Indonesia’s current crude oil and condensate production is approximately 825 MBOD while the domestic demand for oil is approximately 1,400 MBOD. Indonesia has 8 major refineries with a combined installed capacity of 1,031 MBOD but is currently only utilizing approximately 870 MBOD or 84% of the total capacity. With demand exceeding supply, one would think that all oil produced in Indonesia would be refined and sold domestically but the reality is that only 60% to 65% of total production is used for domestic requirements while the rest is exported. There are two main reasons why Indonesian oil production is still exported: (1) domestic refineries are not able to process the oil because the oil specifications do not meet the refineries’ specifications requirements, and (2) the Production Sharing Contract (PSC) gives the rights to the PSC contractors to freely lift their lifting entitlement. Historically, domestic refineries were built to process all of the domestic oil produced at that time. However, maintaining such integrated strategy over a long period of time can be challenging as the production from old oil fields declines and new production may have specifications that are not in line with the refineries’ capabilities. Under these circumstances, produced oil may need to be exported quickly to prevent a critical storage situation in the upstream facilities. A further consideration is that building new refineries or modifying existing refineries will take time, may reduce refining capacity while modifications are being undertaken and will likely require significant capital investment with little to no margin due to the domestic fuel pricing policy. This paper will explore how the contractual, operational and commercial aspects of oil lifting in Indonesia and the dynamics of them in light of the current supply and demand situation lead to the export of oil despite an increasing domestic demand.
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