THE PUBLIC WILLINGNESS TO PAY FOR

INCREASING REFINERY CAPACITY IN

INDONESIA

Ardin Fadolly
(INDONESIA)
International Energy Policy Program (IEPP)
Seoul National University

Seoul, September 17th, 2018 Theory and Practice of Technological Innovation

1
INDONESIA OIL AND GAS PROFILE
OIL Oil Production GAS Gas Production
(MBOPD) (MMscfd)

8,078 8,078
MBOPD

MMscfd
7,938 7,938
7,762 7,762
7,620 7,620

2015 2016 2017 2018* 2015 2016 2017 2018*

Oil Reserves Gas Reserves

(MMSTB) (TSCF)
7,535
143

42
4,364
Potential Reserves Potential Reserves
Proven Reserves Proven Reserves
Total 100 Total
3,171

OIL RESERVES GAS RESERVES

MBOPD: Millions Barrels of Oil per Day MMscfd : Millions standard cubic feet per day
MMSTB : Millions Stock of Oil Tank Barrels TSCF : Trillions of standard cubic feet 2
Source: Indonesia Ministry of Energy and Mineral Resources, 2018
OIL PRODUCTION AND CONSUMPTION
Oil Production
Oil Consumption

Import
Production

Consumption

MBOPD: Thousands Barrels of Oil per Day 3

Source: Indonesia Ministry of Energy and Mineral Resources, 2018
CRUDE OIL SUPPLY
Thousand bbl Crude Oil Supply
600,000
Parameter 2017 Unit
Production Export
Day in a year 365 days
500,000
Refinery capacity in a day 1,169.1 MBCD

Refinery capacity in a year 426.7 Million Barrels

400,000

Oil Refinery Input in a year 323.9 Million Barrels

300,000 Domestic Production for refinery 182.3 Million Barrels

Import Crude in a year for refinery 141.6 Million Barrels

200,000
Crude Oil Production in a year 292.4 Million Barrels

Crude Oil Export in a year 102.7 Million Barrels

100,000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

bbl : Barrels
4
Source: Indonesia Ministry of Energy and Mineral Resources, 2018
INDONESIA TYPICAL CRUDE OIL & PRODUCT DISTRIBUTION

bbl : Barrels
5
Source: PT Pertamina (Persero), 2018
REFINERY PRODUCTS SUPPLY
Production Refinery Products Supply Indonesia Indonesia
500,000 Impor Domestic Import
Total Consumption
Refinery Refinery
450,000
Product: Product:
400,000 403,577
Avtur+JP5 Avtur
350,000
Avgas Avgas
300,000
Thousand bbl

RON 88 RON 88
260,477
250,000
RON 92 RON 92
200,000
RON 95 RON 95
150,000 143,099 Fuel Oil Fuel Oil
100,000
IDO IDO
50,000
ADO ADO
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Kerosene DPK
RON 51 HOMC
Source: Indonesia Ministry of Energy and Mineral Resources, 2018
6
bbl : Barrels
INDONESIA IMPORT COMMODITIES 2017
Articles of iron or steel

Food industry waste

Cereals

Top 10 Organic
Commodities,
Vehicles
101.67, 65% Miscellaneous
Top 10 Commodities Plastics, plastic articles
Miscellaneous,
55.23, 35% Iron, steel

25.4 Electrical machinery, equipment

Machinery including computers

0.00 10.00 20.00 30.00
Billion USD Mineral Fuels including Oil

Highlight : Natural bitumen, asphalt, shale

• Total Import Commodities of Indonesia in 2017 is Tar pitch, coke

156.9 Billion USD Petroleum jelly, mineral waxes

• The highest Import Commodities category is Coke, semi-coke

Mineral Fuels including oil with 25.4 Billion USD Coal tar oils
(16.2%) Petroleum oil residues
• The highest Import Commodities is processed Coal, solid fuels made from coal
petroleum oils with 14.1 Billion USD (9.0%) Petroleum gases
14.1
Crude oil
Source: Indonesia, B. P. S. (2017). Statistika Indonesia. BPS Pusat. Jakarta. 0.00 5.00 10.00 15.00
Billion USD Processed petroleum oils
7
RESEARCH QUESTIONS

How to analyze the public preference and WTP (willingness to pay) for a
reliable capacity of domestic refinery to secure fuel supply and minimize fuel
oil import dependence in Indonesia?

