Blue sky project at Cilacap refinery faces the risk of failure

The upgrading of the Cilacap fuel refinery in Central Java, also known as the blue sky project, which is crucial to help increase fuel output in the country, is facing the risk of failure due to tender problem, Kontan daily reported on Monday.

According to document obtained by Kontan, of 13 companies participating in the tender process for the project which started in April 2013 resulted in two final bids made by JGC-JGC Indonesia and Toyo-IKPT at US$350 million and $450 million, respectively. JGJ-JGC Indonesia was supposed to be the winning bidder.

But the tender process has to be repeated after state-owned oil and gas company PT Pertamina, which owns the Cilacap refinery, revised the interest rate of return (IRR) of the project from 10 percent to 14 percent, Kontan said, thus lowering the cost of the project from $380 million to$266 million.

Pertamina asked the two bidders to revise their bids. Only Toyo-IKPT made the revision slightly down to $420 million.

Pertamina Director for Investment Planning and Risk Management, Afdal Bahaudin said that the IRR of 14 percent is quite reasonable to assure economic scale of the project.

But Chrisma Damayanto, Processing Director at Pertamina, said that the ideal IRR was 12 percent, not 14 percent. ?All over the world, there is no refinery project with IRR of 14 percent,? he said, reflecting internal friction within the company on how to proceed with the blue sky project.

Chrisma said that negotiation between Pertamina and the two final bidders is still in progress. (*)