Is Indonesia’s Small Refineries Plan for U.S. Crude Viable?

Indonesia plans to build more than a dozen small modular refineries to process growing volumes of U.S. crude but analysts have expressed concerns that the plan may not be viable and could limit the refining mix and profits of the biggest economy in Southeast Asia.

Reports emerged last month that Indonesia was preparing to sign an $8-billion contract with U.S. engineering company KBR Inc to help it build 17 modular refineries, as part of the U.S.-Indonesia trade deal.

In the middle of July, Indonesia and the United States reached a trade deal, under which the U.S. tariffs on Indonesian products will be lowered to 19% from an initial levy of 32%.

Indonesia was slapped with one of the highest tariffs – 32% – in the “liberation day” tariffs announced by U.S. President Donald Trump in early April. These tariffs were suspended for 90 days, during which the Trump Administration expected most countries to come pleading their cases and promising to boost their imports of U.S. goods to avoid high tariffs.

Following weeks of negotiations, Indonesia’s products will now face a lower – 19% – tariff on entering the United States.

Indonesia has said it would buy billions of U.S. dollars worth of American oil and oil products and has signaled it would offer to buy an additional $10 billion worth of American oil and liquefied petroleum gas (LPG).

Indonesia also plans to slash its fuel imports from Singapore and source more refined products from the United States as the country looks to negotiate lower tariffs with the U.S.

While the small modular refineries would take less time and money to build, they could be constrained in their crude intake, analysts have told Reuters. Moreover, the modular refineries cannot scale up and cannot be sure that the arbitrage economics for importing U.S. crude would always work in refiners’ favor, according to various commodities analysts.

By Tsvetana Paraskova for Oilprice.com

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