Indonesia and Saudi Arabia to build joint refinery

Indonesia’s state oil company PT Pertamina and Saudi Aramco have signed a memorandum of understanding (MoU) to conduct a feasibility study into the construction of a joint refinery in Tuban, East Java, Indonesia. According to a report in the Saudi Gazette, the US$8 billion project will have a 300,000 barrel per day production capacity.
The refinery will be supplied with crude oil by Saudi Aramco under a long-term contract and will produce oil products and petrochemicals for consumption in Indonesia and elsewhere in Southeast Asia. The project has been under consideration for some time with both companies signing a similar MoU in February 2012. The real test of Saudi Aramco’s commitment to the project will be if it signs a binding agreement this time.
Insufficient refining capacity to meet Indonesian fuel demand, particularly in the Java market, is driving the Tuban refinery project, which will help Indonesia reduce oil import costs and lower its exposure to international oil price volatility. However, foreign investors have previously been hesitant to convert MoUs on Indonesian refinery projects into binding agreements due to concerns over investment returns.
In 2005, China Petrochemical Corp. (Sinopec) signed an MoU on the Tuban refinery project, but then reconsidered its participation in the project. Problems in negotiating attractive prices for crude oil feedstock supplies led National Iranian Oil Refining and Distribution Company (NIORDC) to withdraw plans to construct a refinery in Banten Bay, West Java. (February 7, 2013)