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Interview

Rachmad Hardadi – Refinery Director, Pertamina, Indonesia

Rachmad Hardadi, Refining Director, Pertamina

“We anticipate rising demand and are well underway to meet our population’s needs!” – The Refining Director of Pertamina outlines the national oil company’s strategy to supply Indonesia’s demand in refined products and furthermore highlights how strategic partnerships will complement their masterplan. Moreover he explains how Indonesia’s extensive, but scattered gas assets can be leveraged to domestically supply the nation’s energy demand.

Indonesia consumes around 550 million bpd of refined products per year, this is expected to rise to 912.5 million in 2025. How will Pertamina secure the supply of refined products and meet domestic demand?

Our current refining capacity is around 800,000 barrels of oil equivalent per day (BOE/D) of crude oil, however domestic consumption of refined products is at least 1.5 million to 1.6 million of BOE/D; therefore we currently import roughly fifty percent of domestically consumed refined products. We assume, that the growth rate of refined products consumption will stagnate at five percent and will therefore rise to 2.6 million BOE/D by 2025.

Our ambition is to enhance our refining capabilities in order to supply domestic consumption ourselves, with the ultimate goal to not be reliant on imports anymore. To accomplish this, we have established the Refinery Development Masterplan (RDMP) in collaboration with our government. This plan is two-dimensional and includes the upgrade of our current refineries in addition to two greenfield projects soon to be commencing.

The RDMP foresees the following upgrades: Refinery Unit (RU) IV Cilacap from its current output of 360000 BOE/D to 380000 BOE/D with its nelson complexity index (NCI) rising from level three to level nine, RU V (Balikpapan) from its current output of 260000 BOE/D to 360000 BOE/D with its NCI rising from level five to level nine, RU VI (Balongan) from its current output of 125000 BOE/D to 250000 BOE/D with the NCI remaining at level 9, and RU II (Dumai) from its current output of 175000 BOE/D to 350000 BOE/D with its NCI rising from level five to level nine. Once completed, these RU’s will have a total capacity of 1.3 million BOE/D. Additionally we recently took ownership of the Tuban Refinery and the Bontang Refinery which adds another 600000 BOE/D to our total capacity, which then amounts to 1.9 million BOE/D. The RDMP is planned to be fully realized by the end of 2019!

This narrows the gap to estimated consumption of refined products by 2025 to 600000 BOE/D, which we will bridge with two newly build refineries with 300000 BOE/D capacity each. We are currently scrutinizing potential strategic partners for the two greenfield projects and will commence as soon as we found the right partner. As you can see from the numbers, we anticipate the rising demand in collaboration with our government and are well underway to meet our population needs!

H.E. President Joko Widodo said in a recent news article that building refineries is of upmost strategic significance to the nation. How does the recognition of national significance translate to governmental support to Pertamina’s refinery plans as national oil company of Indonesia?

Indonesia’s refining capacity is of strategic national significance and indeed results in strong support from our government and all its ministries. For instance, surrounding the Tuban refineries are 400 hectares belonging to the ministry of environment and forestry—in Bontang it is around 650 hectares— which we will need in addition to land needed for the two greenfield refinery projects, one to be built in the east and one to be built in the west; in all those cases we already have the rights of land usage assured by the ministry. President Joko Widodo already suggested needed infrastructure development plans surrounding the refinery projects to the responsible ministries so that mandatory infrastructure will be developed rapidly. All these refinery projects are under the umbrella of the government’s strategic projects and therefore inherit upmost priority!

How do you ensure that the dependency on imported refined products will not simply shift to dependency on imported feedstock for your refineries?

Crude oil lifted in Indonesia is mostly sweet crude and therefore expensive and limited in quantity on a global scale. Our refineries will be able to refine sour crude as well, this type of crude contains much more sulphur and is therefore cheaper and furthermore the most available crude oil around the world. Supply of sour crude oil will not be a challenge once we transform our infrastructure from supporting sweet crude oil to sour crude oil.

85 percent of Indonesia’s remaining hydrocarbon reserves are gas assets. Your peer Dr. Alam told us in his interview that Pertamina’s upstream operations are already in a “gas mind-set”. In the context of the RDMP which sufficiently creates crude oil refining capacities, what are your plans for LNG plants in order to accommodate Indonesia’s gas future?