10/29/2018 8
METHODOLOGY (1)
This research will use Contingent Valuation Method (CVM) with data processing from certain
survey of fuel end user or households. This research will also use one-and-one-half bound
(OOHB) dichotomous choice model to process the result of the survey.
Estimatin
Estimatin g
g WTP Economic
Data Benefit of
processin using
Selecting statistical this policy
survey g
Selecting package
question responde (STATA)
Construct type nt
Literature ing WTP
Review Scenario
Recent
condition
and policy
analysis

10/29/2018 9
METHODOLOGY (2)
The utility function of the respondent will be presented as follows:
𝑢 𝑗, 𝑦, 𝑠 = 𝑣 𝑗, 𝑦, 𝑠 + 𝜀𝑗 , 𝑗 = 0,1
j is the specific status or situation
𝜀𝑗 is the error term
𝑢 1, 𝑦 − 𝐴, 𝑠 ≥ 𝑢 0, 𝑦, 𝑠
𝑣 1, 𝑦 − 𝐴, 𝑠 + 𝜀1 ≥ 𝑣 0, 𝑦, 𝑠 + 𝜀0
If respondent answer yes to given question, then j = 1 with bid price A
∆𝑣 = 𝑣 1, 𝑦 − 𝐴, 𝑠 − 𝑣 0, 𝑦, 𝑠 ≥ 𝜀0 − 𝜀1 = 𝜂
∆𝑣 is the increment of the indirect utility
𝜂 is the stochastic parameter for expressing the distribution of the utility difference function.
If the increment of the indirect utility is positive, the respondent the respondent may answer yes. Therefore, the
probability that respondent will say yes will be denoted as follows:
Pr(𝑦𝑒𝑠) = 𝑃𝑟 𝐶 ≥ 𝐴 = 1 − 𝐺𝑐 𝐴 = 𝐹𝜂 (Δ𝑣)
𝐺𝑐 is the cumulative distribution function (cdf) of the random variable c
10/29/2018 10
METHODOLOGY (3)
Each respondent will be presented in two type of prices, low to high bound price 𝐴𝐿𝑖 and high to low bound price 𝐴𝐿𝑖
The log-likelihood function will be presented as follows:
𝑁

ln 𝐿 = ෍ 𝐼𝑖𝑌𝑌 + 𝐼𝑖𝑌 ln 1 − 𝐺𝑐 𝐴𝑈
𝑖 ;𝜃 + 𝐼𝑖𝑌𝑌 + 𝐼𝑖𝑌 𝑙𝑛 𝐺𝑐 𝐴𝑈 𝐿
𝑖 ; 𝜃 − 𝐺𝑐 𝐴𝑖 ; 𝜃 + 𝐼𝑖𝑁 + 𝐼𝑖𝑁𝑁 𝑙𝑛 𝐺𝑐 𝐴𝐿𝑖 ; 𝜃
1
where 𝜀𝑗 is vector parameters, 𝐼𝑖 𝑠 are indicator function.
Cumulative distribution functions will be denoted as:
−1
𝐺𝑐 𝐴; 𝜃 = 1 + exp(𝑎 − 𝑏𝐴)
Mean Willingness to Pay (WTP) will be expressed as:
𝑚𝑒𝑎𝑛 𝑊𝑇𝑃 = 𝐶 + = 𝑎/𝑏

10/29/2018 11
 NATIONAL REFINERY CONDITIONS
National Refinery Capacity (2017)

1.169,1 MBCD

Pertamina 1.051 MBCD

Private 118 MBCD
MBCD: Thousands Barrels Crude per Day Development 2.367 MBCD
12
Source: Indonesia Ministry of Energy and Mineral Resources, 2018
Evaluation of Recent Conditions and Policies

High dependence in Fuel price fluctuation High Number of Vehicles Fuel transportation constraint
Fuel Oil Import often occurred 129,281,079 (2016)

Government policy to give the subsidy for the Government policy to initiate One
Source: Google Images
RON 88 Fuel and ADO (Automotive Diesel Oil) Price Policy for Fuel in Indonesia
10/29/2018 and IDO (Industry Diesel Oil) 13
CONTINGENT MARKET IN THE SURVEY
Current Status (2018) Supporting Policy Target Status (2025)

• Capacity of Refinery • Refinery • Fulfill Indonesia

is 1.169 KBD Development Fuel growing
• Percentage of Fuel Master Plan Demand is 1,948
Import is 35.4% (RDMP) KBD (Base Case)
• Upgrading Existing • Increase 2.5 times
Refinery Facility of Fuel Product
construction Supply from 529
• Grass Root Refinery KBD to 1.393 KBD
(GRR) Development by upgrading 5
(five) existing
refinery
• Building 2 (two)
new refineries with
GRR technology to
balance fuel
demand in east and
west part of
Indonesia
Source: PT Pertamina (Persero), 2015
14
CHANGE IN PRICE OF FUEL
No Fuel Type Consumptions Price Willingness to Percentage New Price with WTP
in 2017 (kL)* (IDR/Liter)** Pay Bid (IDR/Liter) of Bid (IDR/Liter)

1 Premium (RON 88) 12,120,404 6,450 (43 cUSD) +100 (0.7 cUSD) 1.5% 6,550 (43.7 cUSD)
+150 (1 cUSD) 2.3% 6,600 (44 cUSD)
+200 (1.4 cUSD) 3.0% 6,650 (44.7 cUSD)
2 Pertalite (RON 90) 14,487,098 7,500 (50 cUSD) +100 (0.7 cUSD) 1.5% 7,600 (50.7 cUSD)
+150 (1 cUSD) 2.3% 7,650 (51 cUSD)
+200 (1.4 cUSD) 3.0% 7,700 (51.7 cUSD)
3 Pertamax (RON 92) 4,780,929 8,400 (56 cUSD) +100 (0.7 cUSD) 1.5% 8,500 (56.7 cUSD)
+150 (1 cUSD) 2.3% 8,550 (57 cUSD)
+200 (1.4 cUSD) 3.0% 8,600 (57.7 cUSD)

