resident Joko “Jokowi” Widodo has urged state-owned enterprises (SOEs) and the Indonesia Investment Authority (INA) to enter the huge but stalled Masela gas block in Maluku to jumpstart the US$20 billion project. Many, however, have questioned the motive behind the move.
The president’s move came after his visit to Japan in July, when he got a commitment from Japanese Prime Minister Fumio Kishida to provide financial support through the Japan Bank for International Cooperation (JBIC) for any Indonesian entity entering the project, by either acquiring stakes from the Inpex Corporation of Japan or from the departing Dutch oil and gas giant Shell.
The two leaders apparently agreed to revive the project, which has stalled since President Jokowi decided to turn the gas project into an onshore liquefied natural gas (LNG) platform in 2016, a complete change from the original offshore scheme. Jokowi said he changed the project from offshore to onshore to bring more benefits to local people in the relatively remote province of Maluku.
Following Jokowi’s call for state investment, Upstream Oil and Gas Special Regulatory Task Force (SKK Migas) head Dwi Soetijpto told Pertamina to review the company’s capability to buy a participating interest in the Masela block. Pertamina reluctantly complied, but experts warned that Pertamina was already financially overstretched because of other commitments. The company, for example, is still struggling to amass enough working capital for the Rokan oil and gas block.
Inpex and Shell had previously agreed to build an LNG facility with an annual capacity of 9.5 million tons in a cost-recovery contract worth around US$20 billion. Shell decided in 2020 to walk out of the project by selling its 35 percent stake at $2 billion. Inpex, the majority stakeholder with a 65 percent participating interest, was actually interested in buying the stake but considered the price tag too high. The fair price of the 35 percent shares is estimated at between $800 million and $1 billion.
The Japanese company, however, is reluctant to continue the project alone. Therefore, the offer came from Kishida for an Indonesian entity to take part in the project, whose total cost has been revised up several times. When it was planned as an offshore project, the project was set to cost about $15 billion, but when it was changed into an onshore project, the cost exploded to $18 billion and now $20 billion.
The costs will likely increase further as Inpex plans to include a carbon capture, utilization and storage (CCUS) facility to reduce the Abadi natural gas field project’s carbon dioxide emissions. The requirement to construct a CCUS facility would increase the cost of the Masela block, so SKK Migas has requested the reduction of the CCUS facility’s construction cost in order to maintain the economic value of the project.
Masela project timeline
What we’ve heard
One of our sources at SKK-Migas said that Pertamina was obliged to purchase the participating interest of Shell in the Masela block. On one hand, the state-owned company does not have the desire to take part in the development of the gas in the Tanimbar Islands of Maluku. On the other hand, the company was forced to reconsider after President Joko “Jokowi” Widodo asked Pertamina to become a replacement contractor in the block.
The source added that Pertamina did not have a portfolio for deep-ocean projects. “Pertamina does not have the technical capability needed for deep-ocean drillings,” the source said. It bears mentioning that the only offshore project that Pertamina has run is the Offshore North-West Java (ONWJ). The aforementioned is not in deep ocean like in Lapangan Abadi, Masela, which has much higher risk. Meanwhile Inpex Masela Ltd, the Japanese company with a concession that lasts until 2055, needs a partner to replace Shell on the block.
Aside from that, Pertamina is also having financial difficulties due to its obligation to sell Pertalite below its market price while the compensation from the government for Pertalite sales still cannot be collected. Another source mentions that due to the forced sale of Pertalite below market value, the state-owned company is incurring losses. The ability of Pertamina to prepare funds of at least Rp 90 trillion needed to buy the participating interest in Masela is doubted by experts in the oil and gas sector.
A practitioner in the gas industry explains that Pertamina is even struggling to access new loans from banks for working capital because the company already has large debts that fall due this year. Because of this, the capability of Pertamina to fulfill the fuel stock is very limited. “Many new loan applications made by Pertamina have been rejected by national banks,” said the source. New banks gave the green light after the House of Representatives approved the government’s proposal to increase the quota for subsidized fuel from 23 million kiloliters to 28 million kiloliters.
Other than that, according to the source, even if Pertamina were to purchase the participating interest in the Masela block, the company has to bear the expensive drilling costs to develop gas in deep waters.
The Inpex CEO asked Jokowi about the fate of the Masela block when Jokowi made a visit to Japan last July, whether or not the decision of the President to assign Pertamina to participate in the Masela block was triggered by the high cost of LNG in the world right now. “Jokowi is rumored to be interested in the current price of LNG,” said the source. Amid the ongoing energy crisis, the price of LNG could reach US$30-40 per MMBTU.
The issue is that the development of the Masela block has lost a lot of momentum. If the government had not changed the development plan of Masela from offshore to onshore, that block would have been producing LNG by 2024. Meanwhile, the high price of LNG is projected to hold until 2025.
According to another source, the global price of LNG will start decreasing after 2025 because several LNG developments projects in the world will finish by 2025 and 2026. The influx of LNG reserves will lower the price. Masela, if its development goes smoothly, is projected to start producing LNG by 2027.
Meanwhile the Final Investment Decision (FID) process of the Masela block, which should have finished by 2020, has not concluded yet. “What I expected of the Front End Engineering Design (FEED) still has not finished,” said the source.
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