Pertamina: Refinery Project Requires Tax Relief

The Jakarta Globe, Reva Sasistiya, February 7, 2009 

A $7.8 billion refinery project in Banten Province involving state oil and gas producer PT Pertamina, Petrofield Refining Company of Malaysia and the National Iranian Oil Refining & Distribution Co., or NIORDC, might be delayed unless the government expands tax incentives for the project, a Pertamina representative said on Thursday. 

“We’ve asked the Ministry of Finance for additional tax breaks,” said Rukmi Hadihartini, Pertamina’s processing director. “The ministry has agreed, but we still have yet to discuss the matter in detail.” 

Pertamina is aiming for a 14 percent profit margin on the refinery project, which is scheduled to start operations in 2012, and is seeking a permanent tax exemption from the government. 

“With the incentives the government is currently offering, our profit margins on this refinery would only be 10 percent,” said Rukmi. “Given the multibillion dollar investment required and other high risks associated with the project, investors might become reluctant to continue.” 

Pri Agung Rachmanto, an analyst at the ReforMiner Institute, which studies energy issues, said the fall in crude oil prices has made the refinery project less attractive to investors. 

“The government should support [Pertamina’s request for more tax breaks] because the venture lacks the funds to cover the cost of the project,” he said. “The government should offer additional credits for import taxes, corporate taxes and investment taxes related to specific types of refining equipment.” 

Pertamina and NIORDC have each agreed to take 40 percent stakes in the refinery, while Petrofield has agreed take the remainder. 

If the project goes ahead as planned, Pertamina will likely finance 35 percent of its share of the construction costs with internal funds and the rest through loans. Rukmi said Pertamina will review the project’s financing requirements in the coming weeks. 

In the early stages of operation, the facility is expected to refine 150,000 barrels per day, with production gradually expanding to 300,000 bpd. 

NIORDC had agreed to supply 150,000 bpd, but Pertamina is still seeking the remaining 150,000 bpd from other as-yet-unidentified Middle Eastern producers. 

Pertamina currently operates six refineries, with total production capacity of 1.035 million bpd. However, it is only able to supply 70 percent of domestic oil product consumed, with the balance being imported. 

Rising domestic fuel demand has heightened the urgency of expanding refining capacity.