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JAKARTA – Former mines and energy minister Sudirman Said, known for following the advice of oil and gas experts around him, may be forgiven for feeling vindicated following the collapse of Indonesia’s US$20 billion Masela natural gas project in the remote Arafua Sea.
Upstream regulator SSKMigas and senior government sources have confirmed an earlier Asia Times report that the foreign-invested project is now at a standstill and will be for the foreseeable future.
Well-meaning or not, industry analysts put the blame on President Joko Widodo’s decision four years ago to switch from a widely-preferred offshore liquified natural gas (LNG) operation to an onshore plant instead.
“This was a mixture of populism and incompetency leading to the wrong judgment,” says Said, whose strong argument in favor of the offshore option cost him his post when the president reshuffled his second-term Cabinet in July 2016.
After three years of obvious foot-dragging, SSKMigas now acknowledges that minority partner Royal Dutch Shell is pulling out of the mega-project, leaving Japan’s Inpex Corporation to cast around for another company to buy its 35% share.
The previous Susilo Bambang Yudhoyono government had already given the go-ahead for an offshore operation, built around Shell’s floating liquefied natural gas (FLNG) technology that would have given the company big input into how to manage the project.
But Rizal Ramli, the maritime coordinating minister in the new Widodo government, and presidential energy adviser Acandra Tahar persuaded the president to reverse the decision on the basis it would be an economic boon to underdeveloped eastern Indonesia.
Cynics claimed the only real benefits would favor politically-wired Jakarta businessmen who stood to win some of the lucrative construction contracts involved in laying a 180-kilometer pipeline from Masela’s Abadi field to the planned 9.5 million ton LNG facility on Yamdena, the main island in the remote Tanimbar archipelago.
A former finance minister with no petroleum experience, Ramli appeared unperturbed that the pipeline would have to run through a seismic zone, crossing a 3,000-meter-deep trench that marks one of the world’s most active fault lines.
After 20 years in the United States, where he worked for offshore construction companies, Tahar was brought in as an adviser by Widodo’s nephew, Andi Wibowo, a former classmate at the prestigious Bandung Institute of Technology.
Tahar subsequently replaced Said as mines and energy minister in the 2016 reshuffle, but he lasted barely a year before it was discovered he was the holder of both Indonesian and American passports, forbidden under Indonesian law.
When Widodo reversed course, Shell lost interest. In fact, since last year’s presidential election ended any hope it had of a change in mindset, insiders say the Anglo-Dutch oil giant has been demanding $2 billion to exit the project, five times more than Inpex is willing to pay.
According to a range of industry sources, that conflict has caused the recent delays more than the Covid-19 pandemic, which held up preliminary field surveys. SSKMigas has claimed that the global slump in oil and gas prices have caused Shell’s withdrawal.
“The show goes on,” the regulator’s deputy for operations Julius Wiratno was quoted saying in the Jakarta Post last week “They (Shell) cannot just pull out like that. They have to remain committed to their plans for this year, even if they are just limping along.”
With Inpex’s market capitalization hovering around $8-9 billion, and Moody’s recently downgrading its credit rating from “stable” to “negative”, the company won’t be able to carry the project on its own and is unlikely to receive help from the Japanese government.
A source close to SSKMigas told Asia Times: “We will summon Inpex to clarify this. It becomes a serious issue if the Japanese government doesn’t help.” For many experts, it has reached that point already, given the current slumping state of the LNG market.
“This is a case of a myopic focus on economic nationalism rather than economic rationalization.” says one petroleum analyst who requested anonymity. “LNG is a commodity and position on the cost curve is critical. The cost increases of the onshore project simply made it uncompetitive.”
The onshore option elevated the project’s price tag from $14.8 billion to $19.3 billion, not only slowing the project but also greatly extending the period of cost recovery for the developers in an already difficult environment that made the mega-greenfield projects uneconomic.
