T

he rising issue of development options for the Masela block in the Arafura Sea has stimulated opinions from various perspectives.

Salis Aprilian'€™s article entitled Examining FCNG option for Masela block in The Jakarta Post proposes floating compressed natural gas (FCNG) as a compelling alternative for developing the prospective block in addition to the previously suggested option of onshore liquefied natural gas (OLNG) and floating LNG (FLNG).

We, however, urge the Indonesian government to cautiously explore the technical risks, economic ramifications and sustainability aspects of each development option prior to selecting the most appropriate.

The Abadi field in the Masela block is expected to be prominent in the nation'€™s declining oil and gas industry as the next largest producing natural gas field. Publicly accessible reports suggest that the Masela block contains a vast amount of proven reserves, ranging from 6 to 12 trillion cubic feet (Tcf) of natural gas, two to four times the size of the nation'€™s current largest natural gas block, Mahakam.

The Abadi field, located in the Maluku area, is thought to be able to produce 2.5 - 7.5 million tons per annum (mtpa) of LNG and 8,400 barrels oil equivalent (Boe) per day of condensates for the next 30 years.

Under the options of FNLG and OLNG proposed by different parties, the development of Masela block would cost US$15 billion and US$19 billion, respectively.

At first glance, FLNG is perceived as the more feasible option because it is less expensive to develop.

However, assuming a 15 percent rate of return (ROR), a rough economic calculation of the break-even price results in $8 per Mcf for FLNG and $10 per Mcf for OLNG, both of which are not feasible considering the current price slump in the industry.

It is therefore necessary for the Indonesian government to immediately, though carefully, ponder other options to avoid future losses.

The other alternative, FCNG, is believed to generate additional multiplier effects.

Firstly, it creates the opportunity to revitalize the declining Badak LNG assets, which is crucial for the state'€™s future income considering the emerging global LNG demand.

Secondly, FCNG is aligned with the mission of helping the nation'€™s maritime industry to prosper.

Thirdly, there are positive spillover effects to other industries (e.g., petrochemical, industrial, shipbuilding) and regions as well as less adverse environmental impacts from FCNG relative to both LNG options.

Fourthly, the FCNG method is more practical and reliable compared with the other two.

Despite the multiplier effects favoring FCNG, we advocate that the government also take the following aspects into consideration.

The first is technical risk. The most relevant at this stage of discussion is the reserve estimation risks and exploitation risks.

There are numerous factors that could cause reserve miscalculation and underachieving production rate considering the nature of the oil and gas industry.

Hence, installing a fixed-capacity facility is the least preferred way to deal with these risks. The OLNG and FLNG options require installation of a facility with fixed capacity for the liquefaction process, but FCNG allows for flexible capacity as it gradually increases its processing capacity to compensate for the increase of production rate in the early phase of exploitation.

This flexibility is also advantageous when reserves or production rates are overestimated. Furthermore, when the CNG vessels are idle, they could be cross-functioned and used as ship fleets to reinforce the maritime highway program.

The second is the economic aspect. FCNG could be a relatively inexpensive and more feasible option, requiring only $4 billion of investment for a conventional estimated production rate with the 12 CNG vessels, which is equivalent to break-even price of $3 per Mcf.

This is more realistic than the much higher breakeven prices for FLNG and OLNG considering the current dip in natural gas prices.

The cheaper production costs will increase the commerciality of the field as it attracts more prospective buyers.

The third is sustainability. It is commonly agreed that building an onshore facility for OLNG and FLNG could improve the well-being of local residents as regional economic activities intensify.

Nevertheless, decision-makers should be extra vigilant about short-term socio-economic progress followed by perverse effects.

The rapidly rising intensity of developing the natural gas field is expected to instantly attract locals to leave their normal occupations and rely on the growing oil and gas sector.

However, the non-renewable nature of this sector could be harmful for the long-term socioeconomic conditions of the region.

The Indonesian government and local authorities have to consider the permanent benefits of producing the field.

Income from extracting the natural resources should instead be reinvested in long-term local welfare such as enhancing local infrastructure, improving the electrification ratio, advancing educational facilities, establishing renewable energy facilities and so forth.

By doing so, the benefits of exploiting the Abadi field will not only go to the current generation, but also be sustained for future generations.

The Indonesian government must act prudently and promptly for the sake of the nation'€™s oil and gas industry and welfare.
______________________________________

Fadli Rahman is a PhD candidate in mineral and energy economics at the Colorado School of Mines, US. He also serves as VP, external affairs, for the Society of Indonesian Energy Professionals in Houston, also in the US. Erwinsyah Putra, PhD is a reservoir engineering consultant at Occidental Petroleum Corporation in Houston. The views expressed are their own.