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Inpex spends on upstream and LNG to shore up supply security

Japanese energy player Inpex is keeping an eye on the future as it invests in foreign upstream developments, chief executive Toshiaki Kitamura tells Kwok W Wan in an exclusive interview

After last year’s Fukushima Daiichi nuclear disaster, Japan needs gas. And Japanese energy firm Inpex firmly believes that investing in overseas upstream and liquefied natural gas (LNG) projects is vital to not only diversify the country’s import sources, but to ensure security of supply.

Japanese LNG imports hit a record high of 78.5 million tonnes last year, after the country started using gas-fired generators to offset the shutdown of its nuclear power plants. In May this year, all 54 reactors were offline. And, without any indication of when they will be brought back into operation, imports for 2012 could set new record highs.

“As a result of the Fukushima incident, the most serious issue Japan faces is securing a stable and efficient LNG supply,” Inpex president and chief executive officer, Toshiaki Kitamura, told Petroleum Economist in an exclusive interview.

“It is Japan’s energy security requirement that continues to drive Inpex’s search for more oil and gas across the world and to take part in upstream projects where they proceed to development. It is important also that Japanese utility companies promote actively their energy requirements to upstream companies such as Inpex,” he said.

Inpex is involved in a number of overseas upstream gas projects, but is most proud of its “crown jewel” – the huge $34 billion Ichthys LNG project in northern Australia.

Inpex approved Ichthys’ final investment decision in January this year. LNG production capacity at the terminal is 8.4m tonnes a year (t/y) and first shipments are expected at the end of 2016. All production is already contracted out on long-term deals with around 70% of output destined for Japan.

Inpex holds a 72.07% stake in the project, while France’s Total has 24%. The rest is held by Tokyo Gas (1.575%), Osaka Gas (1.2%), Chubu Electric (0.735%), and Toho Gas (0.42%) but the deals are yet to be approved by the Australian government.
Inpex said it was Australia’s regulatory stability and the prospect of producing natural gas liquids that made the Ichthys project so attractive.

“Facing growing resource nationalism, it is a great opportunity for Inpex to produce LNG in such a stable country like Australia. The Inpex operated Ichthys LNG project has, in addition to 8.4m t/y LNG production, considerable volumes of condensate (liquid rich), which leads to favorable economics for the project,” Kitamura added.

As well as LNG, the Ichthys project is expected to produce 1.6m t/y of liquefied petroleum gas (LPG) and 100,000 b/d of condensate at peak production.

Inpex has also acquired a 17.5% of Shell’s Prelude floating LNG (FLNG) project in Western Australia, which is expected to be the first floating liquefaction facility in the world. Prelude has 3.6m t/y production capacity and first LNG is expected in 2016/17.

The Japanese company is also looking at Canada as another potential supply source. Inpex acquired a 40% interest in British Columbia from Canadian exploration firm Nexen with LNG exports in mind.

“Canada is very supportive of LNG export. There is a chance it will be supplied to the Asian gas market, including Japan,” Kitamura said.

He added that US LNG exports could also provide additional supply to Asian buyers, but does not expect all seven proposed projects to go ahead and warned US gas prices could be volatile as the market adjusts to the oversupply during the recent shale gas boom. US power producers and chemical manufacturers are also against LNG exports because they want cheap fuel and feedstock.

“It would not be an overstatement to say not all planned LNG export projects in North America will be realised. It is unlikely a substantial volume of shale gas will come to the LNG market in the near future and even when it does, that would only be considered as an arbitrage transaction,” he said.

But with several Australian LNG projects expected to start up before 2020, Inpex expects the LNG market to loosen at the end of the decade if there are no delays. Australia could overtake Qatar as the world’s largest LNG exporter with over 100m t/y production capacity, but rising raw material and labour costs means some projects could overrun and expansion plans may also be scaled back.

The possible delays in new supply is against a backdrop of surging demand, which would squeeze the LNG market.

“The demand increase in South Korea and Taiwan, higher energy demand in emerging economies such as China and India due to the rapid economic growth, and the consequence of a revision in the energy policy in Japan, means LNG demand in east Asia will markedly increase in the medium-to long-term,” he said.

After Japan, South Korea and Taiwan are the next largest Asian LNG importers. But other Asian countries are rapidly adding new import terminals. China has 25m t/y of additional LNG import capacity planned or under construction versus current capacity of 18.8m t/y LNG, according to Petroleum Economist’s LNG Insight data.

India has import capacity of 13.5m t/y, but is expected to add an additional 26.5m t/y.

“Considering the environmental benefits of natural gas in comparison with other fossil fuels, we expect demand for this product will continue to grow worldwide. This will lead to intense competition for natural gas creating difficult negotiating conditions for oil and gas producing countries,” Kitamura said.

With the LNG market growing and becoming more competitive, Inpex sees foreign investment as key to securing gas supply to Japan. Before the Fukushima disaster, the Japanese government wanted to increase nuclear as part of the energy mix from around 30% in 2010 to 50% in the coming decades.

But with public fears over safety after the earthquake and tsunami in March last year, this seems unlikely so Japan is likely to import more fossil fuels, including LNG, in the long term.

“We all need to understand that securing LNG supply stability for Japan will be achieved by diversifying LNG supply sources. We believe firmly that it is our mission to provide a stable supply of natural gas and/or LNG, thus satisfying our corporate objective of contributing to Japan’s energy security,” said Kitamura.

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