Sinopec Group, China's biggest refiner and second-biggest oil producer, is building what experts predict will become the largest oil storage terminal in Southeast Asia, in the Batam free trade zone in Indonesia.

In an investment worth $850 million, Sinopec Kantons Holdings, a unit of the company, will hold a 95 percent stake in the PT West Point Terminal project, which will include a 2.6 million cubic meter oil storage facility capable of storing up to 16 million barrels of crude and refined fuels, and the construction of extensive port facilities, the company told the Hong Kong Exchange, in a market statement on Tuesday.

The company said the project's location will help it increase its market shares in Southeast Asia, Northeast Asia and the Middle East.

The project was originally planned as a joint venture between Sinopec and OilTanking, a unit of the privately held Marquard & Bahls AG, but did not work out, according to Reuters.

The Batam project will be Sinopec's first big facility near Singapore, generally considered the hub for Asia's oil trading activities. The Chinese refiner first established its presence there 15 years ago, and it now trades refined products there with a team of around 50.

Taking 18 to 24 months to complete, the project has about 360 hectares of land set aside for it.

A refinery and petrochemical project are also being considered in a second phase of development, a source familiar with project details said.

China National Petroleum Corp, Asia's largest producer of oil and gas, has a 35 per cent stake in a 14 million-barrel universal oil terminal on Singapore's Jurong Island.

Liao Na, information director at the energy consultancy ICIS C1 Energy, said the management rules for oil storage terminals in Singapore are more developed and regulated than they are in Indonesia, but the new Batam facility will enjoy some attractive tax benefits offered by the Indonesian government.

"Singapore is saturated with oil storage terminals which leads to higher prices than in Indonesia. But it is a good deal for Sinopec, considering the Batam location is so near (Singapore)," Liao said.

Sinopec has aggressive plans to expand its oil vessel activities in the area, but its biggest challenge has been finding sufficient oil storage capacity.

Once finished, the project will allow the company to avoid transporting oil back to China, giving it the flexibility to have it refined in Indonesia instead, Liao said.

Sinopec's crude oil output in the first half was 163 million barrels, up 4.33 percent year-on-year.

Its domestic output was 152 million barrels, 1.16 percent up while overseas crude oil output increased 82.46 percent in the first half to 11.13 million barrels, according to company figures.