As Indonesia's oil production is expected to rise while a new oil refinery in Tuban (East Java) has started to come online, Indonesia's Ministry of Energy and Mineral Resources targets to stop imports of diesel fuel altogether and cut imports of gasoline fuel by 30 percent in 2016. The refinery in Tuban is owned by Trans Pacific Petrochemical Indotama, which was recently acquired by Indonesia's state-owned energy company Pertamina.
The new Tuban refinery has currently reached about 80 percent of its total designed production capacity of 100,000 barrels per day (bpd). The refinery now produces about 45,000 barrels of premium (research octane number of 88) per day and 15,000 barrels of pertamax (92-octane gasoline) per day.
Soon, possibly next week, the government will also see the start of operations of the residual fluid catalytic cracking unit in Cilacap (Central Java). With this refinery on steam, the government hopes that there will be no more diesel fuel imports needed starting from 2016. Currently, Pertamina imports about 600,000 barrels of diesel per month.
Most existing refineries in Indonesia are old (due to a lack of investment in this sector) and are not efficient in terms of production costs.
Furthermore, future imports of gasoline fuel can be cut further provided a planned refinery (a cooperation between Pertamina and Aramco) will be realized. Moreover, the government's fuel-to-gas conversion program - initiated by Presidential Regulation No. 64/2012 regarding the Supply, Distribution and Price Setting of compressed natural gas (CNG BBG) - is expected to curtail oil imports once the program develops further.
According to data from the Ministry of Energy and Mineral Resources, imports of premium in the first ten months of 2015 fell 37 percent to 236 million barrels per day (mbpd) from the same period last year. Meanwhile, imports of diesel fell 84 percent to 20 mbpd over the same period. The decline in imports is also related to reduced economic activity in Indonesia. In the second quarter of 2015 Indonesia's economic growth slowed to the six-year low of 4.67 percent (y/y), improving slightly in the following quarter. Moreover, due to sharp rupiah depreciation amid speculation about higher US interest rates, imports into Indonesia have become much more expensive.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
The lack of exploration and other investment in Indonesia's oil sector that have resulted in the decline in Indonesia's oil production are mainly due to weak government management, bureaucracy, an unclear regulatory framework and legal uncertainty regarding contracts. Together, it creates an investment climate that is not appealing to investors, particularly if it involves costly, long-term investment. Meanwhile, Indonesia's oil consumption has been rising due to a growing population, an expanding middle class and a growing economy.
Visit our crude oil section for a detailed overview of Indonesia's oil industry