Thursday 24 March 2016

Indonesia's president on Wednesday rejected Inpex Corp and Royal Dutch Shell's proposal to build the world's largest floating liquefied natural gas plant in the country's east, saying an onshore plant would benefit its economy more.

The announcement is a blow to the two energy firms, as well as to Indonesia's energy regulator (SKKMigas), which warned last week that rejecting the $15 billion plan to process gas from the Masela field offshore would lead to delays and job cuts.

Shell and Inpex declined to immediately comment on the matter as they said they had not received official notification on the decision. It is unclear whether the companies would be involved in the onshore project.

President Joko Widodo said he backed the onshore LNG plan because it would provide bigger economic payoffs to Indonesia's impoverished east than the 7.5 million-tonne-per-year floating LNG project.

"This is a long-term project that concerns hundreds of trillions of rupiah. From these calculations, we have decided to build it onshore," Widodo said in a statement.

"Our considerations are first we want the regional economy as well as the national economy to benefit from the development of the Masela block."

Supporters say an onshore LNG export terminal would spur much needed development in the eastern province of Maluku, including the construction of petrochemical and fertilizer plants.

Inpex and Shell submitted their floating LNG proposal back in September, but the president's decision was delayed for months due to divisions within his administration over the issue.

SKKMigas has warned that shifting to an onshore project would increase costs and could push the completion date back by three years from around 2026. However, the maritime coordinating ministry, which oversees energy, has said an onshore plant would be cheaper than a floating LNG facility.

Energy Minister Sudirman Said, who initially advocated the plant be offshore, urged SKKMigas to quickly meet with Inpex and Shell on the president's decision to prevent a long delay.

He did not think the two companies would exit the project.

"These two investors will continue to work together because they've been working for this for 16 years and they've spent on exploration costs," Said said.

"We will give them a chance to reassess this, but we want all parties to have the optimal benefit."

The Masela block, located in the Timor Sea near Indonesia's border with northern Australia, is 65 percent owned by Inpex and 35 percent by Shell.

State-owned Pertamina has said it wants a stake of at least 10 percent in the Masela block.

The decision came as Woodside Petroleum and its partners shelved plans to build the $30 billion Browse floating LNG project off Australia in the face of global oversupply.

The pace of development of giant gas export schemes has slowed globally as LNG prices have plummeted with oil prices, prompting many companies to delay funding decisions until business conditions brighten. In Asia, LNG prices have plunged by 80 percent over the past two years.

Source: Reuters (Additional reporting by Kanupriya Kapoor and the Jakarta bureau; Writing by Randy Fabi; Editing by Joseph Radford and Christian Schmollinger)