Stealing Clarity in Masela

Oleh Metta Dharmasaputra 13 Februari 2016

Masela is a golden opportunity that must not be wasted amid the slide in oil and gas prices that has decreased global appetite for exploration.

Metta Dharmasaputra
Donang Wahyu|KATADATA
Unduh Infografik

KATADATA - As controversy surrounding the Masela Block heats up, it would be useful for us to borrow the term "Stealing Clarity", which was popularised by famous talkshow host, Wimar Witoelar. The problem has grown so complex that even a closed cabinet meeting on 1 February was unable to make a decision.

There are sharp differences of opinion over the best option for the Masela development. In fact, Coordinating Minister for Maritime Affairs Rizal Ramli had a row (again) with Minister of Energy and Mineral Resources (EMR) Sudirman Said over this matter.

Sudirman, who has the backing of SKK Migas Chief Amien Sunaryadi, agrees with the proposal submitted by the contractors, Inpex and Shell, that the processing of liquefied natural gas using a floating vessel (Floating LNG) is the best option.

But Rizal thinks otherwise. He believes that an onshore plant (onshore LNG), where the gas is channelled to the Island of Aru or Tanimbar, would be more suitable. He argues that it will have a multiplier effect on the people of Maluku, for example by encouraging the development of a petrochemical industry.

Various studies have already been conducted. The latest was carried out by Poten & Partners. The British consultant with a track record of over 75 years was appointed by SKK Migas to conduct an independent study. The government has yet to disclose their report. However, based on information obtained by the author, Poten’s conclusion supports the floating option.

There are a number of aspects that make the offshore LNG option more convincing. First are the finances. Inpex and other calculations reckon the state could reap revenues of US$52-57 billion from the floating option, compared with US$43-48 billion from the onshore LNG option.

The difference between these two options is a whopping US$9 billion (nearly IDR 120 trillion) for the production range of 22-24 years, due to higher capital expenditure and operating the onshore LNG option. According to Inpex, capital expenditure for the offshore LNG option is expected to be US$14.8 billion. Meanwhile, for the onshore LNG option, which requires construction of 200-km of pipelines to Tanimbar, the capital expenditure is expected to be as high as US$19.3 billion. The cost will swell to US$22.3 billion if the pipelines are extended to Aru Island, which is 600 km away.

The high cost of the onshore LNG is attributed to the complexity of managing the Masela Block due to its location in the deep sea and other remote areas, as well as the composition of its natural gas, which contains wax with high CO2 levels. That is why an offshore facility or a floating production storage offloading (FPSO) unit is still needed.

So, the difference in cost between the offshore and onshore options is a substantialUS$4.5 billion-US$7.5 billion, or IDR60-100 trillion! Which will lead to an increase in cost recovery. Without this additional cost, 60 percent of these funds would go to the state.

That said, the results of calculations by the Presidential Staff Office (KSP), obtained by Katadata, differ from – contradict even – the Inpex figures. According to the KSP, the offshore option is more expensive, atUS$18.2 billion, whereas the cost of the onshore option is justUS$12.9 billion.

This difference, according to the study by KSP, is due to Inpex underestimating the cost of the offshore LNG and overestimating the cost of onshore LNG. To resolve these differences, the results of an independent study conducted by Poten are crucial.

Second is the timing. With construction of the offshore LNG expected to begin in 2019, this option will be operational by 2024. Meanwhile, construction of onshore LNG is expected to begin in 2021 and be operational by 2026, because it requires 600-800 hectares of land.

And there is always the risk of delay, as experienced by ExxonMobil in the Cepu Block. The land acquisition process was hampered due to the presence of land brokers and speculators, which caused prices to soar. With a land requirement of only 40-60 hectares, the offshore LNG obviously poses lower risk as an energy crisis looms large.

Third is the value added aspect. The idea of building a petrochemical industry seems rather inappropriate. Given the characteristics of the Abadi Field and the remote location of Masela, the price of the gas produced would be high for a petrochemical industry.

On the other hand, offshore LNG provides an opportunity for Indonesia to build a national shipbuilding industry – imitating the success of Korea and Japan – which is in keeping with the maritime vision of the Widodo administration. Another plus point is the additional expertise in offshore LNG technology, which will be valuable for future oil and gas exploration, particularly in the eastern region of Indonesia, which is mostly in deep water.

Fourth, the internal rate of return (IRR) for contractors needs to be considered. This will become a problem if the IRR of the onshore option is so low that it is not worth the investment.

The Poten study suggests this. To close the gap, the government needs to provide fiscal incentives in the form of tax breaks or higher profit sharing for contractors, which will ultimately eat into the state revenue.

Masela is one of four oil and gas blocks that has been included in the development plan besides IDD Chevron, Tangguh Train 3, and Muara Bakau – with a total investment of US$43 billion or more than IDR560 trillion! This is a huge amount of money compared with foreign direct investment flowing into Indonesia throughout 2014, which was only US$28.5 billion.

Masela is a golden opportunity that must not be wasted amid the slide in oil and gas prices that has decreased global appetite for exploration. Clarity of thought and the right decision from the government are much awaited.

*) This opinion piece was published in Koran Tempo on 10 February 2016

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