Japan's INPEX signs deal with Indonesia on Masela block development

Following the announcement of Japan's INPEX signing Heads of Agreement (HoA) with the Indonesian government on the Masela block development, Wood Mackenzie research director Andrew Harwood said:

"The HoA formalises the recent outline agreement between the government of Indonesia and INPEX on the Masela development project. After several setbacks in recent years, it is a positive step for the project, which is of national strategic importance given its size and potential contribution to Indonesia's oil and gas supply outlook.

"The agreement will provide further details on the development concept, schedule, capital investment and production sharing contract (PSC) terms under which the giant Abadi field will be developed. The proposed PSC terms are confidential, but we understand that the Indonesian government and INPEX have agreed terms that improve the project's economic viability.

"Globally, we estimate over 90 million tonnes per annum of new LNG supply capacity will take Final Investment Decision (FID) during 2019-2020, leading to a wave of new investment. Over US$200 billion will be spent on LNG developments between now and 2025. With this increased level of activity, LNG operators will be under pressure to avoid the cost and schedule overruns that have plagued the LNG industry in the past. The projects with the best chance of taking FID will be those with the lowest breakeven costs, those that have secured long-term buyers or projects of strategic importance to key stakeholders.

"There are two key risks facing the project. Firstly, with Abadi set to take FID by 2022, the project partners will face crowded construction and engineering markets. Secondly, the project will be brought onstream at around 2027, which may be a softer environment for marketing LNG offtake to buyers as other LNG supply will have already entered the market.

"INPEX has ramped up output from its first operated LNG project, Ichthys in Australia, and will have strong cash flow to carry out a second LNG project."