Shell in talks to exit Indonesia's Masela block and LNG project, regulator says

Jakarta — Oil major Royal Dutch Shell is in talks to withdraw from Indonesia's Masela block and is looking for a buyer, which could either be Japan's Inpex which is the operator of the development with a majority interest, or another interested party, Indonesian upstream regulator SKK Migas' operations deputy Julius Wiratno told S&P Global Platts on July 6.

Shell's potential exit from the Masela block, which includes an offshore gas development and the Abadi LNG terminal, would follow several international oil companies like BP and Chevron which have pulled out of some of Indonesia's largest upstream projects in recent years due to resource nationalism or poor project economics, or both.

"The company (Shell) is in the process of finding a partner to take over its participating interest in the block," Wiratno said. "They are currently in discussions on a B2B (business to business) basis with Inpex and potential partners," he added.

Wiratno said Inpex will likely continue to control the Masela project, either by itself or along with other partners. "It depends on the negotiations," he added.

Inpex is the operator of the Masela block with a 65% interest and Shell holds the remaining 35%. A Shell spokeswoman said the company does not comment on portfolio activity. Inpex did not immediately respond to queries that were sent out of office hours on July 6.

On June 30, Shell said it would take a post-tax impairment charge of between $15 billion and $22 billion in the second quarter. Out of this $8 billion to $9 billion would be in its integrated gas business, mainly in its Queensland and Prelude projects in Australia, and $4 billion to $6 billion in the upstream segment largely in Brazil and North American shale.

As oil majors cut the value of their oil and gas assets, reshuffle global portfolios and slash capital expenditure to ride through the pandemic, analysts said they are unlikely to commit to big-ticket, long-gestation projects in a significant way.

Additionally, regions like Indonesia are also unlikely to sustain international E&P investment unless their production sharing contracts are extremely attractive and project approvals are less bureaucratic.

The Masela block, for which the latest plan was to produce 9.5 million mt/year of LNG and 35,000 b/d condensate, has been the subject of disagreements between the government and project owners for several years.

The initial project plan involved a floating LNG plant scaled up from 2.5 million mt/year to 7.5 million mt/year, but the Indonesian government then insisted on an onshore LNG terminal that would provide more local employment, although the project partners opposed a more expensive and time-consuming onshore project.

Eventually, the companies agreed to an onshore terminal and the Indonesian government approved the revised development plan for Abadi LNG. Indonesia also approved a 20-year extension to the production sharing contract for Masela to make it more attractive with other incentives.

This may be jeopardized if there is a change of hands, although Inpex is likely to have first right of refusal for a change in ownership.

The Abadi LNG terminal was listed by Indonesia as a national strategic project in June 2017 and as a priority infrastructure project in September 2017. It would be key to plugging the country's falling gas production and boost its position as an LNG exporter.