As per the Indonesian authority, European oil giant Royal Dutch Shell Plc (RDS.A) and associate Japanese firm Inpex Corporation will invest approximately $12 billion in the development of the natural gas offshore block – Masela – in the Arafura Sea.

However, the companies’ investment could go over $20 billion in an attempt to enhance the production capacity of the Abadi liquefied natural gas (LNG) facility in the Masela block. However, Shell has yet to confirm the financial aspects of this collaboration.

Shell and its partners have designed a development plan for the block that includes Indonesia’s first floating liquefied natural gas unit.

With an initial annual production capacity of 2.5 million tons, the facility is expected to commence operations by 2018-2019. Shell will remain committed to boost the capacity of the floating LNG plant to 6 million metric tons per year.

Shell controls a 30% interest in the Masela block – acquired from the operator Inpex Corporation in 2011. Inpex currently holds a 60% stake. The remaining 10% is with Indonesia’s PT Energy Mega Persada.

With the success of the project, this will be one of the largest ever foreign investments in the Indonesian energy sector. The country’s vast untapped resources have become an attractive investment option for many global oil and gas players.

Royal Dutch Shell is one of the largest integrated energy firms in the world with a strong and diversified portfolio of development projects that offer attractive long-term opportunities.

Shell, which operates in the industry with big players such as BP plc (BP) and Total SA (TOT), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Longer-term, we are maintaining our Neutral recommendation on the stock.

The company – renowned for its success in bringing some of the largest and technically challenging capital-intensive projects to fruition – is expected to continue accelerating revenue and earnings growth over the next few quarters.

However, being one of the largest integrated oil and gas companies in the world, Shell is particularly susceptible to the downside risk from the current turmoil in the global economy. We are also concerned about the group’s high level of capital spending, which may result in reduced returns going forward.

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