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Investors beware in Indonesia

Resource nationalism seems to have killed a viable and important gas project in Indonesia

INDONESIA is starting to look distinctly unattractive to foreign energy investors. The country’s president, Joko Widodo, has confirmed that he will veto a proposal from Shell and Inpex to build a floating liquefied natural gas plant at their proposed Masela field development in the Arafura Sea. The decision jeopardises upstream investment in the sprawling archipelago.

Heated debate about the Abadi project focused on whether the liquefaction plant should be built offshore as floating LNG or onshore several hundred kilometres away on either Aru or Tanimbar island. But at the end of March, Widodo, commonly known as Jokowi, eventually sided with Coordinating Maritime Minister Rizal Ramli, who argued for an onshore LNG plant. Ramli claimed the onshore project would be cheaper to build and have a wider economic multiplier effect on the regional economy.

But Ramli did not have access to detailed data about the project’s characteristics, such as the contour of the pipeline that would need to be laid or the nature of the gasfield. He estimated the onshore route would cost $16bn, while the floating concept would come in at $22bn. That, according to the developers, was way off. Inpex said capital expenditure for floating LNG would come in $7bn cheaper than an onshore scheme, which it calculated would cost $14.8bn. The floating plant would also be quicker to build, said the Japanese firm.

By undermining the energy minister and upstream regulator Jokowi’s administration has sent a negative signal to upstream investors

The floating plan, which had been approved in 2010, also had the support of the energy ministry, which did have access to the operator’s detailed project data. Fundamentally, argued the developers, the offshore option would avoid the need to build either a 600km- or 200km-long pipeline, depending on which island is chosen, across a technically tricky deep-sea trench. The offshore project wouldn’t need costly, not to mention time consuming, land clearings and permits to build.

The president’s decision shocked Inpex and Shell. The pair had simply asked to increase the production capacity of the already approved floating LNG concept – from 2.5m tonnes a year to 7.5m t/y, so weren’t expecting a response that tore up the original plans altogether. Nor did they expect Jokowi to overrule both his own energy ministry and upstream regulator SKKMigas.

It’s hard to see what more the two investors could have done. Shell and Inpex followed the correct legal processes with the energy ministry and SKKMigas. In late 2015, an independent consultant, Poten & Partners, was even drafted in at the behest of Jokowi to assess the merits of the onshore and offshore project development plans. The consultant also confirmed that floating LNG was by far the most profitable option for both the government and the investors.

Others see a worrying trend. Jokowi’s narrow nationalist decision-making tends more toward short-term popularity rather than wooing investment. For a country struggling to recover its upstream mojo, the resource-nationalist bent is troubling. The Masela project, which would be Indonesia’s biggest gas development, now looks less commercially attractive and even unviable for the investors. Poten & Partners reckons that the returns for the onshore option would be less than 10%, well beneath the benchmarks sought by most oil firms.

The waiting game

By undermining the energy minister and upstream regulator, Jokowi’s administration has also sent a negative signal to upstream investors. It will be hard to take approval from either at face value in future.

If Masela is to proceed, the government will need to give significant incentives to Shell and Inpex to make the onshore route viable. That might end up costing the state more. And with economic nationalist rhetoric gaining ground it is hard to see Jokowi’s government swiftly concluding negotiations with the project sponsors. An agreement will probably have to wait until after the next presidential elections in 2019. That would probably defer full production until as late as 2030, nearly a decade after it was supposed to supply Indonesia’s energy-hungry economy.

For all the talk of luring in foreign developers, the Jokowi administration, which took office in late 2014, has made little effort to improve the upstream investment climate to tap over $40bn worth of oil and gas megaprojects waiting in the wings. To put that in perspective, overall foreign direct investment across 24 sectors, including automotive and manufacturing, totaled $29bn in 2015.

Jokowi will see no economic multiplier effects from the stalled upstream projects, which not only include Masela, but Chevron’s Indonesia Deepwater Development and BP’s Tangguh LNG expansion.

Indeed, by the time the next presidential elections are held Indonesia will almost certainly face a severe energy crunch thanks to dwindling domestic production and soaring local demand. The business environment looks less certain than ever and upstream investment in Indonesia has never looked less appealing.

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