Government May Drop Taxes To Spur Refinery Construction
Indonesia, Southeast Asia’s biggest oil importer, is searching for ways to persuade investors to build oil refineries to process the country’s crude supplies, including cutting taxes to zero on construction inputs and income, Energy Minister Purnomo Yusgiantoro said on Wednesday.
Domestic demand for imported oil products, now at 300,000 barrels per day and rising at 5 percent per year, has heightened the need to expand the country’s capacity to refine oil.
Government officials are split on a possible solution, however, with Purnomo and Evita Legowo, director general of oil and gas at the Ministry of Energy and Mineral Resources, saying that only a refinery plan involving state oil and gas producer PT Pertamina would be viable, because the low returns on refined products would not attract private investors.
Meanwhile, State-Owned Enterprises Minister Sofyan Djalil said the government should court private investors because Pertamina’s internal cash reserves should be used for purposes other than building refineries.
Pertamina currently imports 30 percent of the country’s refined-oil products, straining the national budget and weighing on the rupiah. Because of its inability to process crude, the government must buy low-octane gasoline on the open market.
The company now operates six refineries producing 1.035 million barrels a day - enough to refine the more than 900,000 bpd Pertamina produces itself, but not enough to cope with national fuel needs, particularly for transportation.
President Susilo Bambang Yudhoyono has urged Pertamina to build enough refining capacity to meet demand. However, given the small profit margins on refined products, the company is delaying construction until the government grants a tax exemption.
The Investment Coordinating Board, or BKPM, is now discussing Pertamina’s tax proposal with the Finance Ministry, Purnomo said on Wednesday.
“The government’s policy is to build new refineries and import fuel to meet national demand,” he said. “That is why we will prioritize the refinery plan and provide incentives if possible.”
A refinery plan involving Pertamina is the only viable answer, Purnomo said, because private investors would likely be turned off by the fact that the government would be the only realistic secured buyer, given the small size of the private market.
Evita agreed, saying a refinery project would not materialize without Pertamina’s involvement. Private investors fear the government would pay less because it would sell the refined oil at subsidized prices.
Several projects have been registered with the BKPM over the past 15 years, but none have progressed very far, including a proposed facility on Selayar Island, South Sulawesi Province, with a projected capacity of 220,000 barrels per day.
Foreign companies such as Saudi Aramco, Kuwait Petroleum Corp. and Malaysian state oil firm Petronas have said they were interested in various projects, but none of these plans have materialized.
Petrofield Refining Co. of Malaysia and the National Iranian Oil Refining & Distribution Co., or NIORDC, have made plans to invest with Pertamina in a $7.8 billion refinery project in Banten Province, but Pertamina has signaled that it might delay the project until 2015, due to questions over tax incentives.
Anang Rizkani Noor, Pertamina’s vice president of communications, said the company was still working on negotiations over the tax issue.
Yudhoyono issued a decree on income tax incentives for investment in oil refineries last October.
In 2007, the government offered six-year tax holidays for refinery projects, but these incentives have been seen as insufficient, with profit margins estimated below 10 percent.
Domestic demand for imported oil products, now at 300,000 barrels per day and rising at 5 percent per year, has heightened the need to expand the country’s capacity to refine oil.
Government officials are split on a possible solution, however, with Purnomo and Evita Legowo, director general of oil and gas at the Ministry of Energy and Mineral Resources, saying that only a refinery plan involving state oil and gas producer PT Pertamina would be viable, because the low returns on refined products would not attract private investors.
Meanwhile, State-Owned Enterprises Minister Sofyan Djalil said the government should court private investors because Pertamina’s internal cash reserves should be used for purposes other than building refineries.
Pertamina currently imports 30 percent of the country’s refined-oil products, straining the national budget and weighing on the rupiah. Because of its inability to process crude, the government must buy low-octane gasoline on the open market.
The company now operates six refineries producing 1.035 million barrels a day - enough to refine the more than 900,000 bpd Pertamina produces itself, but not enough to cope with national fuel needs, particularly for transportation.
President Susilo Bambang Yudhoyono has urged Pertamina to build enough refining capacity to meet demand. However, given the small profit margins on refined products, the company is delaying construction until the government grants a tax exemption.
The Investment Coordinating Board, or BKPM, is now discussing Pertamina’s tax proposal with the Finance Ministry, Purnomo said on Wednesday.
“The government’s policy is to build new refineries and import fuel to meet national demand,” he said. “That is why we will prioritize the refinery plan and provide incentives if possible.”
A refinery plan involving Pertamina is the only viable answer, Purnomo said, because private investors would likely be turned off by the fact that the government would be the only realistic secured buyer, given the small size of the private market.
Evita agreed, saying a refinery project would not materialize without Pertamina’s involvement. Private investors fear the government would pay less because it would sell the refined oil at subsidized prices.
Several projects have been registered with the BKPM over the past 15 years, but none have progressed very far, including a proposed facility on Selayar Island, South Sulawesi Province, with a projected capacity of 220,000 barrels per day.
Foreign companies such as Saudi Aramco, Kuwait Petroleum Corp. and Malaysian state oil firm Petronas have said they were interested in various projects, but none of these plans have materialized.
Petrofield Refining Co. of Malaysia and the National Iranian Oil Refining & Distribution Co., or NIORDC, have made plans to invest with Pertamina in a $7.8 billion refinery project in Banten Province, but Pertamina has signaled that it might delay the project until 2015, due to questions over tax incentives.
Anang Rizkani Noor, Pertamina’s vice president of communications, said the company was still working on negotiations over the tax issue.
Yudhoyono issued a decree on income tax incentives for investment in oil refineries last October.
In 2007, the government offered six-year tax holidays for refinery projects, but these incentives have been seen as insufficient, with profit margins estimated below 10 percent.