After Project Stalled 3 Years, Inpex Must Return Masela Block to Government

ENERGY - JAKARTA. Three years after the government approved the plan of development (PoD) of the Abadi Field Liquid Natural Gas (LNG) Project in the Masela Block, until now the project has not been started. If until 2024 this project does not run, Inpex Corporation as the contractor of the Masela Block is obliged to return one of the blocks with considerable natural gas reserves to the government.

The obligation is stated in the Government Regulation (PP) Number 35/2004 concerning Upstream Oil and Gas Activities. The regulation, signed by President Megawati Soekarnoputri, was promulgated on October 14, 2004.

Article 96 paragraph 1 of the PP number 35/2004 states, if within five years after the development plan approval does not carry out activities according to the first field development plan, the contractor must submit the entire working area to the minister.

The provisions in article 9 paragraph 1 will be excluded if within the stipulated period there has been no agreement to buy and sell natural gas. If that is the case happened, the minister may extend the period as per paragraph 1 for the contractor concerned. However, in the POD approval of the Abadi Masela field in July 2019, the contractor has included the purchase of the gas. Because according to the provisions, the POD for natural gas can only be approved and signed if there is already a gas offtaker.

Energy economics expert from Gadjah Mada University (UGM), Dr. Fahmy Radhi MBA, assessed, the slow development of the Masela block was caused by Shell's planned retreat as one of the participating interest holders (PI) of the Masela Block. As a result, the project, that was supposed to start entering FID, has not made any significant progress until now.

"Since its discovery in 2000, the Masela Block hasn’t made much progress for more than 20 years. Meanwhile, it should go ahead in 2024, so I think the block should be taken again by the government. With the huge potential of natural gas, there will be many investors entering Masela, although the investment is very large,” said Fahmy on Wednesday (24/08/2022).

According to Fahmi, with the great potential that the Marsela block has, the government should leave it to the state-owned companies (SOEs). After all, he said, the state-owned companies in the domestic energy sector are already quite capable of managing the block.

“We’ve the energy SOEs such as Pertamina and PGN. It is time, the country wealth is managed by the state. For funding issues, I think our banks can afford to finance in a consortium, or it can also issue bonds. So in terms of financing, I don't think it's difficult,” he disclosed.

More Optimal Onshore

Based on the pod approval by the Ministry of Energy and Mineral Resources, the Abadi Masela block development was carried out onshore (land). This decision was taken after considering many aspects. In addition to more efficient investment, onshore development will encourage the construction of new industrial estates around the Masela field area. Such as petrochemical businesses that have the potential to provide greater economic added value for the national economy interests, including employment for communities in the surrounding area.

Referring to the 2020 information, the investment cost in the Masela block on an onshore basis requires an investment cost of around USD17.3 - 19.9 billion. The fund was capable to finance the LNG production of 9.5 Milion Tons Per Annum (MTPA) plus pipeline gas production of 150 MMSCFD. The gas production of the pipeline is planned to supply the needs of the Petrochemical plant around the Masela Block field area.

If the Masela project is developed offshore (sea), the financing is estimated to cost up till USD28.8 billion. The investment is only to produce LNG with a capacity of 9.5 MTPA.

In comparison, the offshore natural gas project was also developed by Shell, the PI owner in the Masela block besides Inpex, at their Project in Australia, namely Shell Floating Prelude LNG. As quoted from www.boilingcold.com.au/after-prelude-few-win-from-shells-floating-lng, the project had spent an investment or capital expenditure (capex) worth USD17 billion in 2020.

With this jumbo investment, Shell prelude production is far below Masela, which is only 3.6 MTPA LNG, 1.3 MTPA Condensate and 0.4 MTPA LPG. Since the beginning of construction, the Shell Floating Prelude LNG project has not provided optimal results. In fact, its capex until this year is expected to continue to swell.

According to the calculations of the Ministry of Energy and Mineral Resources at that time, the Masela block offshore development would save costs of around USD8.9 - 11.5 billion. If it is converted into the current exchange rate, the savings value is around Rp134 - 173 trillion. This figure is very large for the state, considering that the development of the Masela block uses a cost recovery system, which is entirely financed from state budget funds.

“The investment in the Masela Block development will determine the selling price amount of LNG and natural gas that will be produced from the field. The lower investment cost, of course, the more affordable the selling price of gas will be. That’s why, it is very important that efficiency is done so that LNG can be sold at a competitive price,” added Fahmy.

The Ministry of Energy and Mineral Resources does have a positive experience related to efficiency in the development of oil and gas blocks. One of them is in the Jambaran Tiung Biru (JTB) field development project in Bojonegoro, East Java. The cost recovery project, which originally budgeted a capex of USD2.2 billion, can be cut to USD1,550 billion.

In addition to saving the state budget costs, the reduced capex has made the price of gas from the JTB field can be cut to USD6.7 per MMSCFD. Previously, assuming an investment of USD2.2 billion, the selling price of gas from JTB was above USD8.5 per MMSCFD.