While Indonesia's once-vibrant oil and gas production business is mostly a victim of geology and the natural decline of aging fields, the decrepitude of its oil refining industry is the result of bad decision-making -- poor policies, red tape, and lack of strategic planning.
Even though President Joko Widodo's last government contributed to these failures, his re-election last month creates an opportunity to revive much-needed reforms, especially in phasing out fuel subsidies.
Smaller economies in Southeast Asia, such as Malaysia and Vietnam, have stolen a march in recent years by modernizing and expanding their refining sectors, while Indonesia struggles to attract foreign investment, with projects prone to cancellation and delay, even though the country has a much bigger and faster-growing retail fuel market.
With a refining capacity of just over 1 million barrels per day against domestic products demand of 1.5-1.6 million barrels per day, state-owned Pertamina ends up importing a third of its fuel requirements, instead of bringing in crude for processing.
That is a growing drain on the country's foreign currency reserves and erodes the strength of the Indonesian rupiah, while saddling Pertamina with losses from importing fuel at international prices and selling it at government-capped subsidized rates. The company has a monopoly over refining, with foreign majors, which came to the country decades ago, remaining in oil and gas production.
Widodo's last government made a creditable start in tackling the root cause of the problem by taking advantage of the 2014 oil price crash to start reducing Indonesia's distortive and costly fuel subsidies.
But his decision to backtrack soon after, as crude prices began recovering, was a retrograde step.
That rendered Indonesia's downstream sector even more unattractive to foreign investors. The absence of a road map to phase out fuel subsidies and the government's seeming inability to offer investment incentives totally ignore the needs of overseas companies, which have many alternative choices in the region.
Pertamina is forced to share the government's fuel subsidy burden for selling petrol and diesel below cost and, lacking willing foreign partners, comes up short on its own funds to invest in its refining system.
Indonesian refinery projects have a revolving door that regularly sees the arrival and departure of potential suitors from Russia, Japan, and the Middle East.
When Pertamina awarded the engineering, procurement and construction contracts for the upgradation and expansion of its 97-year-old Balikpapan refinery last December, the completion target was pushed back to 2023, from the original 2021.
It is telling that Saudi Aramco, a keen investor in downstream projects across Asia in recent years, has remained out of Indonesia's refining sector. Talks between Pertamina and Aramco to expand and upgrade the Cilacap refinery in East Java, following a heads of agreement signed in 2015, are in a stalemate over asset valuation.
Pertamina has finally appointed an independent consultant to assess Cilacap's enterprise value and has set a June deadline to settle differences with Aramco, or call off the partnership.
Indonesia has turned away other potential partners. In 2010, the government signed a preliminary agreement with Kuwait Petroleum International to build a 300,000 barrels per day refinery at the Balongan petrochemical complex in West Java, but the project failed to materialize as Jakarta refused to grant KPI the incentives it sought.
In January 2018, Pertamina announced that a consortium of Oman Overseas Oil and Gas and Japan's Cosmo Oil had won the project to build a 300,000 barrels per day greenfield refinery in Bontang in East Kalimantan. By the time Pertamina signed the framework agreement last December with the Omani company to proceed with a feasibility study, Cosmo Oil had dropped out.
Russian oil giant Rosneft signed a joint-venture agreement with Pertamina in 2016 to build a 300,000 barrels per day greenfield refinery at Tuban in East Java, but the project is still struggling to acquire land, amid local opposition.
In contrast, Malaysia's state-owned Petronas brought in Aramco as an equal partner in its 300,000 barrels per day Refinery and Petrochemical Integrated Development (RAPID) project within 13 months of agreeing the partnership in February 2017.
In the past five years alone, Aramco, the UAE's Abu Dhabi National Oil Company, and Kuwait Petroleum Corporation have taken stakes in several new refining-cum-petrochemical projects in China, India, Malaysia and Vietnam. The Middle Eastern national companies view these as a way to secure crude markets, while participating in the retail profits.
A strategic shift by Asian refiners is expanding their petrochemicals footprint. Amid expectations of oil demand growth plateauing in the next 15-20 years due to a push for environment-friendly technologies and energy alternatives, refiners are future-proofing themselves by betting on petrochemicals, where consumption is predicted to keep growing.
Sadly, Pertamina has missed that boat too. Amid strong domestic demand growth and inadequate investment over the years, Indonesia relies on imports to meet more than half of its petrochemicals needs.
Jakarta may view an MoU on oil and gas sector cooperation signed with Petronas in February this year as an accomplishment. But the devil will be in the detail. Besides, shouldn't two countries so closely aligned geologically, geographically and culturally, have done this decades ago?
Indonesia may benefit more by taking a leaf out of Malaysia's book. The latter has its own challenges, including sensitive fuel subsidies, but Petronas is far more profitable than Pertamina and is not forced to book fuel subsidy losses, because the government absorbs them. The company enjoys more freedom from government intervention and is more dynamic.
Petronas recorded a 22% jump in its 2018 net profit to 55.3 billion ringgit ($13.6 billion) and has planned a capital expenditure of over 30 billion ringgit for 2019. Pertamina, which is yet to release its 2018 results, hopes to book a very modest net profit of around 5 trillion rupiah ($351.6 million). The company slashed its 2019 capex by a quarter from its earlier plan, to $4.2-4.5 billion. Aside from losses from subsidized fuel sales, estimated at $2 billion in 2018, Pertamina is now saddled with aging oil fields that the government has been wresting back from foreign operators in a wave of resource nationalism. They will need investment just to maintain output.
There are no easy solutions for Indonesia. After Widodo and other election candidates pandered to the masses in the election campaign with populist promises, the atmosphere is not conducive to level-headed debate. The inability to attract investment in refining may be compounded by the whipping up of anti-foreign-investment rhetoric in the campaign.
But every new presidential term provides a fresh chance. The new Widodo government should return to gradually eliminating fuel subsidies, the best way to break the vicious cycle of a weak state-owned oil company and a severely-handicapped downstream sector.
Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets. She has two decades of experience providing essential intelligence on the energy sector.