Indonesia M&A: Is the eternal wait for Abadi over

It would appear that the eternal wait for progress on the Abadi LNG project in Indonesia may almost be over, with Pertamina reportedly be set to acquire Shell's 35% stake in the Masela PSC that contains the Abadi gas field.

Why are Shell exiting

Shell started to process to divest their 35% stake in 2019, shortly before POD approval was granted for a development based on an onshore LNG liquefaction plant in Indonesia. However, it is likely that Shell's interest in developing the field had waned long before this.

Back in late-2010, there was an initial POD approval to develop the field, with the development plan being based on a 2.5 mtpa FLNG vessel. However, with the GFC and the 2012 oil price crash, the project never progressed to FID. Instead, additional appraisal was undertaken that resulted in a significant reserves upgrade, with a second POD sent for approval in 2015, this time based on a 7.5 mtpa FLNG vessel, that would be similar in size (dimensions rather than throughput) to Shell's Prelude FLNG vessel in Australia, for which FID was taken in 2011.

However, mid-2016, the authorities decided that a POD based around an FLNG vessel would not be approved, and instructed the project partners to propose a new plan of development based on onshore LNG. Shell's desire to continue to develop the field will have been significantly impacted at this point as they had wanted to highlight their FLNG technology (although the less said about Prelude's performance the better).

Why are Pertamina buying

It is fair to say that Pertamina are the buyer of last resort as there has been little real interest from other companies in acquiring the asset. I have never heard any suggestion of IOC interest and, whilst there was some talk that PETRONAS may be a bidder, I think they will have attended the data room more out of curiosity than as a serious bidder.

Bringing Abadi onstream is a massively important to Indonesia making any headway against its goal of doubling gas production by 2030. In addition, we are fast approaching a general election in Indonesia (Feb 2024) and therefore there will be additional pressure being applied to have positive announcements before this time. Therefore, the Indonesian government will have put significant pressure onto Pertamina to acquire the asset and move towards development, even if their capital resources are already being stretched due to them recently taking over key producing assets such as the Rokan PSC and the Offshore Mahakam PSC.

Why is it taking so long?

From the Shell perspective, whilst they will be more than happy to divest the asset, they will not be under any internal pressure to rush the deal and will want to achieve the maximum value they can.

However, with a general election in February next year (2024), Indonesia's ministers will be keen to get the deal completed as soon as possible. A sign of this pressure is the recent comments from Djoko Siswanto, secretary general of the National Energy Council, and Arifin Tasrif, Indonesia's energy minister, stating that Shell have had enough time to sell its stake but the company has been too slow to decide. Even going as far as stating that Shell's stake in the Masela PSC could be cancelled and re-auctioned.

What price can we expect?

I will look at the NPV of the project in a separate article but, as there is only a single bidder, it won't a competitive process. Therefore, the price will be determined by the negotiations between Shell and Pertamina, with the government's pressure to get a deal done not aiding Pertamina's negotiating position.

A further muddying of the waters

In late-May 2023, Luhut Binsar Pandjaitan, the Minister of Maritime Affairs, said that his ministry was working on a report that would suggest banning LNG exports so Indonesia has enough gas to meet its domestic needs. This was later toned down but the message was still that, whilst existing sales contracts would be honoured, any new sales contracts for the export of LNG would need to take into consideration domestic demand, with the latter prioritised.

What is missing from the statement, is any outline of how the LNG diverted to the domestic market would be priced. If it was still based on international LNG benchmarks (Abadi gas would need to still be converted to LNG to reach any of the main domestic demand centers) then the impact on investment in LNG projects would be limited and the domestic market may see some small savings from the reduced shipping costs vs other non-domestic sources of LNG. However, it can be expected that any new policy would be designed to reduce domestic gas prices, with some suggestion of a cost-plus model.

What would this mean for Abadi

The Abadi project is based on a new onshore LNG liquefaction plant with a capacity of about 9.5 mtpa (million tonnes per year). I would imagine that INPEX’s investment in Adabi is based on the premise that a significant proportion its equity stake of the LNG volumes would be exported to Japan on long-term contracts (as we see with their Ichthys project in Australia). However, if uncertainty is created about their ability to do this, then their potential investment in Abadi will come into question.

The final irony

I have just read an article suggesting that, given the priority will be to bring Abadi gas to market as quickly as possible, an FLNG solution may now be considered.