Commentary: Decision on Masela plan will impact other giant gas projects

Vincent Lingga, The Jakarta Post, Jakarta | Commentary | Tue, February 09 2016, 6:18 PM

The government’s decision with regard to the US$15 billion Masela gas development plan in Maluku will have a great impact on Indonesia’s hydrocarbon industry because most of the country’s promising sedimentary basins are located in the country’s eastern region and the highest success ratio of explorations has, thus far, been in gas.

The question now is just how did Japanese Inpex and Royal Dutch Shell (Shell) find themselves in such an imbroglio for their gas development plan, previously under the full jurisdiction of the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) and Ministry of Energy and Mineral Resources.

Why did the Masela gas project become the first of such developments required to go directly to the President for approval, not simply the minister of energy and mineral resources as has been the case for the last five decades.

Another question is whether the Masela debacle portends that the final approval process for oil and gas development projects no longer rests with the authority of SKKMigas and the minister of energy and mineral resources. If that is the case, it will cause severe damage to the whole industry at a time when oil prices are at their lowest.

When Inpex, as the operator of the Masela Block in the Arafura Sea, submitted its plan of development (POD) for the 10.7 trillion cubic feet of gas reserves in the Abadi field last April, the licensing process should have run as normal through comprehensive technical and economic assessment at SKKMigas. Recommendation from this regulatory body have so far been perfunctorily approved by the energy minister.

In September, SKKMigas recommended the Masela POD, for a floating LNG (FLNG) project with a designed capacity of 7.5 million tons a year and 24,000 barrels of condensate a day, to the Energy and Mineral Resources Ministry. The two-year feasibility study by Inpex concluded that an onshore LNG (OLNG) plant on Aru Island would cost $22.3 billion and require a reasonable length of time to build.

But Coordinating Maritime Affairs Minister Rizal Ramli, who entered the Cabinet only in mid-August, cried foul in October, shooting his mouth off against the project. He demanded a whole review of the Masela project, arguing that the POD should be linked to an OLNG plant instead of FLNG so as to generate more multiplier impacts on the national economy.

Analysts wondered, though, how comprehensive and reliable Rizal’s study was, especially when compared to the Inpex POD which is based on a two-year feasibility study of both FLNG and OLNG concepts. If Rizal’s study was so credible why was it not submitted to SKKMigas as a comparison to the Inpex POD?

I don’t think SKKmigas is so short of technical experts and analysts as to recommend the POD on Masela project if it is largely biased against the country’s interests. It is worth a reminder that it is Inpex and Shell that bear the entire cost of the Masela project and that these companies will only be able to recoup their investment only after the LNG plant has commenced commercial operation.

The feasibility study used for the POD must be accepted as credible and reliable by those international creditors who will finance the bulk of the $15 billion investment.

It is also regrettable that President Joko “Jokowi” Widodo, instead of encouraging vigorous discussions and debates within his Cabinet, allowed such policy bickering in public.

But the ministerial squabbling should also be blamed on Jokowi. The President has been so obsessed with his concept of developing a maritime axis and sea toll roads that he created the portfolio of the coordinating maritime affairs minister in his first Cabinet in October, 2014.

Jokowi made another misguided decision during the first reshuffle of the Cabinet last August, when he agreed to change the nomenclature of the maritime affairs portfolio to “coordinating maritime affairs and natural resources minister”, hence putting four ministries — maritime and fisheries, tourism, transportation and energy and mineral resources — under it.

I think this nomenclature change will continue to dog the Cabinet’s economic policy making because of the blurred division of jurisdiction between the coordinating economic minister and the coordinating maritime affairs and natural resources minister.

Things became increasingly murky when Jokowi responded to Rizal’s criticism and ordered an independent assessment of the Masela project. But US consultant Poten & Partners, hired by the ministry of energy and mineral resources, also recommended a FLNG last December, as proposed by Inpex and approved by SKKMigas.

Both Rizal and Jokowi are wise and right in demanding that the Masela gas project generate maximal benefits for the Indonesian people and have a multiplier impact on the national economy. But it is misguided to push through this objective at the expense of the commercial viability of the project.

For the Maluku administration and its people, neither concept matters much because there are not many local people on the small islands of Aru or Tanimbar whom are qualified to take the jobs created by the project construction. It is better for them to invest additional revenue from Masela in priority programs to meet local needs.

There have been exhaustive debates on the pluses and minuses of FLNG and OLNG concepts for the Masela project.

The advantages of FLNG are that its capital cost is $7 billion cheaper than OLNG and faster to construct because it does not need vast land acquisition and long gas pipelines, causing less environmental impact and generating $57 billion in revenue for the government, in comparison to $48 billion in the case of OLNG. The domestic shipbuilding and offshore structure industries will also benefit greatly from the FLNG concept.

Proponents of OLNG claim benefits including greater multiplier impacts on Aru or Tanimbar Islands — such as jobs, businesses, services and amenities like markets, a hospital, housing and other public facilities and infrastructure — as well as the petrochemical industry.

For the OLNG concept, the big question is, do we possess the capacity and resources in engineering, procurement and construction (EPC) for such a huge and complex, high-technology industrial complex?

If the final decision is in favor of OLNG (rather unthinkable), it will cause another long delay, meanwhile the concession for the Masela block will expire in 2028.

And, even if the President finally decides soon to choose the FLNG concept, the Masela project will not be commercially viable if the Masela 30-year concession is not extended at least by 10 or 20 years because Inpex-Shell needs two years after the President’s final POD approval to prepare their final investment decision and another six years for the building of the FLNG and its supporting infrastructure. - See more at: http://www.thejakartapost.com/news/2016/02/09/commentary-decision-masela-plan-will-impact-other-giant-gas-projects.html#sthash.jhB7OkC9.dpuf