INDONESIA - The Indonesian Refining Sector Is Still In Need Of Expansion.

Producing 950,000 b/d of crude oil and consuming 1.2m b/d of fuels, Indonesia in 2004 became a net oil importer. For years, there has been an urgent need to increase refining capacity in the country through new projects and the upgrading of existing plants. State-owned Pertamina, to be privatised by 2006, is importing petroleum products at high cost. Two refineries nearing completion are for export and can help meet some of the local demand. Pertamina will pay international prices in buying fuels from them as they are a joint venture involving foreign companies.

Indonesia has eight refineries, with a total capacity of 992,745 b/d. The largest are the 348,000 b/d Cilacap in Central Java, the 240,920 b/d Balikpapan in Kalimantan, and the 125,000 b/d Balongan in Java. The smallest plant, in Cepu, Central Java, has a capacity of 3,420 b/d. The two JV refineries being built are mainly for export to China.

Fuel Price Protests: Students took to the streets in at least 10 Indonesian cities on March 1 to protest steep fuel price increases in what could be one of the biggest political tests for President Susilo Bambang Yudhoyono since he took power last October. The government on Feb. 28 said it was reducing fuel subsidies in a budgetary move that would result in average price increase of 29%, and the price increases took effect March 1.

Fuel prices have been a sensitive matter in Indonesia, ever since riots over a price increase in 1998 hastened the collapse of the authoritarian Suharto regime. This time the authorities placed about 13,000 police and other security forces on alert to deal with any violent protest.

The cutting of the subsidies angered many poor Indonesians who depend on cheap vehicle fuel to earn a living. There was also concern that the rise in fuel prices may make other basic commodities more expensive. One of Yudhoyono's major political allies in parliament, the Prosperous Justice Party (PJP), criticised the cutting of the subsidies, saying the government had yet to work out a detailed plan to compensate the poor.

Hundreds of students blocked roads in the city of Makassar in eastern Indonesia. In Jakarta, students burned tires near a major intersection and shouted slogans accusing Yudhoyono of failing to defend the poor.

Gasoline now costs 2,400 rupiah (25 US cents) per litre, up from about 1,800 rupiah, but is still the cheapest in Asia. (Malaysia also moved on Feb. 28 to cut subsidies, and unleaded gasoline now sells for about 37 US cents/litre).

Previous phased reductions of subsidies have set off violence and forced presidents to roll back some price increases. Yudhoyono, Indonesia's first directly elected president, recently said he was prepared to lose popularity by sticking to the plan. But with a small support base in parliament, he could come under political pressure if the protests turn violent.

Yudhoyono, who won the presidency on Sept. 30, on Feb. 28 told Indonesians the measures were a bitter but necessary step. Economists have welcomed the decision, saying Indonesia needs to free up funds for infrastructure and development spending. The subsidies last year cost the state 59 trillion rupiah (about US$7 bn). Officials said the cuts would result in a fuel subsidy cost this year of 39.8 trillion rupiah, about 10% of budget expenditure.

Now, gasoline prices have increased by 32.6% and automotive diesel fuel prices by 27.3%. Household kerosine, vital to impoverished Indonesians, was left unchanged. Anticipating the price increase, motorists lined up at fuel stations late into the night on Feb. 28. The government has promised that some of the money saved by the reduction of subsidies will be redirected to improving schools and housing for the poor. But many critics are concerned that the money could be lost to corruption, which is endemic at all levels of Indonesian society.

A promised fund could help those who suffer most from the price rises. But Rama Pratama, a member of the parliament's budget commission from the PJP, said the details of that plan were unclear. The party, he said, "rejects the fuel price increases because the government has not prepared details of the compensation...to show they can reach the right target". He added: "The government also has no clear plan to deal with the inflation that will be triggered by simultaneous increases in the prices of staple goods".

PT Kilang Minyak Intan Nusantara, a joint venture of Al-Banader Int'l Group of Saudi Arabia (40%), China National Electrical Equipment Corp. (40%) and PT Intanjaya Agromegah Abadi (20%), are investing a total of $6 bn in two export refineries being built - one in Pare-Pare, South Sulawesi and the other on Batam Island, Riau.

Both projects are expected to be operational in 2005, with capacities of 300,000 b/d. The refineries will be taking Saudi crude oil and refining it for sale primarily to the Chinese market.