Vincent Lingga, Wed, March 30 2016
| 09:20 am
President Joko '€˜Jokowi'€™ Widodo'€™s decision to choose an onshore liquefaction process for the giant Masela gas project could be right for domestic political consumption.
But his hardball approach and policy inconsistency, without taking into account the prevailing weak oil-market conditions, could jeopardize the commercial viability of the whole Masela LNG project gas development in southern Maluku.
That was our main reading of the President'€™s decision last Wednesday to select an onshore liquefaction (OLNG) concept for the Masela project, which sits on almost 11 trillion cubic feet of gas reserves in the Arafura Sea.
His decision overrules the recommendations of the SKKMigas upstream oil and gas regulatory body, his energy and mineral resources minister and the oil and gas contractors, Inpex-Shell, which all chose a floating LNG (FLNG) concept.
Ordering Inpex-Shell to go back to the drawing board to prepare an OLNG project will possibly postpone the final investment decision on the project until 2022, almost three years after a new government takes over.
Both Inpex and Shell say they have not received the final documents on the President'€™s decision, so were unable to make any meaningful comment, except confirming that the project would suffer another delay.
But analysts have noted that since this is a huge project, Inpex-Shell will certainly conduct a disciplined approach to see whether the OLNG project will be consistent with their requirements for a development concept that is commercially robust across a range of scenarios.
Wood Mackenzie consulting company observed in its latest report that '€œ the decision to go onshore will not only extend the time to first gas [delivery] but also brings into questions Inpex and partner Shell'€™s commitment to the project'€.
Inpex-Shell had previously looked into both OLNG and FLNG options but had selected a FLNG concept because it would cost over US$7 billion less than the estimated $22 billion for an OLNG, as well as being faster to develop.
They will certainly ask for more incentives to make the project commercially viable and bankable, but these additional incentives could wipe out most of the economic advantages (multiplier impacts) Jokowi had in mind when he chose an OLNG over a FLNG.
Upstream oil and gas analysts here estimate that Inpex-Shell will need at least two years to conduct another environmental impact analysis, another one year for a more detailed feasibility study on the OLNG and one year more for finalizing its final plan of development (POD).
Even if the government speeds up approval of the POD, the oil companies will still need another two years to seek potential buyers and lenders. Hence analysts predict Inpex-Shell will not make a final investment decision until 2022. If the contract for the project'€™s front-end engineering design is awarded within one year later, engineering, procurement and construction will start only in 2023 and the plant will come on-stream in 2029.
The main predicament in this process is that Inpex-Shell will have to negotiate an extension of the Masela block concession, which will end in 2028, because even under the original POD for a FLNG, as proposed by the contractors, the project had been scheduled to start production only in 2024/2025.
Fortunately, though, the extension of an oil and gas production contract can be negotiated 10 years before its end. But negotiations for the contract'€™s extension are unlikely to start in 2018, an election year, when inordinately strong nationalist sentiments heat up campaigns.
The negotiation process will also plunge the project into political and social quagmire, as the Maluku provincial and regency administrations, as well as state-owned Pertamina oil company, may demand a piece of the huge gas-resource pie.
Since this is a gas business and all the risks are to be borne by Inpex-Shell, commercial viability is the key to determining whether the project will advance to the implementation stage or end up mothballed.
The main question then is who will buy the gas and at what prices and for how long. When it comes to the LNG market, many analysts have predicted a market glut within the next 10-15 years, with an estimated additional capacity of 50 million tons a year to come on stream, mainly in Australia, the US, Africa and Malaysia.
The day Jokowi announced his choice of OLNG for Masela, newspapers in Australia reported that Woodside Petroleum and its partners, including Shell, had shelved plans to build the $30 billion Browse floating LNG project off Australia in the face of global oversupply. The decision means there are no longer any major gas export projects under serious consideration in Australia after a $220bn-plus run of investment decisions unprecedented anywhere in the world.
The pace of development of giant gas export schemes has slowed globally, as LNG prices have plummeted with oil prices, prompting many companies to delay funding decisions until business conditions brighten.
In Asia, LNG prices have plunged by 80 percent over the past two years. The basic question then is whether the much larger cost and the more complex development of OLNG justifies spending vast amounts of money at current oil prices below $40/barrel.
Yet more important is whether potential lenders who will put up at least 80 percent of the investment will be convinced that their credit will be returned. After all, most giant oil and gas companies have seen their available funds for development decimated by slumping prices.
