Earlier, Saudi Arabian Oil Co (Aramco) has officially withdrew from Cilacap Refinery Development Master Plan as Pertamina has also announced that Pertamina will continue to independently develop the Cilacap RDMP, while looking for another strategic partner.
Not long after Aramco’s withdrawal from Cilacap RDMP, Shell - another super major- officially withdrew from Abadi LNG Project in Masela Block by intending to sell its participating interest in the Masela Block. Upstream Oil and Gas Special Regulatory Taskforce (SKK Migas) operations deputy Julius Wiratno states that Shell’s decision was based on the current low crude oil prices and development delays caused by the COVID-19 pandemic. It is interesting to learn the basis of Shell’s withdrawal because the withdrawal is actually has been signaled since a year ago when it curiously absent from meeting in Tokyo between Indonesia’s Minister for Energy and Mineral Resources Ignasius Jonan and Inpex.
Chairman of SKK Migas Dwi Sutjipto, CEO Inpex Masela Ltd Shunichi Sugaya, and President & CEO Inpex Corporation Takayuki Ueda sign the Head of Agreement (HoA) for the development of Abadi Gas Field in Masela Block in the midst of G20 Ministerial Meeting on Energy and Environment in Karuizawa, Jepang, on June 16th, 2019. Indonesia's Minister for Energy and Mineral Resources ESDM Ignasius Jonan and Japan's Minister on Economic, Trade and Industry Hiroshige Seko witnesses the signing. - Photo courtesy of Bisnis/Hery Trianto
With a proven reserve of 18.4 trillion cubic feet of gas, Masela block is one of Indonesia’s biggest gas field ever. Obviously, Shell’s decision is raising eyebrows everywhere.
Or does it?
When in 2011 Shell acquire 30% of participating interest in the Masela Block, the project was designed as an offshore project. Shell acquire further 5% from Bakrie’s Energi Mega Persada in 2013, which sees Shell increase its participating interest in Masela Block become 35%.
Masela Block as an offshore project is changed with the arrival of the new President, Joko Widodo. On March 2016, the President decided that Masela Block must become an onshore project.
1. Change of Government, change of heart?
Whether an onshore option is better than an offshore option will have remain to be seen. However, Shell’s decision confirmed the basic rule for Investor to invest in major projects: continuity in policy is very important. When a new government change the policy of previous government, then be prepare to accept the consequences: Investor will walk away.
2.Investor wish to complete any major project under the same government
We believe that Shell is counting to complete the project during President Joko Widodo second term, assuming that the government still favor the offshore option. What we understand is that with the offshore option, both the FID Schedule as well as On Stream schedule is assumed to be under the same government: President Joko Widodo.
As for the onshore option, project schedule will be extended beyond President Joko Widodo’s term. With new government after Jokowi, there is a risk of a change of policy just as Shell has learned the hard way when President Joko Widodo became the nation’s new president and change the project from offshore into onshore.
3. Shifting Policies hurts Investor
If a shift in the policy by the government is unavoidable, the government must be prepared for the worst case scenario where projects will be delayed. It will also increase Indonesia’s uncertainty in the eye of Investors.
Is it a failure?
Referring to the title of this Highlights, is it considered as failure on Indonesia’s side? More importantly, is it Indonesia’s fault?
First, let’s take a look at the numbers:
1. Investment Realization is increased. Indonesia’s Investment Coordinating Board – Badan Koordinasi Penanaman Modal (“BKPM”) has announce that for a period of January until December 2019, investment realization has reach a staggering total of USD53.9 billion. This is an increased of approximately 12.2% year-on-year in comparison to 2018. The following image from BKPM shows the detailed numbers in Bahasa Indonesia
Or does it?
When in 2011 Shell acquire 30% of participating interest in the Masela Block, the project was designed as an offshore project. Shell acquire further 5% from Bakrie’s Energi Mega Persada in 2013, which sees Shell increase its participating interest in Masela Block become 35%.
Masela Block as an offshore project is changed with the arrival of the new President, Joko Widodo. On March 2016, the President decided that Masela Block must become an onshore project.
1. Change of Government, change of heart?
Whether an onshore option is better than an offshore option will have remain to be seen. However, Shell’s decision confirmed the basic rule for Investor to invest in major projects: continuity in policy is very important. When a new government change the policy of previous government, then be prepare to accept the consequences: Investor will walk away.
