudi Aramco offers are denied, however, the government might be left with only a single refinery project, one that is entirely funded by the state
Melvi, above left, is now the three-time champion of the Thursday Ladies Night 8-Ball Challenge, despite the efforts of players such as Yohana, above right. But Ladies Night is not just about competition. Ester, Melvi and Risma take the stage, right, to join the live music featured every Thursday night.
Ladies Night at Goodies
budget. That project is set to begin in 2015, and the government has allocated Rp 17 billion ($1.7 million) in this year’s budget for a feasibility study and another Rp 250 billion for preliminary design. Construction will cost Rp 90 trillion and would be completed in 2018.
The government acknowledges that the profitability of the project is the least of its priorities, said Edi Hermantoro, the director general for oil and gas at the Energy and Mineral Resources Ministry.
“The main idea [of refineries] projects is to meet domestic need,” Edi said.
Indonesia’s crude oil resources have slowly been declining in the past 20 years. As of 2011, the nation had 4 billion barrels of oil in reserves, compared to 5.1 billion barrels in 2001 and 5.9 billion barrels in 1991, according to BP in its 2012 Statistical Review of World Energy report.
Malaysia, by comparison, has been increasing its oil reserves, to 5.9 billion barrels in 2011 from 3.7 billion barrels 20 years earlier.
Indonesia’s average daily oil output last year was around 840,000 barrels, of which Pertamina’s own production was 196,000 barrels per day. The government gets around 85% of oil output produced by private firms, based on the production-sharing contract scheme.
Susilo Siswoutomo, deputy energy and mineral resources minister, said that only 650,000 barrels per day of crude oil can be processed into gasoline or diesel fuel domestically, and the country needs to import 400,000 barrels of gasoline and diesel to meet local demand.
While Indonesia’s refining capacity remains stagnant, consumption has increased significantly.
Part of the reason for the rise in fuel use has been the surge in demand for cars and motorcycles of the past few years, as low borrowing costs and easy down payments made vehicles more affordable to pur-chase. Car sales topped 1 million units for the first time last year.
About 9.6 million passenger cars were on the road in 2011, an almost threefold increase from 2001, while there were almost 69 million motor-cycles, up 350% in the same period.
Fuel consumption in Indonesia climbed to 44 million metric tons of oil equivalent in 2011 from 16.8 million tons in 2001, BP data show.
Imports of petroleum products, including fuel, amounted to $7.3 billion in the first quarter of this year, which led to a current account deficit of $5.3 billion, according to Central Statistics Agency data.
Despite the increase in domestic fuel use, the last refinery built in Indonesia went on line in 1994, a Pertamina facility in Balongan, West Java. Currently, Pertamina has six refineries operating in Indonesia, producing up to 700,000 bpd of refined fuels. They are located in Balikpapan, East Kalimantan; Balongan, West Java; Cilacap, Central Java; Dumai, Riau; Kasim, West Papua; and Plaju, South Sumatra. 
According to government sources, Indonesia needs at least three new oil refineries in order to bolster the nation’s fuel stockpile and ease pressure on the national budget. The refineries would enable the country to cut fuel subsidy spending because the country will no longer need to import fuel.
Current Indonesian refinery production is unable to meet the country’s gasoline demand of 1.16 million bpd, resulting in the importing of gasoline to meet the country’s needs. Enter Batam as a fertile location for new oil-processing facilities.
The government of Azerbaijan is just the latest entry into the Batam refinery sweepstakes.
“Our state oil company, SOCAR, is in negotiations with Indonesia’s OSO Group to build a large oil refinery in Batam,” Azerbaijani Ambassador to Indonesia Tamerlan Karayev recently told The Jakarta Post. “There is no final decision yet on the project; it is being considered,” he added.
The project details were first unveiled by the OSO Group’s CEO, Mariano Asril, in October. OSO would build the 600,000-bpd, $4.8-billion facility in a joint venture with SOCAR, he said. Funding and crude oil would be provided by Azerbaijan, with the project set for completion in 2017.
OSO Group is expected to ask for incentives, however, perhaps killing the project before it gets off the ground.
Currently, Azerbaijan, an oil-rich nation in South Caucasus, exports around $2 billion worth of oil to Indonesia, $1.23 billion exported directly and the rest via Singapore and other countries. 
Meanwhile, Indonesia’s Setdco Group and its partner PT Intan Megah have sought permission to build a 300,000-bpd refinery at Tanjung Sauh on Batam.
