Earlier in August, Iran send a proposal to Indonesian authorities involving the construction of an oil refinery in Indonesia with a processing capacity of at least 100,000 barrels per day, together with the requirement that the crude oil that is required for the processing would originate from Iran. Iran’s state-owned news agency Mehr informed that the project has a value of USD $8.4 billion and would be build over the course of five years on Java.

Given the evident interest from Iran to build a fuel refinery in Indonesia, Wiratmaja says it would be best for Indonesia to offer the Bontang refinery project to Iran. This Bontang oil refinery, estimated to require about USD $14.5 billion worth of investment, is one of the Indonesian government's ten priority projects. State-owned energy company Pertamina is tasked to lead the project. However, this energy giant needs to find investors in order to realize the grand project and this is difficult considering that in the current era of low oil prices oil companies tend to postpone costly investments in exploration and production expansion.

Although being tasked to develop the Bontang refinery project it remains uncertain whether Pertamina will invest in the project. According to earlier reports, Pertamina is interested to invest and is eager to have a stake in the joint venture that will be set up to develop the Bontang refinery. However, the Indonesian government is still discussing this option.

However, Wiratmaja informed that there also exists interest in the Bontang refinery project that originates from China, Kuwait, Saudi Arabia and Russia. As such, Iran will have to come up with an attractive plan in order to make a competitive bid. Provided construction of the Bontang refinery can start in 2017, it should be operational by 2022. The Indonesian government proposes the build-operate-transfer (BOT) system for the refinery, meaning that the investor obtains the concession rights to build and operate the refinery for a specific period. After this period has expired it then transfers the ownership to the Indonesian government. In this case Indonesia proposes a 30-year period. Hereafter, state-owned Pertamina would become the operator.

Indonesia's Oil Production & Consumption:

Year Production Consumption
2016 835,000 bpd¹
2015 786,000 bpd 1,628,000 bpd
2014 794,000 bpd 1,676,000 bpd
2013 826,000 bpd 1,643,000 bpd
2012 860,000 bpd 1,631,000 bpd
2011 900,000 bpd 1,589,000 bpd
2010 945,000 bpd 1,402,000 bpd
2009 949,000 bpd 1,297,000 bpd

¹ oil production in Q1-2016 only
Sources: Investor Daily & BP Statistical Review of World Energy 2016

Indonesia highly welcomes foreign investment in oil refineries as fuel demand in Southeast Asia's largest economy has been rising rapidly over the past decades. Wiratmaja says Indonesia needs to expand oil refinery capacity continuously up to 2025 because by that year domestic fuel demand will have surged to some 2.6 million bpd. Therefore, at least two big fuel refineries - with a processing capacity of 300,000 bpd - need to be developed (in addition to the existing oil refinery projects). Suitable locations to develop these refineries are Aceh (Sumatra), Riau (Sumatra) or Lombok (West Nusa Tenggara). Output of the new refineries will only be used to meet domestic demand.

Due to ever-increasing fuel demand in Indonesia both the nation's upstream downstream oil sector are in need of big boost. Due to a lack of investment over the past decades, it has resulted in an increasing amount of oil and fuel imports into Indonesia, putting pressure on the country's current account balance and rupiah (in times of high oil prices). Today, Indonesia's total oil refinery capacity (estimated slightly below one million barrels per day) is roughly the same as 15 years ago, indicating that there has been limited progress in development of the downstream oil sector. The country currently has six oil refineries, all operated by Pertamina. Without adding refining capacity, Indonesia is on track to become the world's largest fuel importer within a decade.

Read more: Overview of Indonesia's Oil Industry

Recently, Indonesia's upstream oil & gas regulator SKK Migas announced that the nation's crude oil production in Q1-2016 reached an average of 835,234 bpd, slightly above the target of 830,000 bpd that was set in the 2016 State Budget. This is positive news as it is very rare for Indonesia to achieve its crude oil output target. So far this year the target was met due to the combination of a realistic oil production target and long-awaited crude oil production growth at Exxon Mobil Corp's Banyu Urip field (part of the Cepu Block in East Java).

Tuban Refinery: Pertamina-Rosneft Oil Company Joint Venture

Pertamina is also engaged in the Tuban refinery in East Java through a USD $13.8 billion deal with Russia’s state-controlled Rosneft Oil Company. This project is the first oil refinery project for Pertamina in 22 years and should reduce Indonesia's reliance on fuel imports. The Tuban refinery is designed to process 300,000 barrels of oil per day and should become fully operational by 2022. In the joint venture, Pertamina holds a 55 percent stake, while Rosneft holds the remaining 45 percent. The plant will become the first refinery to combine gasoline and petrochemical production.

Poll Indonesia Investments:

Where do you see the crude oil price going this year?

Voting possible:  -


  • Hovering near $50 per barrel (60.2%)
  • Rising toward $65 per barrel (20.4%)
  • Sliding to around $35 per barrel (15.9%)
  • I don't know (3.5%)

Total amount of votes: 113