Masela mothballed until 2029, analysts say

Jakarta’s insistence on an onshore liquefaction plant rather than a floating facility for its Masela development means first gas is likely to be delayed by five years, to 2029, analysts said this week.

Japanese operator Inpex finally received an official letter of rejection for its Abadi FLNG development on Monday, more than a week after President Joko Widodo announced his instruction for output from the gas-rich block in the Arafura Sea to be developed onshore.

Sending Inpex and project partner Shell back to the drawing board to prepare an onshore development proposal will probably postpone an FID on the LNG scheme until 2022, nearly three years after general elections in 2019.

As a result, most Jakarta-based analysts are not expecting first gas until 2029, a year after the current production-sharing contract (PSC) expires and some five years later than under the vetoed FLNG concept, William Simadiputra, an Indonesian energy specialist at research agency DBS Vickers, told Interfax Natural Gas Daily.

On paper the onshore project seems feasible, but the investors will need to massively overhaul their development plan, while the president’s decision could even see the companies pull out, Simadiputra added.

Inpex declined to comment specifically on the decision, but a spokesperson told NGD the company is reviewing the letter carefully before responding, as Masela is a high-risk and complex upstream block that will requires huge levels of investment.

Inpex and Shell had previously assessed both onshore and floating development options. They selected the FLNG concept because it would be at least $7 billion cheaper than plans for the onshore complex – estimated at $22 billion – as well as being quicker to develop.

But the president – who overruled the recommendations of Shell, Inpex, Indonesia’s energy minister and upstream regulator SKKMigas, all of which backed the FLNG model – hopes an onshore plant will boost regional economic development in Southern Maluku province.

The onshore model

Analysts told NGD they expect Inpex and Shell will need at least two years to carry out another environmental impact assessment, a year to prepare a detailed feasibility study on the onshore plant and one more year to complete the final development plan.

On top of that, they will also need at least two more years to shore up buyers and lenders for the project, meaning an FID is unlikely before 2022.

A sticking point will be extending the current PSC – which expires in 2028. Negotiations could potentially be drawn out, Simadiputra warned. The extension can be negotiated 10 years before the contract expires.

But talks are unlikely to start in 2018, an election year, when nationalist fervour will be at its peak. State-backed oil company Pertamina’s desire to get involved in the project could complicate matters too, he added.

"Aside from figuring out [how to lay] pipelines across a deep-sea trench in an extremely tectonically active area and finding a suitable site for the LNG processing facility, the investors need some certainty on domestic gas pricing as a significant chunk of production will be sold locally," said a source close to the project, who wished to remain anonymous.

"The whole pricing issue is generally up in the air in Indonesia. As things stand now it will be hard going finding project finance, not to mention buyers," the source added.

Even after the feasibility study is finished, land acquisition will be a huge challenge and has proven to be a key hurdle for many of Indonesia’s other projects, resulting in multi-year delays, said Simadiputra.

It is not uncommon for powerful Indonesian businessmen to buy land that could potentially be used for oil and gas projects from locals when it is cheap. This kind of behaviour obstructs strategic state projects, a spokesperson at upstream regulator SKKMigas told NGD.

For instance, in recent years, whenever Inpex surveyed land in the Maluku region with an eye for developing a logistics supply base to support its FLNG scheme, speculators would snap up the land.

Leaked information about the planned construction of onshore facilities to speculators has not helped either. They want to take advantage and make as much money as possible, added the spokesperson.

Inpex can only hope the government will help expedite the buying of project land once a location for the LNG plant is finally decided, otherwise it will be one more problem delaying the development of the Masela block.