The RDMP doesn’t involve LNG plants, as this is focusing solely on crude oil refining. However, as former President Director of Badak LNG and now refining director of Pertamina, I can elaborate on that topic as well, as it complements the RDMP. The direction for gas refining is quite different to the direction in crude oil; gas refineries have to be built near the source! As it is correct that 85 percent of Indonesia’s reserves are gas assets, it has to be acknowledged that these assets are scattered across Indonesia. Therefore mini LNG plants will be the appropriate solution for the archipelago, it will allow the building of refining capacities at the source while simultaneously scattering the capacities across Indonesia thus easing the process of supplying every island of the archipelago with energy.

Pertamina recently took ownership of the Tuban refinery and Bontang refinery with the mandate to enhance efficiency and capacity of these refineries for the benefit of Indonesia. Why was Pertamina chosen and how will you fulfil the responsibility that accompanies this task?

Frankly speaking, there is only us. This situation however is wanted, as it is about trusting just one entity to secure the supply of refined products and bundling benefits for Indonesia! Obviously we are aware that in the modern business climate one can’t survive alone, which is why part of our plans are to find the right strategic partner. Under the RDMP for instance, we will collaborate with Saudi Aramco, the memorandum of understanding and head of agreement for RU IV Cilapac is already signed, for RU VI Balongang and RU II Dumai we are currently evaluating the economic feasibility studies and following suit with appropriate arrangements with Saudi Aramco is imminent. The RU V Balikpapan project will be carried out with our own capabilities. In other words: we will fulfil our responsibility to the full extent through a mix of our own capabilities complemented by the capabilities of strategic partners were needed.

Honestly, to build the new refining infrastructure is not that challenging; we choose and decide on the best configuration, focusing on where we want to go and realize where we need to collaborate with the correct partners. The challenging part is the financing of the projects which is where our strategic partners will step in. We estimate that the total costs of our plans will amount to USD 70 billion over the next ten years. However staggering the cost may sound, together with the right strategic partner we will stem it and realize opportunities together!

You’re currently filling capability gaps with strategic partners. Besides financing, where does Pertamina have sufficient self-capability and where are partners needed?

Saudi Aramco rose from over 400 screened potential partners for the RDMP projects as crude supply will be crucial; as strategic partner they will also supply the crude oil to our refineries. For our greenfield projects we are far advanced in finding the right partner. The initial 400 potential partners have been narrowed down to five potential candidates which are Rosneft, Saudi Aramco, China National Offshore Oil Cooperation, Kuwait Petroleum International, and a consortium of PTT GC and Thai Oil, Thailand. All offer advantages and disadvantages as strategic partners and our role is to identify those and evaluate which partner offers the most comfortable partnership; we are in charge of finding the right partner with the sole mandatory of our government, that cooperate governance of the chosen partner must be spotless! We will make our decision in the coming weeks ahead; we will decide on one partner only as we want to have an efficient and effective bilateral partnership!

2015’s news saw headlines of Pertamina planning to acquire a foreign refinery. What was the result of these plans and what was the rationale of this move?

We evaluated multiple options to supply the domestic consumption of refined products ourselves, and we considered the acquisition of a foreign refinery as interim solution until we build up our own capabilities. However, as our projects are well underway with the first projects to be finished by 2019, the acquisition of a foreign refinery was not an economically feasible interim solution. Bringing the refined products to Indonesia would have amounted to staggering high costs. However, sound business acumen dictates to evaluate all options, therefore this option was considered as well.

You became refining director in December 2014, and have already initiated the process of building new refineries in Indonesia, which hasn’t been done since 1994. What can we expect you to accomplish next?

The last refinery was built in 1994, 22 years ago! We’re having tremendous experience in operating and modifying aging refineries, having overcome so many challenges due to this aging infrastructure. We’re truly curious to have new refineries build, increase efficiency and apply our expert operating knowledge to our new refineries! This will be next: we will prove ourselves as world class operators!

Click here to read more articles and interviews from Indonesia, and to download the latest free oil and gas report on the country.

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