Why is the government pushing for an onshore refinery at Masela?

President Joko Widodo put an end to months of discord within the government about the development of the Abadi gas field, in the Masela block of the Arafuru Sea off Maluku.  Jokowi said the Masela block will be developed onshore.

The problems revolving around the development of the Masela block, which is believed to hold one of the country’s largest gas reserves with an estimated 10.7 trillion cubic feet, came into the spotlight following a heated debate over whether the deepwater field would have a refinery onshore or offshore.

The debate emerged after Coordinating Minister for Maritime Affairs and Resources Rizal Ramli criticized the offshore development plan submitted by the project’s developer.

Inpex Corporation, the operator of the block which shares the stake with Shell at 65/35, leaned toward an offshore floating refinery, which it said would cost less and carry less risk. The company argued that a pipeline was more vulnerable, especially in an area that is prone to earthquakes.

A feasibility study by Inpex put the cost of constructing an offshore refinery with an annual capacity of 7.5 million tons at around 14.8 billion. It would cost about $22.3 billion for an onshore one.

The construction of the offshore option could begin in 2019, and be operational by 2024; while the construction of an onshore refinery wouldn't begin until 2021 because of the time to purchase and prepare the land. It wouldn't be operational until 2026.

Land acquisition had already forced delays in the development of the Cepu oil and gas block in Central Java.

But officials in Maluku, a province which is among the poorest in the country, want the plant to be built onshore. They argue that the local economy would benefit more from an onshore refinery. 

Rizal Ramli, who as coordinating minister oversees the energy sector, said that he also believed the multiplier effect on domestic industries and the local population would be much greater if the project was built onshore.

Rizal argued that while an offshore floating refinery will be able to contribute foreign exchange of around $2.52 billion a year, an onshore solution will enable the development of new fertilizer and petrochemical industry in Maluku; as well as helping to push the development a new regional industrial hub.

Although the location for the onshore refinery has not yet been announced, likely candidates are  the nearby islands of  Tanimbar, some 200 kilometers away or Aru, 600 kilometers southeast. A refinery on those islands will require the construction of a long pipeline to link the refinery to the drilling location.

The Masela block has a surface area of about 3,221 square kilometers. The field is estimated to be within a depth of 400 to 800 meters under the sea. Based on the location and where the gas reserves is estimated to be, the Masela deepwater project has been said to be one of the most challenging projects in the country.

SKK MIgas head Amien Sunaryadi said that Inpex and Shell will not withdraw from Masela Block following the government decision but have demanded time to study it first. Amien spoke a day after he and his team met with representatives of Inpex and Shell on the evening of March 23, 2016 to inform them of the president's decision.

The upstream oil and gas regulator had appointed British consultant Poten & Partners to conduct an independent study and although the results have not been disclosed, industry sources said the results pointed in favor of an offshore refinery. 

However, the Presidential Staff Office (KSP), is said to have reached a different calculation results, saying that that offshore option was more expensive, totaling $18.2 billion. An onshore refinery would cost $12.9 billion under those calculations.

Industry sources are mostly in agreement with an offshore option. They said that the high costs of building an onshore LNG plant arise from the need to build a long pipeline, as well as the complexity of managing the Masela Block because of its remote location and its deep sea nature. 

Another factor that added to the cost is the composition of its natural gas, which contains wax with high CO2 levels. They also pointed out that the construction of an onshore option take longer and thus delay the actual operation of the project.

Proponents of the offshore option has said that costs of an onshore option were not only higher but the country also stood to loose the opportunity of building new expertise in offshore LNG technology, especially where most blocks are now increasingly found in deep seas.

And higher costs means an increase in cost recovery, making the project less attractive to investors.

Inpex Senior Manager Communication and Relation Usman Slamet declined to comment saying only that the company was still awaiting the official notification from the government.

Masela is a golden opportunity that must not be wasted amid the current business environment and declining world oil prices, conditions that have decreased global appetite for exploration.

With the internal rate of return (IRR) for contractors of the onshore option is low compared to the offshore one, it may not be worth the investment.

The government may now need to provide some fiscal incentives to keep the onshore option attractive.