Indonesia hopes the recent exit of global giants Shell and Chevron from two long-delayed natural gas projects will jumpstart their development, as it races to more than double gas production by 2030.
The Masela and Indonesia Deepwater Development (IDD) projects, together estimated to cost $27 billion, are test cases for Indonesia to show its commitment to attracting oil and gas investment and reversing a decade-long output decline before climate change kills demand for its fossil fuels.
"Our window is short, we are competing with the energy transition," said Benny Lubiantara, a senior official at upstream regulator SKK Migas.
Key hurdles for the two projects include the country's caps on domestic gas prices, limits on gas exports and the high costs for carbon capture and storage - required for new gas projects to help fight global warming.
Last month, Shell said it would sell its holding in the Masela project to Indonesia's Pertamina and Malaysia's Petronas, while Chevron agreed to sell its stake in the IDD project to Italy's Eni.
The deals - three years after the two majors declared their intention to exit - clear the way for the government to negotiate fresh terms for Indonesia's biggest gas projects after years of delay.
New investment is essential for the country to more than double its gas production to 12 billion cubic feet per day (bcfd) by 2030 to meet growing local demand.
Local gas demand is expected to jump 19% from 2023 to 7.6 bcfd in 2030, forecasts from think tank Institute for Essential Services Reform showed.
Without drastic changes to attract investment, Indonesia will become a net gas importer by 2040, said Andrew Harwood, a research director at consultants Wood Mackenzie.
"If it can move projects like IDD and like Masela forward, there is the potential it can remain a net exporter," he said.
NEW TERMS NEEDED
Once one of the world's top five liquefied natural gas (LNG) exporters, Indonesia's LNG exports have halved in the past decade, Kpler data showed.
The country has not approved a major oil or gas project since 2016 - the expansion of BP's Tangguh LNG plant.
The complexity of Indonesia's fiscal terms has long hampered investment. For example, the government determines the revenue split only after a development plan is submitted, which makes it challenging for investors to assess potential risks and returns, Indonesia Petroleum Association and Wood Mackenzie said in a joint report.
SKK Migas' Benny acknowledged that under current terms returns are unattractive for most projects, especially when they have to consider installing carbon capture and storage, which costs hundreds of millions of dollars.
Jakarta is considering revising its gross split scheme, he said, without elaborating. The current formula for splitting revenue between the government and investors in gas projects sets the base rate at 48% for companies.
For the IDD project, the priority now will be to extend the production sharing contracts for the three blocks expiring in 2027 and 2028, said Prateek Pandey, an analyst with consultancy Rystad Energy.
Eni will start carrying out IDD plans after the Chevron transaction is completed, a spokesperson said, but did not comment on questions about production-sharing talks.
At Masela, which will feed the Abadi LNG project, operator Inpex's 1605.T CEO Takayuki Ueda said having Pertamina on board was "very significant, in the sense that we can naturally expect support from the Indonesian government" and a market for Masela gas.
EXPORT, PRICE CAPS
The IDD and Masela projects, combined with BP's Tangguh Train-3 project and Pertamina's Jambaran Tiung Biru, would provide an additional 3.5 bcfd gas production to the current 5.3 bcfd output, SKK Migas data showed.
Indonesia requires oil and gas producers to sell 25% of their production domestically, but growing local demand has led to calls by some government officials to halt exports entirely, which could deter developers.
"This needs to be reconsidered, allowing foreign investors to profit from their investments," said San Naing, an analyst at BMI Research, part of Fitch Group.
Any moves to restrict exports "could potentially have a considerable impact on the economics of our project", Inpex's Ueda told reporters in Tokyo on Wednesday.
Another drawback is the country's price cap on gas sold to seven business sectors. It was set at $6 per million British thermal unit (mmbtu) in 2020 to ease the impact of the pandemic and remains as a check on inflation, said industry ministry official Triyani. Previously, the cap was at $7-$10 per mmbtu.
Beyond IDD and Masela, Indonesia is keen to exploit other resources across the archipelago. It is auctioning a number of gas blocks this year, including the Natuna D-Alpha block, one of the world's biggest gas resources, with an estimated 230 Tcf.
"We need immediate action before project financing on fossil energy development gets more difficult," SKK Migas' Benny said.
"It is very important to make investment now, or never."
Indonesia's natural gas production https://tmsnrt.rs/43PQXpd
(Reuters - Reporting by Fransiska Nangoy; Additional reporting by Bernadette Christina Munthe in Jakarta, Emily Chow in Singapore and Yuka Obayashi in Tokyo; Editing by Florence Tan and Sonali Paul)
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