Considering Indonesia’s growing resource nationalism, the order to use an onshore LNG refinery is not surprising. Officials are optimistic that the development of the gas-rich block will continue but admit commercial operations will be delayed until the late 2020s. Some believe the project is at risk amid low energy prices and a coming LNG glut.
The order also brings the curtain down on the war of words between Coordinating Maritime Affairs Minister Rizal Ramli and Energy Minister Sudirman Said. During the build-up Ramli, an ardent onshore supporter, lambasted the ‘independence’ of oil and gas regulators, while Said has alleged manipulation by unnamed forces with ‘filthy intentions’.
Post-mortems about state-led commercial interventions too often emphasise the importance of the ‘investment climate’, a platitudinous concept that assumes investment is always good and effective governments do what investors want. More useful analysis takes stock of the political context, including, for example, how a decision normally reserved for the energy minister became a politicised free-for-all requiring presidential intervention.
Jokowi’s decision to act only after a prolonged period of instability shows his instinct for the theatre, rather than mechanics, of governance. A similar 2015 decision on the Mahakam gas project followed comparable political infighting and left much unclear and no useful vision for resolution. Even the rolling ‘reform packages’ have tended towards vague and obscure changes, with slow implementation making them more of a marketing exercise than an economic program.
More important for Masela is that Jokowi, swayed by the ‘multiplier effect’ for local industrial development and job creation, likely chose the more costly option. Consistent with his emphasis of development for eastern Indonesia, Jokowi believes that onshore development will do more to help this remote and underdeveloped corner of the country.
But, though the Coordinating Maritime Affairs Ministry claims ‘new technology’ will make onshore development less expensive, all other studies suggest it will take longer and be up to 50 per cent more expensive. Contractors have themselves estimated onshore refining will cost US$22 billion — considerably higher than the expected US$15 billion for FLNG. A government-commissioned study also found that onshore refining will have up to a 25 per cent lower rate of return, a possibility the Finance Ministry and Jokowi himself have conceded.
Some claim the relatively untested FLNG concept would have been prone to cost blowouts. But this is true for resource projects of all varieties. What distinguishes the more expensive, onshore option is upstream cost recovery, a longstanding feature of Indonesia’s Production Sharing Contract that reimburses contractors’ exploration, development and production costs from the government’s production share. Indonesia pays for and owns oil and gas facilities; contractors are simply entitled to a share of production. Cost recovery appears as a line item in the state budget and topped US$18 billion last year — exceeding the government’s production share for the first time. This generates criticism and is not without its pitfalls considering the elastic concept of ‘state losses’.
The point is not that there is no logic behind the decision to set down an industrial footprint in an underdeveloped province in the hope that future benefits will surpass the upfront cost. Indonesia’s leaders should make such decisions where resources can be used to support complementary industrialisation rather than simply filling the export coffers. If successful, Masela could be a case study for boosting a developing economy through its natural resources.
But if officials expect ‘spillovers’ to simply follow regulatory fiat, Masela risks becoming a white elephant amid an emerging energy crisis. Simply funnelling cheap, captive gas to state fertiliser firms, or facilitating predatory local interests, will leave Indonesia worse off. Wrong too are claims that onshore development means Indonesia will get more of the gas. Domestic gas users are struggling with high prices and lack of supply, but this is the result of poor planning and inadequate domestic infrastructure. A FLNG with large volumes earmarked for domestic consumers seems a less risky solution.
Jokowi’s decision also ignores the pressing risk created by Inpex’s contract extension. With commercial operations pushed even closer to (or beyond) the contract’s 2028 expiry, Inpex might dig in before committing more capital. In principle this could be simple: commit to the government’s preferred onshore option and get the extension. It is rarely so clear. Freeport, which is similarly pursuing a contract extension, agreed in 2014 to build a US$2.3 billion copper smelter that will likely never turn a profit. It also conceded to a 20 per cent divestment, higher royalties and to shift procurement to favoured state firms.
In the meantime, the president dithered, ministers battled and political manoeuvres triggered a massive scandal that has made progress impossible for the foreseeable future. Hopefully the same mix of inadequate leadership and political predation does not afflict the now-onshore Masela LNG development.
Matthew Busch is a PhD candidate at Melbourne Law School, University of Melbourne. You can follow him on Twitter @busch_matthew.
As INPEX appears to be a Japanese owned company does this decision have anything to do with the geopolitics going on between the two countries?
Also, was an onshore plan decided because it would be more secure from Chinese naval and fishing boat incursions?
This is a very revealing post, particularly thanks to the light that it casts on Jokowi’s rather amateurish approach to governing Indonesia.
Partly because his opponent, Prabowo Subianto, had in 2014 aroused considerable alarm among domestic and foreign observers through his seemingly anti-democratic attitudes and his undeniably poor human rights record, Jokowi assumed a ‘white knight’ status that was in many ways undeserved.
