Saudi Aramco Review

Indonesia rejects Aramco refinery

Last year, the government at Jakarta rejected a request from Kuwait Petroleum International (KPI)

INDONESIA has rejected a proposal from Saudi Aramco to build a refinery in the Southeast Asian country after deciding it could not offer the incentives the world’s largest crude oil exporter had demanded.

The Jakarta government is now considering opening an international tender for a new oil refinery instead.

“If any company wants to build a refinery in Indonesia then they can follow that tender,” Bambang Brodjonegoro, head of the Indonesian finance ministry’s fiscal agency, says.

“We will see who has a good proposal and is competitive. We will decide what kind of incentives we can give to the investors and not let the investors decide.”

“They (Aramco) demanded too many tax incentives from the government,” Brodjonegoro adds. “It is against our tax rules. Therefore, we cannot give what they want.”

Aramco and Indonesia’s state Pertamina submitted a feasibility study earlier this year for a multibillion-dollar 300,000 barrels per day (bpd) refinery in Tuban, East Java after signing a memorandum of understanding on the project in 2012. The plant is planned to produce refined products and petrochemicals.

Aramco is not the first foreign investor to be turned away by Indonesia. Last year, the government rejected a request from Kuwait Petroleum International (KPI), which is studying the possibility of building a 200,000-300,000 bpd refinery at the Balongan petrochemical complex in West Java, for long-term import tax exemption on project equipment.

KPI has now turned its attentions to new refining projects in Vietnam and China.

Pertamina boss Karen Agustiawan says the company has not received a formal answer from the finance ministry about Aramco’s request for incentives.

“If the finance ministry cannot give the incentives then our plan to build a new refinery with Saudi Aramco cannot be continued. But we don’t know yet whether it is rejected or not,” Agustiawan says.

An Indonesian energy ministry official says it was very difficult to invite foreign investors to build refineries in Indonesia because of low, subsidised fuel prices.

“Some of the fuel prices are subsidised by the government and the price is below market level, while refining margins are very small. How can they be interested in building a refinery here?” asks the ministry source.

“It is normal if the investors ask for many incentives because they want to protect their investment and guarantee their investment return,” the official adds.

The Aramco project was expected to help meet oil demand in Indonesia, which is Asia’s largest importer of gasoline and gasoil due to a shortage of domestic refining capacity.

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