ANALYSIS-Indonesia struggles to hold down oil imports

* Indonesia 2010 crude imports up as economy rebounds

* To increase sweet crude imports to fill tanks, blending

* New refining capacity, local crude supplies slow to rise

By Florence Tan

SINGAPORE, Nov 25 (Reuters) - Indonesia's crude imports will keep rising over the next few years as its economy rebounds and a delay in getting peak output from the giant Cepu field defeats efforts to cut dependence on overseas crude.

Indonesia's need for crude imports for its simple refineries will feed competition among top Asian buyers such as China and India for sweet grades as regional supplies from matured fields dwindle while strong dated Brent prices may curb arbitrage flows from the Atlantic Basin.

"I think it is a combination of increased demand, less product imports in favour of crude and improved refinery utilisation," said Al Troner, president of Asia Pacific Energy Consulting.

Southeast Asia's largest economy imported 11 percent more crude this year than in 2009, at around 103,000 barrels per day (bpd), as refineries improved processing rates. This followed annual declines of 10-12 percent between 2007 and last year, data from Reuters and FACTS Global Energy showed.

The country will remain one of Asia's top buyers of sweet crude to feed its refineries, which lack upgrading capabilities to process domestic grades that have increasingly higher sulphur content. It has also built new storage tanks for bigger imports.

AGEING, OUTAGE-PRONE OILFIELDS

Indonesia could have boosted its refinery utilisation to 90 to 95 percent from 80 to 85 percent in recent years, said John Vautrain, senior vice president of Purvin & Gertz in Singapore.

"The quality of refining operations is improving."

But a lack of new oil refining capacity, as well as growing use of gas and coal in critical industries, could cap purchases over the next few years.

The former OPEC member's push to limit oil imports by boosting domestic supply took a hit from problems last month at its two largest fields, Minas and Duri.

The country's production is set to fall short of the 965,000-bpd goal this year, after the outage stopped the steady rise in crude output seen for most of the first eight months.

Declining output at Indonesia's ageing fields and sudden shutdowns in oil wells have often derailed its plans to meet annual production targets.

"The problem in Indonesia has been, other than these big projects (Cepu, Tangguh), there's been no other big new sources of crude oil," said Stuart Traver, principal adviser at upstream consultancy Gaffney Cline and Associates.

Exxon Mobil Corp expects peak oil production of 165,000 bpd from its Cepu block, one of the oil major's top 10 projects worldwide, to be delayed until end-2013, with current production seen around 20,000 bpd.

Indonesia needs a plan to spur operators to either explore more or try to enhance production in their own existing fields, Traver said.

"A big, big part of Indonesia's future is how they get companies to explore and develop discoveries in the deepwater," he said, referring to the waters off eastern Indonesia.

"The older production-sharing contracts are very good when you don't have to make those large upfront costs," he said. "But then, deepwater you have to spend a lot of money upfront."

BETTER AT MANAGING SUPPLY

State-run Pertamina is building three storage tanks with a capacity of 400,000 barrels each to store imported sweet crude such as Azeri Light for the Balongan refinery, a company official said. These are likely to be completed next March.

The company is also studying the feasibility of crude blending tanks to better manage supplies as domestic oil output is becoming more sour in quality, the official said.

Ample crude storage will allow Pertamina to better control costs and cushion the impact of price swings, a practice commonly seen in big consumers such as China, South Korea and Japan.

"We're entering a time for a more complicated crude slate," Vautrain said, adding the tanks will help to segregate sour and sweet crude.

Indonesia has been trying to ease its reliance on costly crude imports -- made more urgent by record-high oil prices in 2008 -- by trying to tap more domestic supply for refineries and cut use of oil products for power and fertiliser production by switching to coal and gas.

The country aims to use renewables for a quarter of its total energy mix by 2025, up from an initial target of 17 percent, with coal at 32.7 percent and gas at 30.6 percent.

"In the short term, it will rise. For the medium- to longer- term, it might go down," said Singapore-based Deloitte Petroleum Services analyst Alex Siow, referring to crude imports.

A wider energy mix as the country develops its unconventional gas reserves and infrastructure is likely to cut or stabilise crude imports within 10 years, he added.

Indonesia's oil product demand is expected to slow or even fall over the next five years as it tries to cut use of imported diesel in power generation, said H.S. Yen, analyst at Singapore-based consultancy FACTS.

The consultancy expects oil products demand to fall by around 36,000 bpd in the next two years to 1.148 million bpd, before rising to nearly 1.2 million bpd in 2015. "Once this transition is complete, growth will resume," Yen said.

NEW REFINERIES AFTER 2015?

The lack of new refining capacity, as projects were stalled by the 2008-2009 financial crisis and the lack of government incentives, will also curb Indonesia's crude use, analysts said.

No grassroots refineries will be built until 2015-2017, although upgrading has been planned at existing plants to convert excess supplies of naphtha, kerosene and fuel oil, Pertamina official Heru Sutrisno said at a recent conference in Singapore.

Indonesia has nine refineries with a combined capacity of around 1 million bpd, meeting 70 percent of domestic demand, with the rest coming from imports.

Strong potential energy growth in an economy on track to grow 6.1 percent this year has awakened interest in building refineries from Middle East producers and private refiners, but no final investment decisions have been made.

Indonesia has built no refineries since 1995 because of escalating project costs and low margins due to fuel subsidies.

"From a resources or market perspective, it's got a lot of potential," Vautrain said. "To invest in Indonesia you need to have Pertamina as a partner. Pertamina has its own idea who is the right partner."

The government would have to offer tax breaks and other incentives to attract investors to build refineries said Frost & Sullivan consultant Subbu Bettadapura. (Additional reporting by Chandni Vatvani in JAKARTA; Editing by Ramthan Hussain)