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The government said that the development of the Masela gas block in Timor Sea is expected to start in 2012, with production beginning five years later.

The first stage will start operations in 2017, with a total production of 2.5 million tons of liquefied natural gas, followed by a second stage of construction, said Hatta Rajasa, the Coordinating Minister of Economic Affairs in Jakarta. Hatta met with executives at Inpex, Japan’s top oil and gas developer on Friday, and said the investment would be “in the billions of dollars.’’

Gde Pradyana, spokesman for upstream oil and gas regulator BPMigas, said that the Inpex will start building the country’s first floating LNG receiving terminal in the Masela block, or Abadi block, next year. He said that initial investment for the project is estimated to cost up to $5 billion.

Inpex was awarded the contract to operate the Masela LNG block in Timor Sea, East Indonesia last December. The project was set to start this year, but was delayed pending a decision on the type of terminal to be built.

The latest target for a 2016 start is two years ahead of Inpex’s announcement last December, when it said that LNG production from the Abadi field in the Masela block will only start in 2018.

Inpex spokesman Keisuke Yano said this week that Inpex had delayed the start of front-end engineering and design to the first half of 2012 from the second half of 2011. The company would only decide when to make a final investment decision on the project and when to start production during the preliminary design process.

Inpex said in July that its joint venture with a Japanese government affiliate will sell a 30 percent stake in Indonesia’s Abadi gas field in the Masela block to Royal Dutch Shell RDS.

The joint venture, which includes Japan Oil, Gas and Metals National Corp (JOGMEC), will retain a 60 percent stake, with the remaining 10 percent held by the project’s other operator, Indonesia-listed Energy Mega Persada, a unit of Bakrie group.

Shell Upstream Overseas Service has been selected as a strategic partner for the project to build the LNG floating terminal, Inpex said.

Hatta said that 20 percent of the gas would be sold in the domestic market with the remaining sold overseas.

Inpex has said that the Abadi field could hold reserves of 10 trillion cubic feet.

The Indonesian government typically uses the profit-sharing contract to work on the gas project, where contracts stipulates the revenue sharing between the companies and government. It also sets tax incentives, tax obligation and cost recovery.

With additional reporting by Reuters.