Indonesia is striving to finalize a development plan for the much-delayed Abadi oil and gas field in the deepwater Masela Block and the associated LNG project with operator Inpex Corp. amid reports that partner Royal Dutch Shell is moving to exit the project.

Ignasius Jonan, the country’s energy and mineral resources minister, met Inpex CEO Takayuki Ueda twice in less than two weeks to resolve differences on developing the field and the 9.5 million tons per year LNG project that has been on hold for over a decade.

“Inpex and SKK Migas [Indonesia’s upstream regulator] agreed on the main points of the development of the Masela Block. A number of strategic points were successfully agreed upon, which enabled this giant gas field to be developed immediately,” the minister said in Tokyo this week after an agreement on framework for the development.

“The investment value of the Masela Block development will reach around US$20 billion,” he added. “Both parties succeeded in achieving a win-win solution with a profit-sharing scheme, in which the government received at least 50%,” he added.

Plans are for the final agreement, he said, to be signed during the G20 Group of countries meeting in Japan, which is scheduled for late June.

SKK Migas communication head Wins Pabawa Taher clarified that “the [Tokyo] meeting discussed the development of the Masela Block, to get the best option, with rational and efficient investment estimates.”

This development follows reports that partner Royal Dutch Shell has a plan to exit from the concession. Citing unnamed sources, Reuters reported Shell is moving to sell its 35% stake in the Masela Block as part of an asset disposal program.

Differences

SKK Migas and Inpex agree on factors such as location and capacity of the onshore LNG plant and extending the production-sharing contract (PSC) by another 20 years after the existing contract expires in 2028. But the companies have yet to agree on issues like compensation for changing from an offshore to onshore LNG project, development cost, internal rate of return (IRR) on investments and fiscal incentives.

The regulator has agreed on the operator’s estimated development cost of about $20 billion for the Abadi project, though its studies have indicated total costs of about $16 billion.

Inpex said pre-FEED studies estimated that development costs for the fields and onshore LNG plant could reach $20 billion, considering geological complexities of prospective fields, location in the remote deep sea and little supporting infrastructure nearby.

The company added that development of a gas liquefaction plant in an isolated, undeveloped part of Tanimbar island and 180 km of offshore pipeline across an extremely tectonically active area in water depths of 2,000 m to 3,000 m could pose serious challenges for the developer.

Inpex is demanding compensation for an additional 10 years over the extension of PSC for 20 years from 2028 for switching to an onshore LNG plant, IRR on its investments of 15%, tax holiday of 10 years and additional cost recovery of $1.4 billion.

But the regulator says the operator’s demands are high compared to industry standards and need to be scaled down. It has hinted at offering compensation of seven years for the change in LNG scheme, IRR of 12% and “reasonable” fiscal incentives.

The energy ministry is willing to accommodate some of the Japanese firm’s interests in the Masela project because such development will improve the country’s investment climate and development of its eastern region.

Indonesia does not want to lose Inpex from the Masela development when several global majors, such as Exxon Mobil Corp., Chevron and Total, are exiting the Indonesian upstream sector. Researcher Pri Agung Rakhmanto of Jakarta-based ReforMiner Institute warned that the government would lose a big investor in the country’s oil and gas sector if it was not serious about resolving uncertainties in the project.

Development Plan

Inpex is equally interested in developing the Masela project and said it is weighing development options for the Abadi Field to make the project cost-effective. “We are now continuing our dialogue with the Indonesian government in order to prepare for the submission of the revised plan of development,” Inpex said in an update last week.

The revised development plan for Abadi and the onshore LNG project is based on a pre-FEED study prepared by KBR and a consortium of Chiyoda Corp. and Synergy Engineering in October.

The operator planned to develop the field with an offshore LNG plant of 7.5 million tons per annum in 2014 but changed to an onshore LNG scheme after a directive from the country’s president Joko Widodo.

The latest pre-FEED suggests 18 development wells from five subsea manifolds, an FPSO, 180 km (118.8 miles) of subsea pipeline with a capacity of 900-1,000 million standard cubic feet per day (MMscf/d) to an onshore unit and a gas liquefaction plant with a capacity of 9.5 million tons per year on south Tanimbar island. About 150 MMscf/d of the transported gas is to be allocated to local industries on the island.

Production from development wells is expected to be up to 1,200 MMscf/d and 24,460 barrels of condensate per day.

Discovered in 2003, the Masela Block, located in a water depth of between 299.9 m and 1,000 m (984 ft and 3,281 ft) in the Arafura Sea, is estimated to hold total recoverable reserves of about 10.73 trillion cubic feet of gas and 209 million barrels of condensate.