Indonesia Advisory

Indonesia's president has issued a decree giving income tax incentives for investment in oil refineries and geothermal projects, according to a copy of the decree obtained by Reuters on Tuesday.

Indonesia, Asia's biggest importer of diesel and gasoline, is trying to push for more investment in oil refineries to cut imports of oil products. According to the decree, the government will offer tax allowances at 30 percent of capital investment for the first six years of the project.

"(The decree) is aimed at increasing investment activities to boost economic growth," it said.
The decree was signed by President Susilo Bambang Yudhoyono on Sept. 23 and came into effect immediately and will be evaluated in two years time, it said. "The tax allowances for oil refinery projects are aimed at also cutting oil product imports," Muhammad Lutfi, the head of Indonesia's investment agency, told Reuters.

Indonesian state oil and gas company PT Pertamina has nine refineries scattered around the archipelago with a combined capacity of around 1 million barrels per day (bpd). But it only supplies 70 percent of domestic oil product consumption and 30 percent comes from imports.
There have been severals new oil refineries project registered at investment agency in the past 15 years, but none of them have started construction.

The government has been trying to develop a refinery in Selayar island, south of Sulawesi, with a capacity of 220,000 barrels per day. Construction of new refineries has become more pressing in the past few years, as growing domestic demand forces Pertamina to import more fuel, straining the budget and weighing on the rupiah currency .

Indonesia has been struggling to maintain crude oil output as the country has failed to tap new oilfields fast enough as old ones become less productive.

While few analysts believe all of the half-dozen or so refineries mooted for Indonesia will be built, there appear to be more progress in joint ventures with Iran and China's Sinopec. Pertamina and an Iranian company have agreed to build 300,000 bpd oil refinery in Java island, although construction has not started.

China's Sinopec Corp also agreed in mid-2005 to help build a refinery in East Java with a capacity of up to 200,000 barrels per day (bpd), although negotiations have foundered since then. Saudi Aramco, Kuwait Petroleum Corp. and Malaysian state oil firm Petronas [PETR.UL] have also expressed interest in building plants in Indonesia.

The government has also given geothermal projects income tax incentive to increase power plant capacity.

Indonesia currently supplies just 850 MW of an estimated 27,000 MW potential from geothermal, or about 3 percent of its current power output. Indonesian state electricity firm PT Perusahaan Listrik Negara (PLN) has a monopoly in the power sector and operates around 24,000 megawatts of capacity, but most of its plants are old, so daily output is far below capacity