The Day We Killed Our Favorite Project

It was our favorite project. A new gas-to-power plant in Sulawesi, designed to fuel a new industrial park. The financial model was perfect. The base case, built on the government’s official electricity tariff plan and a reasonable gas price forecast, showed a 15% IRR. It was the kind of clean, straightforward project that boards of directors love to approve. We spent months polishing this base case, getting every detail right. And then, in one afternoon, I made my team kill it.

We didn’t kill the project itself, but we killed the beautiful, comfortable illusion of the base case. I asked my team to ignore the base case and instead model three scenarios. I called them the “Indonesian Reality” scenarios. These weren’t black swan events; they were the everyday risks of doing business in our country, the things that people know can happen but don’t like to put in the official model.

Scenario 1: The Permitting Quagmire. The base case assumed we would get our AMDAL (environmental permit) and all other key permits within 12 months. Our “Permitting Quagmire” scenario modeled a 24-month delay. This isn’t pessimism; it’s realism. I’ve seen projects get stuck in regulatory limbo for years due to changes in local government or challenges from NGOs. The cost of this delay wasn’t just the extra 12 months of G&A burn; it was the catastrophic impact of construction cost inflation over that period.

Scenario 2: The “Turnkey” Trap. Our base case was based on a cost estimate from our preferred EPC contractor. But we didn’t have a signed, lump-sum turnkey contract yet. Our second scenario assumed a 30% cost overrun. Why 30%? Because studies of Indonesian downstream projects have shown that over half of them experience significant cost and schedule overruns [1]. We were simply modeling the statistical reality. A 30% overrun on a billion-dollar project is a $300 million hole that has to be filled with more debt or expensive equity.

Scenario 3: The PLN Pivot. Our entire revenue model was based on a long-term PPA with PLN, the state utility. But PLN’s own financial health and strategic priorities can change. Our third scenario modeled a situation where, five years into the project, PLN renegotiates the tariff downwards, citing a new government policy to reduce electricity costs. This is a sensitive topic, but it has happened. It’s a political risk that is very real.

We spent the afternoon running these scenarios. The mood in the room went from optimistic to funereal. Here’s what we found:

• In the “Permitting Quagmire” scenario, the project’s IRR dropped to 8%, below our cost of capital.
• In the “Turnkey Trap” scenario, the NPV turned negative.
• In the “PLN Pivot” scenario, the project was still profitable, but the returns were severely diminished in the later years.

Our favorite project, the clean and simple 15% IRR story, was actually a fragile house of cards. It only worked if everything went perfectly. And in Indonesia, nothing ever goes perfectly.

This analysis didn’t kill the project. It saved it. It forced us to confront the real risks and build a more resilient strategy. We immediately changed our contracting strategy, deciding that we would not proceed to FID until we had a signed, lump-sum turnkey EPC contract, effectively transferring the construction risk to our contractor. We also began parallel discussions with a private industrial offtaker, creating a viable alternative in case the PPA negotiations with PLN stalled. We were building resilience, not just chasing a return.

Stress testing is not about being pessimistic. It’s about being a professional. It’s about having the discipline to look at the downside with the same rigor that you look at the upside. The base case tells you what might happen. The stress tests tell you what you can survive.

The Challenge to You

Identify the three biggest non-commodity risks for your project. Don’t just think about price. Think about the things that are specific to your project and your country.

1. Counterparty Risk: What if your main contractor goes bankrupt or your primary customer defaults?
2. Regulatory Risk: What if the government changes a key law or permit requirement?
3. Operational Risk: What if your main production facility has a major, six-month unplanned outage?

Model these three scenarios. Quantify their impact on your cash flow and NPV. This will give you a much more honest assessment of your project’s risk profile than any base case ever will. It will show you where you are truly vulnerable.

References

[1] PM World Journal. (2023). Benchmarking Indonesia’s Downstream Oil & Gas Construction.

Originally published at https://www.linkedin.com.