RI oil investment incentives lack bite: Industry sources
RI oil investment incentives lack bite: Industry sources
SINGAPORE (Reuter): Major oil companies are not likely to pump billions of dollars into Indonesia despite new incentives to build refineries as long as the domestic market remains closed to them, industry sources said.
"Oil companies want a share of the domestic market before they commit billion-dollar investments there," one source at a major oil company said over the weekend.
President Soeharto, in a decree dated July 31, issued new and clearer guidelines to woo the private sector to build refineries. But the incentives did not end state-owned Pertamina's monopoly in the retail market.
They did, however, allow Pertamina to build jointly with the private sector and enabled private refineries to sell their products to Pertamina at international prices.
One source said the incentives were not enough to ensure that refiners will get a reasonable return on their investments in the current climate of over capacity in Asia.
"You need a refining margin of $6.00 per barrel to recover the cost of building a two-billion-dollar refinery. Where are you going to get such margins," another source said.
Oil executives said such high profit margins were only possible if companies sold directly to the domestic market.
In Thailand, where private oil companies have free market access and have made their most recent billion-dollar refinery investments, profits hovered above US$4.00 a barrel, they said.
In 1996, two new refineries were built in Thailand by Royal Dutch Shell and Caltex Petroleum Corp, a joint-venture between Texaco Inc and Chevron Corp, in partnership with state-owned Petroleum Authority of Thailand (PTT).
"The increase in Asian refining capacity has cut margins and led to a drop in oil product prices," one trader said.
Asian refining capacity rose by 1.2 million barrel per day (bpd) in 1996 to 18.1 million bpd.
The sources said that without access to the Indonesian market, oil companies can at best reap similar returns as those enjoyed by Singapore refiners -- and those have dipped in and out of the red this year.
Refineries in Singapore, which export the bulk of their products, now enjoy profits of less than $1.00. They were forced to cut output twice this year due to losses.
The sources said there was a strong push to get the Indonesian government to open the domestic petroleum market and the matter had even been scheduled to be debated in parliament.
But Pertamina is resisting the change.
"They are fighting are a losing battle," said a source familiar with Indonesian policy. "The pressure will be on Pertamina to let go because the domestic market is growing very fast."
Pertamina's processing director Godfried Atihuta said in May the company had petitioned the government on the need for new refineries.
"Indonesia needs at least two 125,000-bpd new refineries at the moment," Atihuta said. Indonesia now has eight refineries with a combined capacity of 989,500-bpd.
Pertamina has said it would import 10 million kiloliters of fuel products in fiscal 1997/98 (April-March), up from an estimated seven million kiloliters in 1996/97.
"I think a partial step-by-step deregulation will go hand-in- hand with new investments," the industry source said.
Industry sources said Indonesia was under pressure to reform its energy sector as it is one of the few Asian countries that maintains a state monopoly on domestic oil sales.