According to existing estimates, Masela’s Abadi field contains proven and probable reserves of 18.4 trillion cubic feet (TCF) of gas, or 3.2 trillion barrels of oil equivalent. Some experts believe further exploration could see it expand to as much as 40 TCF.
LNG is selling in Asia at $2.20 per million British thermal units (MMBTU), with one recent Australian cargo to Japan priced at $1.35. The marginal cost of Masela is $6.50, which means no long-term contracts until at least 2025 when the market may start to come into balance.
Although the issue had been debated for more than a year, Said had little idea what was brewing when Widodo asked him to take a midday flight to the West Kalimantan capital of Pontianak, 800 kilometers north of Jakarta, on March 23, 2016.
Ushered straight into an airport press conference, Said was informed of Widodo’s final decision on the onshore facility only moments before the president stepped to the microphone to make the announcement.
Then he handed over to his startled minister to discuss the details. “It was rather humiliating, but I used my tradecraft to get through it,” Said says now. “I said we had been waiting for the wisdom of the president to make the decision.”
He also had to explain his own feelings on the turn-around. “This is not about losing or winning, this is not a football match,” he told reporters at the time. “This is a public decision, so we must choose the one that is the best for the well-being of Indonesians.”
It is still unclear why the newly re-elected president chose West Kalimantan, a bauxite-rich province 2,800 kilometers away from the project site, to break what had been a prolonged stalemate between the government and the two partners.
What is clear is that in a joint 2015 presentation to the government, both said the risks with the onshore option were greater by a significant margin. They also explained that the technique for “floating” the pipe across the 3 kilometer-wide undersea chasm was still being perfected and subject to cost overruns.
That same year, after four or five Cabinet meetings on the issue, Widodo authorized Said to commission a $4 million study from New York-based consultants Poten and Partners, which concluded that an offshore venture was the obvious economical choice.
Said says he never saw any detailed studies to support Ramli’s argument of an economic flow-on. On the contrary, critics argued that an onshore facility only requires a few hundred staff and that attracting industry to such a remote location was a pipe-dream that has failed to materialize with other projects.
Said, on the other hand, saw the value of a floating terminal coupled with a fleet of tankers supplying gas directly to a string of small coastal power stations state-owned Perusahaan Listrik Negara (PLN) had planned to improve electrification across eastern Indonesia.
Asked if he had any regrets about the way things have turned out, Ramli said in a telephone interview with Asia Times last week: “No, not at all. I’m proud of it.” But this time, he ignored the economic arguments of the past and instead focused on what he saw as technical shortcomings.
Ramli recalls complaining privately to Shell executives in 2015 that Indonesia was being used to experiment with its uniquely-designed floating LNG technology, which was introduced off northwest Australian coast the following year.
“They admitted it was the first time on such a large scale and I told them that Indonesia should not have to pay for the experimental costs,” he said. “I still think it was a good decision (to go onshore). Otherwise, I think we would have suffered larger losses.”
However, some experts disagree. “That’s nonsense,” says one Jakarta-based oil executive familiar with the project. ”They weren’t experimenting. They did the experimentation in Australia. Keep in mind there are other FLNG technologies that have been around for 40 years.”
But with the benefit of hindsight, Ramli insists he feels vindicated too, pointing to persistent teething problems afflicting Shell’s 600,000-ton FLNG Prelude, off-line since last February because of what Australian news reports have described as an electrical trip.
The $19 billion behemoth has been plagued with the safety and regulatory issues that have made the National Offshore Petroleum Safety and Environmental Management Authority, the Australian regulator, notoriously difficult to deal with.
The search for oil and gas has never been easy. Australia’s fabled Gorgan field took 30 years to produce because of a different but equally problematic anomaly to that of Masela. The developers were confronted with having to separate out and store large quantities of carbon dioxide.
That’s the reason why the world’s oil giants have shied away from Indonesia’s Natuna D-Alpha, a 46 trillion cubic feet bonanza discovered in the far reaches of the South China Sea in the early 1970s. It has stayed in the ground ever since. Some believe Masela may now suffer a similar fate.