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Pertamina partners with South Korean entities to build $4bn refinery

Indonesian state-owned energy company plans upgrade of Balikpapan facility

Indonesian state-owned Pertamina hopes to cut reliance on overseas energy providers as it partners with South Korea's SK Engineering & Construction and Hyundai Engineering to upgrade an aging facility.   © Kyodo

JAKARTA -- Indonesian state-owned oil and gas company Pertamina on Monday announced the signing of a 57.8 trillion rupiah ($4 billion) contract with South Korea's SK Engineering & Construction and Hyundai Engineering for a major upgrade of an old refinery in East Kalimantan province.

The signing of the engineering, procurement and construction contract between Pertamina subsidiary Rekayasa Industri, state-owned construction company Pembangunan Perumahan and the two South Korean companies means that construction will soon kick off in the port city of Balikpapan, according to Pertamina Vice President for Corporate Communication Adiatma Sardjito.

"The Balikpapan refinery [development] is part of Pertamina's strategic projects to create independence and national energy resilience," Sardjito said in a press statement on Monday, adding that project completion is expected in 2023. He stopped short, however, of explaining why SK and Hyundai were appointed winners of bids held between March and November.

The Balikpapan refinery, which commenced operations in 1922, is one of seven aging refineries Pertamina operates in the country. The upgrade will increase the refinery's crude processing capacity to 360,000 barrels per stream day from 260,000 barrels per stream day which is equal to 25% of national intake.

It is also expected to boost domestic diesel production by 30,000 barrels per day, or 22%, and thereby reduce diesel imports by 17%. Additionally, the upgraded refinery will generate propylene -- a new product -- at a capacity of 230,000 tons per year.

The Balikpapan refinery upgrade is one of six mega refinery projects Pertamina has had under its development plans for the next several years to increase Indonesia's fuel production capacity and reduce reliance on imports -- which made up a third of the domestic fuel consumption of 1.3 million barrels per day last year. The six projects comprise upgrades of four old refineries and development of two new ones.

But progress has been sluggish as soaring oil prices over the past few years and the government's decision against raising subsidized fuel prices have imposed financial constraints on Pertamina, rendering it more dependent on foreign partners to proceed with development. The Balikpapan refinery upgrade was originally targeted to be completed by 2021 before the deadline was extended on Monday to 2023.

Pertamina said it also signed on Monday a framework agreement with Oman's Overseas Oil and Gas for the $10 billion construction of a new refinery in Bontang, another East Kalimantan city. Pertamina had announced in January that it would award the project to OOG and Singapore-based Cosmo Oil International, a trading arm of Japan's Cosmo Energy Holdings. But Cosmo has since canceled its involvement in the project, Pertamina said without explanation.

Pertamina had earlier signed deals with Saudi Aramco for the upgrade of the Cilacap refinery in Central Java province, and with Russia's Rosneft for the development of a new refinery and petrochemical complex in Tuban, East Java province. These joint ventures, too, have not progressed as expected, with land acquisition problems cited as a major hindrance.

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