2.Investor wish to complete any major project under the same government
We believe that Shell is counting to complete the project during President Joko Widodo second term, assuming that the government still favor the offshore option. What we understand is that with the offshore option, both the FID Schedule as well as On Stream schedule is assumed to be under the same government: President Joko Widodo.
As for the onshore option, project schedule will be extended beyond President Joko Widodo’s term. With new government after Jokowi, there is a risk of a change of policy just as Shell has learned the hard way when President Joko Widodo became the nation’s new president and change the project from offshore into onshore.
3. Shifting Policies hurts Investor
If a shift in the policy by the government is unavoidable, the government must be prepared for the worst case scenario where projects will be delayed. It will also increase Indonesia’s uncertainty in the eye of Investors.
Is it a failure?
Referring to the title of this Highlights, is it considered as failure on Indonesia’s side? More importantly, is it Indonesia’s fault?
First, let’s take a look at the numbers:
1. Investment Realization is increased. Indonesia’s Investment Coordinating Board – Badan Koordinasi Penanaman Modal (“BKPM”) has announce that for a period of January until December 2019, investment realization has reach a staggering total of USD53.9 billion. This is an increased of approximately 12.2% year-on-year in comparison to 2018. The following image from BKPM shows the detailed numbers in Bahasa Indonesia
This comes as a result of improvement in ease of business, encouragement of major investment in partnership with local entrepreneurs, expanding and promotion of investment focused based on sector and countries.
Second, Indonesia’s focus:
Multiplier Effect. Indonesia is now focusing on multiplier effect which will provide better benefits to the people and to avoid the Resource Course as well. Multiplier effect of the Onshore Option is much better than the Offshore Option. Whether or not the Multiplier Effect will be directly received by the people in the area, will be the major homework of the government. Further, the benefit of the multiplier effect must be evenly received by the people and not only focused on a group of people. But that is another subject of discussion. The main fact is the multiplier effect on Onshore Option is better than the Offshore Option. This must be accepted by anyone who is going to invest in Indonesia.
Second, Indonesia’s focus:
Multiplier Effect. Indonesia is now focusing on multiplier effect which will provide better benefits to the people and to avoid the Resource Course as well. Multiplier effect of the Onshore Option is much better than the Offshore Option. Whether or not the Multiplier Effect will be directly received by the people in the area, will be the major homework of the government. Further, the benefit of the multiplier effect must be evenly received by the people and not only focused on a group of people. But that is another subject of discussion. The main fact is the multiplier effect on Onshore Option is better than the Offshore Option. This must be accepted by anyone who is going to invest in Indonesia.
Map of Masela in Indonesia. Source: Inpex
Finally:
3. Inpex is still committed. Inpex as the holder of 65% Participating Interest in the Masela Project still committed to continue the project even though the Project is changed from Offshore into Onshore. If the Onshore option is not feasible, surely Inpex would not continue with the project. It is also important to note that Inpex’ commitment is remain amid the unfavorable conditions for LNG market due to COVID19 pandemic.
Conclusion
We believe the fact that there is an increase of investment realization shows that Indonesia is still attractive to investor. Indonesia wants better benefit for the people from the major projects. Focusing to ensure a better welfare of the people is never a fault. Further, since Inpex is still committed to continue with the project, it shows that government’s decision to change its policy is still acceptable to Investor.
Upon the changes from offshore into onshore, all the parties involved in the project has entered into discussion and negotiation to make sure that the project continues, where finally agreement can be reached. This is a better route to take rather than forcing your will and walk away when your will cannot be fulfilled.
3. Inpex is still committed. Inpex as the holder of 65% Participating Interest in the Masela Project still committed to continue the project even though the Project is changed from Offshore into Onshore. If the Onshore option is not feasible, surely Inpex would not continue with the project. It is also important to note that Inpex’ commitment is remain amid the unfavorable conditions for LNG market due to COVID19 pandemic.
Conclusion
We believe the fact that there is an increase of investment realization shows that Indonesia is still attractive to investor. Indonesia wants better benefit for the people from the major projects. Focusing to ensure a better welfare of the people is never a fault. Further, since Inpex is still committed to continue with the project, it shows that government’s decision to change its policy is still acceptable to Investor.
Upon the changes from offshore into onshore, all the parties involved in the project has entered into discussion and negotiation to make sure that the project continues, where finally agreement can be reached. This is a better route to take rather than forcing your will and walk away when your will cannot be fulfilled.
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