The signing on Sunday of the heads of agreement (HoA) between Japan’s Inpex oil company and Indonesia’s Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) for the development of the US$20 billion Masela natural gas liquefaction plant project in the eastern region of Maluku will go a long way in improving the market perception of the future of the country’s hydrocarbon industry
span>The signing on Sunday of the heads of agreement (HoA) between Japan’s Inpex oil company and Indonesia’s Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) for the development of the US$20 billion Masela natural gas liquefaction plant project in the eastern region of Maluku will go a long way in improving the market perception of the future of the country’s hydrocarbon industry.
The project, which is supported by the country’s biggest gas field with proven resources and capabilities of producing 9.5 million tons of liquefied natural gas (LNG) a year, had been delayed since early 2016 after President Joko “Jokowi” Widodo decided to move the project onshore from offshore as designed by Inpex-Shell in the original plan of development (PoD).
But preparations for the project may take another five years before construction work starts because gas resource development has become increasingly complex with more intricate supply chains. The conclusion of the HoA, though not legally binding, is nevertheless a very good start because it stipulates the basic principles, the terms of a new production-sharing contract (PSC) for the Masela gas field, financial conditions and cost estimates.
Inpex, as the lead operator, will need a few months more to revise the final PoD, make front-end engineering designs, revise the feasibility study, negotiate with potential buyers and lenders and finally offer tenders to contractors.
Before Inpex makes the final investment decision that it has promised for 2022, SKKMigas and Inpex have to first sign a new PSC with all its new terms, including terms for the fiscal regime. And negotiations for the fiscal terms for the 20-year duration of the Masela PSC could be tricky because they must anticipate the new rulings that will be stipulated in the oil and gas bill now pending at the House of Representatives.
The government is well advised to realize during the negotiations of the PSC contract that the regulatory framework should be made to achieve the best possible balance between investors and national interests. Yet more important for two other major gas projects (Eni’s Jangkrik and the Chevron deep water project) in the country, the deal with Inpex should be processed under a transparent fiscal framework.
Transparency of information on concessions, revenue, capacity, prices, roles and responsibilities, as well as processes and procedures will contribute to efficiency in the sector, build trust between stakeholders and reduce opportunities for malfeasance. Even though the International Gas Union has estimated that during the next 10 years more than a dozen LNG plants in Malaysia, the United States and Canada with a total capacity of 50 million tons a year will come on stream, the Masela project will still be commercially viable. Indonesia itself is projected to have an LNG deficit starting next year as state electricity company PLN will double its need for natural gas to 6 million tons, not to mention other industrial demand.
In fact, state-owned holding company Pertamina has committed to importing 4 million tons of LNG from global suppliers starting in 2021. Other ASEAN countries, including Thailand, Vietnam and the Philippines, also depend on imported LNG.
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