4 Pertamax Turbo 379,998 9,350 (62 cUSD) +100 (0.7 cUSD) 1.5% 9,450 (62.7 cUSD)
(RON 95+98+100) +150 (1 cUSD) 2.3% 9,500 (63 cUSD)
+200 (1.4 cUSD) 3.0% 9,550 (63.7 cUSD)

Source: *2018 Handbook of Energy and Economic Statistics in Indonesia

15
** PT Pertamina (Persero)
ECONOMIC BENEFIT POTENTIAL
No Fuel Type Possible Economic Benefit per year (USD) 3.50 3.22

Economic Benefit (Billion USD)

3.00
0.7 cUSD WTP 1 cUSD WTP 1.4 cUSD WTP 2.42
2.50
1 Premium (RON 88)
2.00
80,802,693 121,204,040 161,605,386.67 1.61
2 Pertalite (RON 90) 1.50
96,580,653 144,870,980 193,161,306.67 1.00
WTP?
3 Pertamax (RON 92) 0.50
31,872,860 47,809,290 63,745,720 0.00
0.00
4 Pertamax Turbo
Zero WTP 0.7 cUSD/Liter 1 cUSD/Liter 1.4 cUSD/Liter
(RON 95+98+100) 2,533,320 3,799,980 5,066,640 WTP (cUSD/Liter)

Total
211,789,527 317,684,290 Economic Benefit Potential for 15 years for additional
423,579,053.33
charge to Increase the capacity of national refinery (USD)

Parameter Value 0.7 cUSD/Liter 1,610,887,978

Discount Rate 10% 1 cUSD/Liter 2,416,331,968

Lifetime 15 Years 1.4 cUSD/Liter 3,221,775,957

16
ECONOMIC DECISION TO IMPORT IN 2025

Additional Refinery Capacity (MBCD)

350
No Parameter 2025 Unit 322
300
1 Fuel Demand Base Case 1,948 MBCD 242
250
2 Fuel Supply Existing 529 MBCD
200 161

3 Additional Supply from Refinery 865 MBCD 150

Development Master Plan 100

(Upgrading existing Refinery)
50
-
4 Additional Supply from Grass Root 380 MBCD -
Refinery (Additional Refinery)
Zero WTP
Total Fuel Supply 1,694 MBCD 0.7 cUSD/Liter
1 cUSD/Liter
1.4 cUSD/Liter
Potential Fuel Import -254 MBCD WTP (cUSD/Liter)
Parameter Zero WTP 0.7 1 1.4
cUSD/Liter cUSD/Liter cUSD/Liter
Parameter Value Unit
Additional Refinery Cap. 0 161 242 322
Investment on Additional 10,000 USD/barrel
Refinery* oil day Import Demand 254 254 254 254

Investment for 100 MBCD 1 Billion USD ∆ -254 -93 -12 68

Decision to Import Yes Yes Yes No
*Source: https://www.dawn.com/news/1058291 17
DEVELOPING QUESTIONS IN SURVEY
HIGHER TO LOWER APPROACH
Q1. Would you be willing to pay additional 100 IDR (0.7 cents USD) per liter gasoline each time you refuel
your vehicles for the next 10 years for enlarging domestic refinery capacity and minimize fuel import?
1. Yes (to Q2)
2. No (to Q3).
Q2. Would you be willing to pay additional 150 IDR (1 cents USD) per liter gasoline each time you refuel your
vehicles for the next 10 years for enlarging domestic refinery capacity and minimize fuel import?
1. Yes
2. No
Q3. Would you be willing to pay a little per liter gasoline each time you refuel your vehicles for the next 10
years for enlarging domestic refinery capacity and minimize fuel import?
1. Yes
2. No (Zero WTP)
18
DEVELOPING QUESTIONS IN SURVEY
HIGHER TO LOWER APPROACH
Q1. Would you be willing to pay additional 150 IDR (1 cents USD) per liter gasoline each time you refuel your
vehicles for the next 10 years for enlarging domestic refinery capacity and minimize fuel import?
1. Yes (to Q2)
2. No (to Q3).
Q2. Would you be willing to pay additional 100 IDR (0.7 cents USD) per liter gasoline each time you refuel
your vehicles for the next 10 years for enlarging domestic refinery capacity and minimize fuel import?
1. Yes
2. No
Q3. Would you be willing to pay a little per liter gasoline each time you refuel your vehicles for the next 10
years for enlarging domestic refinery capacity and minimize fuel import?
1. Yes
2. No (Zero WTP)
19
SURVEY
1. Personal Information including: 2. Question about Willingness to Pay
Email address, Gender, Age, Educational
Background, Location, Monthly Income,
Experience in using vehicle

20
EXPECTED RESULT

Annual WTP for Economic benefit Policy

increasing for increasing Recommendation

Outcome 2
Outcome 1

Outcome 3
refinery capacity refinery capacity Framework to
in indonesia in indonesia support the
scheme

21
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