JAKARTA – Japan’s Inpex Corporation and Royal Dutch Shell are in bitter conflict over Indonesia’s giant Masela natural gas project, slowing the US$20 billion venture to a crawl and raising questions whether it will be another decade before it gets off the ground.

Shell has wanted out of the project since the new Joko Widodo government insisted on an onshore development in 2015, removing the need for the company’s floating liquified natural gas (FLNG) technology that brought it into the deal in the first place.

Time is not on the government’s side if it expects to earn foreign exchange from the venture. Market analysts say a 2030 start-up means that Masela’s useful life may only be 20 years when many gas-guzzling countries aim to be carbon-neutral by 2050.

“Even at the moment, it would be difficult to justify doing the project,” said one regional oil and gas expert, predicting that LNG demand is likely to remain sluggish and linked to an oil price that will still be hovering around $60 a barrel by 2023.   

A well-placed source, who wished to remain anonymous, says Shell has already signaled it will withdraw from the project, but an exit agreement is on hold because it is demanding “five times” the price Inpex is prepared to offer for its 35% stake.

Asia Times has learned separately that Shell is asking for $2 billion, a valuation based on oil at $60 a barrel and no risk. Because its stake gives the Anglo-Dutch firm the blocking vote on any major decision, the project is essentially dead in the water for now.

“The real problem is Shell, it’s been a pain in the neck,” the source said. “Inpex is really upset and there is no agreement on how to proceed. The situation is really bad. Inpex feels betrayed and Shell is dragging its feet.

“The feeling among the (Indonesian) bureaucrats, is that Shell is opportunistic and has a reputation for low integrity,” he said. “The problem has been its ungentlemanly behavior.” 

Another industry source confirmed the deterioration in relations between the two partners and said he understands Shell, the world’s largest liquified natural gas (LNG) trader, has been quietly soliciting interest in its stake.

A Royal Dutch Shell worker in Indonesia. Photo: Shell Company Picture

Last January, Shell’s regional director reportedly outlined the firm’s intentions during a meeting with his threadbare downstream staff in Jakarta, but tight-lipped headquarters executives have always refused to say anything publicly despite repeated inquiries.

Asked if Shell is leaving, Inpex spokesman Carlo Niederberger told Asia Times: “Shell is a leading company and a global authority on LNG projects from which we expect contributions towards the realization of the project.” Shell spokesperson Cindy Lopez’ response was brief: “No comment.”      

Masela is not mentioned in the company’s current cost-cutting plans, which include abandoning Louisiana’s Lake Charles LNG facility and delaying a final investment decision on the Crux gas field in northwest Australia and the Whale deepwater venture in the Gulf of Mexico.

Shell chief executive Ben van Buerden has been talking up the longer-term prospects for the LNG market, telling Bloomberg in a recent interview he believed it would quickly recover to pre-pandemic levels of 4% growth a year once the crisis has passed.

But in his first quarter report last April, the Shell executive described the first three months as “extremely challenging” and warned that in the recessionary environment going forward he did not expect any recovery of oil prices or demand for the company’s products over the medium term.

Shell responded to a dramatic slide in global oil prices, now sitting at about $40 a barrel, by cutting its quarterly dividend to shareholders for the first time since World War II, reducing it to 16 US cents per share. That was down from 47 cents at the end of 2019.

Close to the eastern Indonesia maritime border with Australia, the Masela block contains a proven 18.4 trillion cubic feet of gas, but possible and probable reserves could push that to more than 40 trillion cubic feet, making it one of the country’s biggest discoveries.

The onshore option involves laying a 180-kilometer undersea pipeline linked to a 9.5 million ton liquefaction plant to be built on the southeast coast of Yamdena, the largest of the Tanimbar islands in the Arafua Sea, 2,700 kilometers southeast of Jakarta.

The government may now be regretting its decision to move onshore, based on what industry analysts argue is the faulty expectation that the project will create jobs and attract ancillary industry to a remote island without any existing infrastructure.

Part of Maluku province, Yamdena and the 65 smaller islands making up the Tanimbar group has a population of about 118,000, 95% of them Christians who are mostly engaged in fishing, coconut growing and chainsaw milling.

Image: Handout

BP’s Tangguh gas plant has brought no industry into Papua’s Bird’s Head region in the decade it has been in operation. Nor has Mitsubishi’s East Java smelter, which has processed concentrate from Papua’s Freeport copper and gold mine since 1996.

“At the end of the day they had their chance to get it going,” says one oil and gas consultant familiar with the project. “But the delay meant they missed the window and by upping the cost curve they have made it even more difficult.”

That, he and other analysts say, is no place to be for a remote greenfield project when spot LNG prices are currently a fifth of what is needed to make Masela economic.

A former head of parliament’s oil and gas commission, Great Indonesia Movement Party (Gerindra) legislator Kardaya Warnika, caused a stir during a recent House discussion by asserting that the project was still 10 years away from coming on stream.

While the commission went along with the onshore option in the belief it would spur economic development, a former member recalls the disappointment that set in over the resulting delays. “There was a lot of skepticism it would get off the ground,” he said.

Kardaya, who once also headed the country’s upstream regulator, was replaced halfway through his term by Gerindra Party leader Prabowo Subianto after getting into trouble for his criticism of then-mines and energy minister Ignasius Jonan.

The conventional wisdom among industry experts is that a final investment decision (FID) for a project like the Masela must be reached 30-months before the beginning of a new presidential election cycle, which in Indonesia’s case is 2024.

