Maritime Affairs Coordinating Minister Rizal Ramli has triumphed over Indonesia’s entire oil and gas establishment in getting President Joko Widodo to agree to the onshore development of the giant Masela gas block in eastern Indonesia’s Arafura Sea.
But at what price?
Widodo based his decision on the benefits he hopes a processing facility will bring to the remote Tanimbar Islands – currently little more than an occasional destination for small cruise liners and adventurous tourists – and the rest of Maluku province to the north.
Few detailed studies have been made to explain those benefits, compared to what the offshore option might offer in terms of supplying gas straight from a floating liquefied natural gas (LNG) terminal to a string of small power stations across the region.
Critics claim an onshore facility will only favor politically wired business interests in Jakarta who either own property on the main Tanimbar island of Yamdena, or stand to win some of the onshore project’s lucrative construction contracts.
Ramli has never worked in the petroleum industry and when queried in an SMS whether he realized a 170-kilometre pipeline from Masela to the Tanimbars would have to cross a 3,000-metre-deep undersea trench, he responded with a digital smile.
Widodo’s decision has stunned everyone, including Mines and Energy Minister Sudirman Said, upstream regulator SKKMigas and, in particular, joint venture partners Inpex and Shell, which may now contemplate abandoning the project as uneconomic.
It also flew in the face of a $4 million study the Indonesian government commissioned from international consultants Poten & Partners last year, which concluded that offshore development was the obvious option.
While government officials claim Japan’s Inpex and Dutch Shell are still committed to proceeding with the onshore development of Masela’s 40 trillion cubic feet Abadi field, industry sources reveal that’s not what they have been saying in private.
But with 13 years still to run on their contract, they won’t be walking away either. More likely, they are hoping that the three years it will take to half-heartedly plan for an onshore plant will see changes in the world oil market or in Jakarta’s political climate.
Apart from the daunting technical challenge, the cost of the undertaking will rise from $14.8 billion to $19.3 billion, not only causing delays but greatly extending the period of cost recovery for the developers in an already difficult oil and gas environment.
Published figures also show revenue to the state will sink from $51.8 billion to $42.3 billion, based on the current 12 million cubic feet in proven reserves, and the project’s contribution to GDP will also drop from $126 billion to $122 billion.
More to the point is the viability of an onshore development, given the state of the over-supplied world market and the possibility that when the project eventually comes on stream the gas will turn out to be more expensive than imported LNG.
“The current economics don’t support the development of green-field mega-projects,” one Jakarta-based petroleum analyst told The Diplomat. “The market has turned and just can’t wear an extra five billion in costs, no matter what the government wants or thinks.”
Indeed, Inpex president and chief executive Toshiaki Kitamura said in an April 9 interview that it ”may be a while” before any new green-field LNG projects take shape worldwide, with most attention focusing on the long-term strategic value of brown-field expansion.
The joint venture’s proposal for a 7.5 million-ton floating terminal had been approved by Said and SKKMigas before Ramli intervened last September soon after the one-time finance minister was appointed to the Cabinet.
The Masela venture has some interesting parallels with Australian company Woodside Petroleum’s Sunrise venture, 400 kms to the southwest in the Australia-East Timor Joint Petroleum Development Zone (JPDZ).
The common denominator for both is the deep undersea trench, marking one of the world’s most volatile earthquake-prone fault lines, which skirts Sumatra and Java and curls around the southern coast of the Nusa Tenggara island chain.
Woodside also proposed a floating terminal, pointing to the trench and the lack of onshore infrastructure as the reasons for refusing to bring the gas ashore on Timor Leste’s south coast, despite all the benefits it would bring to the tiny island republic.
Last year, it shelved plans to develop the eight trillion cubic feet field after giving the Timor Leste Government an ultimatum to either accept floating LNG technology or leave the $40 billion gas reservoir under the seabed.
More than 95 percent of the Dili Government’s state revenues – or roughly $3 billion – come from the JPDZ’s Bayu Undan field, which began piping gas to a processing facility in Darwin, northern Australia, in 2004. Those revenues are now progressively diminishing.
While Woodside determined that a dual 18-inch pipeline system was technically feasible, it would come at a high cost. Engineers also determined that the steep sides of the 2-3-kilometre wide trench would be subject to periodic collapse.
When it was discovered in 1992, the Abadi field was estimated to contain about 5-6 trillion cubic feet of gas, which given its remote location hard up against the Indonesia-Australia maritime boundary hardly made the field an economic proposition.
But subsequent appraisal wells now put its proven reserves at 12.4 trillion cubic feet, with expectations it will grow to 40 trillion cubic feet – three times more than BP’s two-train Tangguh operation in West Papua’s Bintuni Bay.
Only the Natuna D-Alpha field in the South China Sea is bigger, at 46 trillion cubic feet of recoverable reserves, but the huge volumes of associated carbon dioxide have deterred its development since the early 1970s.
Indonesia has a record of dragging its feet on large-scale resource projects, starting with ExxonMobil’s Cepu oil field in East Java, which took more than a decade to bring on stream because of land acquisition and other issues Jakarta seemed incapable of resolving.
This time it is purely politics, although it is difficult to figure out why a president would ignore studies done by both Indonesian and foreign experts and instead take the advice of someone who has zero experience in the oil and gas industry and appears to know even less about the current world market.
John McBeth is an Indonesia-based author and journalist.