In some ways, Jokowi has shown that the disadvantages of inexperience at the national level of government in Indonesia, one of the factors in his background that had attracted high praise and prompted great hopes, may be underestimated.
These disadvantages may in fact outweigh the possible benefits of any alleged freedom from prior entanglement in crony politics and from the many compromises of elite machinations that such inexperience perhaps betokens.
One of the continuing signs of Jokowi’s inexperience is that talk of a new cabinet reshuffle is constant. He carried out a reshuffle before the first year of his term had ended, yet for weeks now there have been rumours of a new reshuffle.
While it is easy to think of ministers who ought to be sacked, among whom I would put Foreign Minister Retno Marsudi at the top of the list, such talk reveals, as the author of the post indirectly suggests, over what a deeply divided government Jokowi presides.
The post is refreshing precisely because it doesn’t seek to give Jokowi the benefit of the doubt, as so many analysts still do.
On a front far removed from the Masela issue, today’s Jakarta Post reports that an official of the Attorney-General’s Department has announced in rather Orwellian language that a new round of drug trafficker executions may be imminent:
“Amir said executing a person was a complicated matter.
‘The death penalty is related to the loss of someone’s life. It must be done carefully so as not to violate human rights,’ he said.
Preparations for executions must be thorough, he continued, adding that it was a complicated process especially when it involved foreign citizens.”
The Attorney-General is another cabinet member who thoroughly deserves to be sacked.
As Jokowi’s officials blunder forward in search of some means of shooting people that does not violate their human rights, one cannot repress a hope that the Indonesian political system will in 2019 throw up a better presidential candidate, even if it is one more experienced in the corrupt ways of national politics.
Thanks for your informed comment, Ken. I really enjoyed your Lowy paper last year.
I share your concern about the way some academics and commentators interpreted Jokowi’s personal narrative in ways more backed by their hopes for Indonesia than the things we know about the presidency, power, and politics more generally. Even now this continues, especially, as mentioned above, with coverage of the rolling ‘reform packages’, which though breathlessly narrated in a series of media ‘exclusives’ are rarely described for what they are: mostly unimplemented and with a strange conflation of ‘deregulation’ with ‘greater state control’.
Although undoubtedly prompted by good intentions (not to mention the excitement of witnessing some form of generational change in Indonesian politics), such tendencies set back realistic discussion.
I don’t intend to suggest that nothing good is happening in Indonesia – Jokowi’s reorientation of the budget and continued emphasis of the importance of infrastructure certainly brings attention to a critical issue. That being said, what about the upscaling of his approach? For example, his recent FT interview notes that he has visited the Trans Sumatra tollroad project six times to “check land acquisition and construction”. While this undoubtedly makes a good pic fac, I wonder if such ‘spot checks’ are actually a productive use of a president’s time.
This also plays a part in the squibbing of these big decisions, both economic and otherwise (you are right to draw parallel to the executions). With the president away cutting ribbons at ports in obscure parts of Eastern Indonesia, it is inevitable that the mechanics of governing suffer. This worked during his time in Jakarta, when a more workaday No. 2 (Ahok) was busy managing the minutiae of governance and bullying recalcitrant bureaucrats. Now, however, chaos reigns; anyone meeting with him exits their meeting convinced they have won him over to their side (probably also a result of his Javanese communication style). On these major issues Jokowi seems consistently surprised by the hothouse atmosphere of the Jakarta elite and eschews complexities in favour of what increasingly seems to be conviction politics.
This comment by Matthew Busch, supplemented by Ken Ward’s observations, is both helpful and worrying.
It is certainly understandable that the Indonesian government is keen to ensure that the Indonesian nation receives a proper share of the benefits of the exploitation of natural resources. On the other hand, there are also high costs to the continual delays (and outright confusion) that seem to be part of current policy.
It’s possible, too, that under the current unfavourable international market conditions, the two main foreign investors in the Masela project (Inpex and Shell) don’t mind if there is a delay. It’s interesting to note that it was announced last month (March) that plans to develop the large LNG project in West Australia at Browse Island (a Woodside Energy project) are being postponed.
In fact, the possibility needs to be borne in mind that by delaying the Masela project in this way, Jokowi may actually be playing in to the hands of Inpex and Shell.
Thanks for reading, Peter. I hope all is well with you!
I suspect you are right, if it were not for the pesky timing of the contract extension, I think the developers might be ok with a delay.
That being said, I doubt Inpex would have submitted a revised POD last year seeking to triple the output if they weren’t keen to get their extension and see the project get moving.
One thing that needs remembering is that the world is running on the “economics of extinction” at full throttle. Once it is pumped out dry, the resources is depleted. “Resource nationalism” is unfortunately the only prudent way to make sure that resource exploitation is constitutional. If Peru managed to close its Pascua Lama gold mine and boot Barrick out on the same reason, why the heck not Indonesia?