Last month, management consultants Mentor IMC Group issued what appeared to be an authorized release saying upstream regulator SSKMigas expected Inpex would only be in a position to make that decision in the fourth quarter of 2022.

But as one Jakarta-based petroleum executive pointed out: “The banks just won’t be keen on the project if the oil and gas market is where it is now and they don’t know what’s happening politically.”

Even after 2024, analysts say it will take another two years before the start of the four-year construction phase, during which contractors will have to run the pipeline across a 3,000-meter trench, marking the highly-active Indian Ocean fault line.

Workers upload natural gas canisters before sending to customers in PT Pertamina LPG filling station in Jakarta. Photo: AFP

Planning for submarine pipelines always requires geological and bathymetric surveys, a close examination of fishing and shipping charts and aerial and satellite photography, but the most critical task of all is figuring out the best route.

There is no way to avoid crossing the 2-3-kilometer wide trench, but technical papers suggest it can be done with a floating pipeline, which would still have to be tethered to the seabed using weights or stays at varying intervals.

More concerning for some experts is the risk involved in laying the pipeline across a seismically-disturbed zone where the Indo-Australian and Eurasian tectonic plates converge.

Skirting Sumatra and Java and the southern coast of the eastern Nusa Tenggara island chain, it is the same fault line that was responsible for the 2004 quake-triggered tsunami disaster that killed 167,000 people in Aceh province alone.

In the end, it may be the least of Inpex’s problems. With Shell out of the picture, analysts predict endless delays for a project that would have been well advanced if Widodo had stuck to the offshore option approved by the previous Susilo Bambang Yudhoyono administration. 

Last week, the head of upstream regulator SSKMigas, Dwi Soetjipto, seemed to reflect just that, saying Covid-19 protocols had forced Inpex to postpone two surveys “indefinitely.” He added: “We are in discussions with Inpex not to back down.”

Assigned to Dutch geo-data specialist Fugno, the geophysical and geotechnical surveys and assorted studies essential to completing the ongoing Front End Engineering Design (FEED) work for the Abadi field’s offshore platforms and pipeline.

That will allow Inpex to calculate a rough investment cost and will also form the basis of bidding for the engineering, procurement and construction (EPC) phase of the undertaking, though cost overruns are always a feature of greenfield projects in remote areas. 

Covid-19 is also having a significant impact on BP’s third production train at Tangguh on the shores of western Papua’s Bintuni Bay where the company is reducing its work force from 13,000 to 8,000 to conform with physical distancing.

Much of that has been at the onshore facility, which is likely to push back the commissioning date for the $8 billion expansion from the third quarter of 2021 to early 2022, two years behind the original completion date.

BP workers at the Tangguh natural gas project set for a massive expansion in Papua Indonesia. Photo: BP

The new train will boost BP’s production from 7.6 to 11.4 million tons, with 75% of its output destined for the domestic market where annual demand now tops more than 12 million tons.

Politically, Tangguh has never been an issue like Masela, which was discovered in 2000 and at one point was slated to begin production in 2015, the second year of Widodo’s presidency.

A revised Plan of Development (POD) was finally signed in Tokyo last June after Widodo decided to follow the advice of former chief economic minister Rizal Ramli that an onshore facility would do wonders for economically-depressed eastern Indonesia.

Although no reason was given, Shell wasn’t present at two meetings between minister Jonan and Inpex executives the previous month in Tokyo where the government finally relented on the project cost and Inpex agreed to a 50% profit-sharing split.

Many other challenges lie ahead. Chief among them is whether Inpex decides to go ahead with the project on its own once it has separated from Shell or whether it will start the unenviable process of looking for a new partner to carry some of the burden. 

The Japanese company’s reputation for project management took a heavy hit with the Icthyius venture on Australia’s gas-rich Northwest Shelf, which saw costs balloon from $34 billion in 2012 to $45 billion when it finally went on stream in 2018.

But it was one of the world’s most complex energy projects, incorporating the whole chain of onshore and offshore development and production, including an 890-kilometer pipeline to a processing facility near Darwin in the Northern Territory.

The proposed LNG price for Masela has been set at $7.5 per million British thermal units (MMBTU), but that already marks the project as a marginally economic proposition at a time when even oil companies like Shell are looking to expand into renewables and away from fossil fuels.

This year, for example, the government has lowered the gas price for industry to $6 per MMBTU, including for electricity plants operated by cash-strapped state-owned power producer PT Perusahaan Listrik Negara (PLN) which has been paying $9-$11 in recent years.

An Indonesian worker fills up a truck with fuel at a state energy giant Pertamina filling center in Jakarta. Photo: AFP/Adek Berry

Since last year, PLN has made several appeals to the government to reduce the domestic obligation price to $6 on Java and $7 off Java to allow it to return to profitability. Only this month, it reported losses of $2.7 billion in the first quarter of the year and said it was cutting its 2020 revenue target by 15%.

If Masela eventually goes ahead, that will almost certainly be where the future demand for its gas lies. But whittling away coal’s 60% domination of current power generation will take time, evidenced by the commissioning of three new 1,000MW steam-powered plants in the past nine months alone.

“The problem is that as a developing country with a rich store of natural resources, Indonesia will always go for the cheapest source of energy,” says one analyst. “It can’t afford to use clean, more expensive energy. What matters is [that it’s] cheap.”