“The crude oil will be from the Middle East,” according to Legowo. She added the government is still in the process of issuing a permit for the development of the planned refinery.
Previously, Gulf Petroleum Ltd., Qatar’s largest oil company, had planned to build a refinery on Batam. A memorandum of under-standing was signed but the project has not gone forward.
PT Batam Sentralindo, operator of the Batam Free Trade Zone at the time, had agreed to provide a 250-hectare plot of land for the refinery project, which planned to sell its products in Indonesia and other Southeast Asia nations.
None of the recent refinery announcements indicated how many people would be needed to build the facilities, and only one estimated how many full-time workers would be needed (30). In addition, there is no word as yet as to which companies currently operating in Batam might participate in the engineering and construction of the projects.
For comparison, a similar-sized refinery proposed for South Dakota in the U.S. would need 4,500 construction workers for 4-5 years, and would create 1,800 high paying permanent jobs. For each of those jobs created, economists anticipate that there will be three jobs for each one of those jobs. 
A Chevron refinery on 1,200 hectares in Richmond, California, em-ploys more than 1,200 workers. The refinery processes approximately 240,000 barrels of crude oil a day.
While skepticism may be the norm for many Indonesia experts regarding proposed projects in Indonesia, the fact that Asia's top refiner, China's Sinopec, has already started work to build Southeast Asia's largest oil storage terminal at the Batam Free Trade Zone cannot be overlooked; after all, it is an $850-million project.
Sinopec Kantons Holdings, a unit of the Sinopec Group, will hold a stake of 95% in the PT West Point Terminal project, covering the construction of storage for up to 16 million barrels of crude and refined fuels, the company told the Hong Kong Exchange. This would be Sinopec's first facility of such a size near Singapore, Asia's oil trading hub, where the Chinese refiner has established its presence over the past 15 years.
But Sinopec’s Batam presence may not signal a refinery is coming to the island any time soon.
“For the moment, the immediate priority is to get the storage facility built, the refining and petrochemical projects are not at the execution phase yet,” said an industry official.
The project edges the Chinese oil major closer to domestic rival PetroChina, Asia's largest producer of oil and gas, which has a stake of 35% in the 14-million-barrel Universal Oil Terminal on Singapore's Jurong Island. The new storage facility is likely to take between 18 and 24 months to build.
Whether Sinpac’s presence signals that the latest round of refinery proposals will actually result in any deal being approved by the Indonesian government is anyone’s guess. There are many government and financing obstacles to overcome, and recent history has not shown that the government is willing, or able, to provide the incentives necessary to make such huge investments viable for foreign firms. As Gary Dean says, there is ample reason for cynicism. – Compiled from numerous reports

GARUDA INDONESIA is considering a maintenance facility in Hang Nadim international airport in Batam.
“They need 48 hectares. But in the initial stage, it is likely to be built on 15 hectares of areas,” said Batam Free Trade Zone Management Agency (BP FTZ)’s head of public relations and publication, Ilham Eka Hartawan.
Dialogue between BP FTZ and Garuda Indonesia is ongoing to ensure Hang Nadim is the location for the facility, he added.
Garuda Indonesia has previously sounded out the possibility on the same facility in Kuala Namu international airport in North Sumatra.
BP FTZ is sure Garuda will choose Batam because of its free-trade status.
“We are optimistic that Garuda will choose Batam as, previously, Lion Group and PT Indonesia Aero Maintenance (IAM) are developing facilities in Hang Nadim,” said Ilham.
Lion Group began a development on four hectares of area and PT IAM is scheduled to start the infrastructure development at the beginning of September.
Hang Nadim’s 4.03 kilometers-long runway is one of the factors that have attracted many airline companies. – The Jakarta Post
LION AIR has announced a new direct route between the cities of Jambi and Batam.
“We are going to open a new Jambi-Batam route considering the growing demand for direct flights between the two cities,” said Jambi-branch Lion Air manager, Mardanus.
Batam is a transit route for Sumatra, so Lion Air will be accommodating passengers departing from Jambi to the city.
“We plan to use the Boeing 737 Next Generation with a capacity of 189 economy seats,” said Mardanus.
Currently, Lion Air in Jambi has only five Jambi-Jakarta flights per day. – The Jakarta Post
Just in time for this weekend’s sports on TV - and the beginning of the 2013 State of Origin series beginning June 5 - Goodies Restaurant at Smiling Hill has installed a 70-inch LED flatscreen TV in its new dining and entertainment space.
Garuda interested in maintenance facility in Batam
Lion Air to open Jambi-Batam new route