Demand to process gas onshore appears economically unviable
A venture by Indonesia to develop one of the world’s potentially biggest gas fields appears to have foundered, at least temporarily, on the rocks of economic nationalism that flies directly in the face of President Joko Widodo’s ambitions to open the country to investment.
While the president is telling the world and Indonesians the country is “open for investment,” the government is zig-zagging on the huge gas project, backtracking and creating delays. The Minister of Energy and Mineral Resources, Sudirman Said, is pushing the contract while the Coordinating Maritime Minister, Rizal Ramli, apparently is applying the brakes.
The project is the Masela gas block, located to the east of Timor Island and Darwin, Australia. It is being developed by Inpex, Japan’s largest oil and gas developer, and Shell Corporation. Inpex holds 65 percent of the project and Shell 35 percent. If the US$14-19 billion project goes ahead, it is likely to become the biggest deep-water gas project in the country, with reserves estimated at 10 trillion cubic feet of gas although some estimates say the reserves could, on full exploration, reach as high as 40 trillion cu ft.
The consortium has plans for a new floating liquefied natural gas platform at the site. However, nationalists have stepped in to demand that the processing plant be located onshore, an impossibility because of a 3,500 meter deep trench that would make it unfeasible to pipe the gas to shore. The cost of the onshore terminal, estimated at as much as US$19 billion, would render it economically unviable.
As with a number of other projects in recent years, nationalist rhetoric seems to be covering for special interests wanting a piece of the action in construction of the onshore plant. That has stopped the project, which would earn the country billions in foreign exchange if it were to go ahead. Officials say it would make more sense to pump the gas 400 km. to the LNG processing terminal in Darwin, Australia.
In August of 2014, Jokowi, as the president is known, dramatically reshuffled his cabinet, getting rid of nationalists and appointing technocrats and reformers to replace placeholders. But one of those appointed to the cabinet was Rizal Ramli, who immediately began asking why the regulator SSKMigas and Sudirman had approved the capacity of the floating gas terminal proposed by Inpex. Ramli has insisted the gas be piped to a proposed terminal 170 km. northeast of the gas field.
Although a New York-based consultancy brought in by Ramli to study the project agreed that the floating terminal is the most viable, he continues to delay it.
“There are many reasons why it should be floating,” said a western business source. “The whole project may collapse because the idiot nationalists have insisted it be onshore. It will cost the Indonesian treasury billions.”
Economic nationalism is a tide that Jokowi has been fighting since the day he came into office, with many top government officials insisting Indonesia would benefit more by taking over the management of its own resources. That has resulted in billions of dollars of lost opportunity that Jokowi and Sudirman Said have sought to reverse.
Since his cabinet reshuffle last August, Jokowi has rolled out a continuing series of economic reforms culminating on Feb. 10 with the details of a sweeping plan he called a “big bang” to open nearly 50 sectors of the economy to foreign investment that is designed to ease investment rules in e-commerce, retail, health care and moviemaking.
Nine new packages have been made public since a Cabinet meeting in Bogor shortly after the reshuffle, cutting red tape, removing obstacles and opening up for investment. The sweeping changes in the latest package, the 10th in the series, are aimed at dramatically pruning the so-called ‘Negative Investment List” that keeps out investment by foreign interests.
On Feb.16, Sudirman told reporters the government needs to renew its mineral ore export ban policy, which threw global bauxite and nickel supply lines into chaos. As with the demand that natural gas be processed on shore, the country’s 2009 mining law spurred implementing regulations demanding that ores be processed through domestic smelters, which national and international mining companies found impossible, partly because there is not sufficient electricity near mining sites and because shipping the raw ore to sites where there is sufficient electricity would be prohibitively expensive. In other cases there is a global oversupply of smelting capacity.
The law would need to be amended or rewritten to stop the ban. It is already on the legislative calendar in the House of Representatives, according to press reports. Thus decisions like the one over the gas field keep bubbling up from below despite Jokowi’s best efforts to shortstop them.
Most of the obstacles have occurred in the lucrative extractive industries including oil and gas and mining. Freeport McMoRan, the Phoenix, Arizona mining company which operates the Grasburg Mine, the world’s biggest copper and gold mine in Papua, is being forced to divest 20 percent of its shares to local investors, which kicked off a scandal in which the speaker of Indonesia’s House of Representatives, Setya Novanto, was forced to resign on charges he appeared to use the names of Jokowi and Vice President Jusuf Kalla in requesting a bribe of 20 percent of the shares in the mining operation, which must be divested under the terms of Freeport’s mining contract of work.
Although Jokowi has told reporters he has faced no political backlash or resistance to the steps he has taken so far, the gas field decision belies that.
As international growth has slowed, hobbling Indonesia’s exports, particularly coal and other extractive industries, and with domestic consumption contracting, as occurs in most countries, protectionism gains ascendency. Jokowi and his reformers are doing their best to slow it against skeptics preaching that the bad times are due to foreigners raiding the national assets. The global oil and gas markets are facing the biggest slide in prices in decades, contributing to that malaise. Asia Times