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President Joko '€˜Jokowi'€™ Widodo'€™s decision to choose an onshore liquefaction process for the giant Masela gas project could be right for domestic political consumption.
But his hardball approach and policy inconsistency, without taking into account the prevailing weak oil-market conditions, could jeopardize the commercial viability of the whole Masela LNG project gas development in southern Maluku.
That was our main reading of the President'€™s decision last Wednesday to select an onshore liquefaction (OLNG) concept for the Masela project, which sits on almost 11 trillion cubic feet of gas reserves in the Arafura Sea.
His decision overrules the recommendations of the SKKMigas upstream oil and gas regulatory body, his energy and mineral resources minister and the oil and gas contractors, Inpex-Shell, which all chose a floating LNG (FLNG) concept.
Ordering Inpex-Shell to go back to the drawing board to prepare an OLNG project will possibly postpone the final investment decision on the project until 2022, almost three years after a new government takes over.
Both Inpex and Shell say they have not received the final documents on the President'€™s decision, so were unable to make any meaningful comment, except confirming that the project would suffer another delay.
But analysts have noted that since this is a huge project, Inpex-Shell will certainly conduct a disciplined approach to see whether the OLNG project will be consistent with their requirements for a development concept that is commercially robust across a range of scenarios.
Wood Mackenzie consulting company observed in its latest report that '€œ the decision to go onshore will not only extend the time to first gas [delivery] but also brings into questions Inpex and partner Shell'€™s commitment to the project'€.
Inpex-Shell had previously looked into both OLNG and FLNG options but had selected a FLNG concept because it would cost over US$7 billion less than the estimated $22 billion for an OLNG, as well as being faster to develop.
They will certainly ask for more incentives to make the project commercially viable and bankable, but these additional incentives could wipe out most of the economic advantages (multiplier impacts) Jokowi had in mind when he chose an OLNG over a FLNG.
Upstream oil and gas analysts here estimate that Inpex-Shell will need at least two years to conduct another environmental impact analysis, another one year for a more detailed feasibility study on the OLNG and one year more for finalizing its final plan of development (POD).
Even if the government speeds up approval of the POD, the oil companies will still need another two years to seek potential buyers and lenders. Hence analysts predict Inpex-Shell will not make a final investment decision until 2022. If the contract for the project'€™s front-end engineering design is awarded within one year later, engineering, procurement and construction will start only in 2023 and the plant will come on-stream in 2029.
The main predicament in this process is that Inpex-Shell will have to negotiate an extension of the Masela block concession, which will end in 2028, because even under the original POD for a FLNG, as proposed by the contractors, the project had been scheduled to start production only in 2024/2025.
Fortunately, though, the extension of an oil and gas production contract can be negotiated 10 years before its end. But negotiations for the contract'€™s extension are unlikely to start in 2018, an election year, when inordinately strong nationalist sentiments heat up campaigns.
The negotiation process will also plunge the project into political and social quagmire, as the Maluku provincial and regency administrations, as well as state-owned Pertamina oil company, may demand a piece of the huge gas-resource pie.
Since this is a gas business and all the risks are to be borne by Inpex-Shell, commercial viability is the key to determining whether the project will advance to the implementation stage or end up mothballed.
The main question then is who will buy the gas and at what prices and for how long. When it comes to the LNG market, many analysts have predicted a market glut within the next 10-15 years, with an estimated additional capacity of 50 million tons a year to come on stream, mainly in Australia, the US, Africa and Malaysia.
The day Jokowi announced his choice of OLNG for Masela, newspapers in Australia reported that Woodside Petroleum and its partners, including Shell, had shelved plans to build the $30 billion Browse floating LNG project off Australia in the face of global oversupply. The decision means there are no longer any major gas export projects under serious consideration in Australia after a $220bn-plus run of investment decisions unprecedented anywhere in the world.
The pace of development of giant gas export schemes has slowed globally, as LNG prices have plummeted with oil prices, prompting many companies to delay funding decisions until business conditions brighten.
In Asia, LNG prices have plunged by 80 percent over the past two years. The basic question then is whether the much larger cost and the more complex development of OLNG justifies spending vast amounts of money at current oil prices below $40/barrel.
Yet more important is whether potential lenders who will put up at least 80 percent of the investment will be convinced that their credit will be returned. After all, most giant oil and gas companies have seen their available funds for development decimated by slumping prices.
