Inpex to increase spending on overseas oil, gas projects by 50%

by Shigeru Sato and Akira Matsui

Bloomberg

Inpex Holdings Inc. will increase spending on overseas oil and natural gas projects by as much as 50 percent a year to keep pace with soaring material and engineering costs.

Annual spending on overseas projects may rise to as much as ¥300 billion over the next three to five years, compared with a capital expenditure forecast a year ago of about ¥200 billion, Chairman Kunihiko Matsuo, 72, said in an interview Friday.

The Tokyo-based company, Japan’s largest oil explorer, is developing its new overseas flagship venture, the Ichthys liquefied natural gas project in Australia, after losing an operating stake in Iran’s Azadegan oil field. Benchmark LNG prices have more than doubled this decade as demand outpaced supply and a shortage of contractors delayed new production ventures.

“We need such an investment budget strategically since material costs and engineering expenses are rising,” Matsuo said. “We are expecting to supply more LNG to Japan as Asia faces tight supply fundamentals.”

The explorer can probably finance ¥300 billion in annual capital spending without having to borrow or sell new shares, according to Lalita Gupta, an analyst at Morgan Stanley in Tokyo. “They may tap project and equity finance in case they need to spend ¥500 billion a year or more,” Gupta said.

The Ichthys project is “under review” as Inpex and its partner, Total SA, are “holding back” on a decision to start engineering and design work, Sean Kildare, a Perth-based spokesman for the Japanese company, said Jan. 10.

“We’re studying construction of a larger than planned LNG plant, depending on gas reserves and economics,” Inpex’s Matsuo said. “We will hold internal talks to determine the plant size before the final investment decision.”

Inpex holds 76 percent of the Ichthys venture and is the operator, while France’s Total, the world’s second-largest LNG producer outside government control, owns 24 percent.

Inpex and Total’s existing plan includes building two liquefied natural gas production units with a capacity of 3.8 million tons a year on the uninhabited Maret Islands off Western Australia. Inpex estimated last year the project may cost as much as 10 billion Australian dollars and deliveries may start in late 2012 or early 2013.

The project will probably cost the equivalent of ¥1 trillion and its start may be delayed because initial design work is expected to take more than a year and concerns of activist groups need to be addressed, Matsuo said.

“Startup of the project may be delayed as we have to deal with some arrangements with local citizens and authorities in Australia,” he said. “At present we don’t have any clear timetable because we can’t determine it solely by ourselves.”

The plan to build the Ichthys LNG plant on the Maret Islands off the Kimberley coast is being opposed by environmental groups, including WWF Australia. Tourism Australia describes the Kimberley region as “one of the world’s last true wilderness areas.”

Inpex is considering alternative sites in case Australian authorities decline to approve the current location, Matsuo said. “Maret Islands still is the best location for us,” he said.

The venture expects to receive environmental approval for the project at the end of 2008 or early 2009, later than originally expected, spokesman Kildare said on Jan. 10.

Matsuo said Inpex has ruled out tapping Royal Dutch Shell PLC as a partner for the Ichthys project, although the two companies are in talks to cooperate in procuring plant materials, including steel pipes, he said.

Shell, which has discovered gas in an area adjacent to Ichthys, is considering options for developing the field, including joining with companies such as Inpex, the Australian newspaper reported in September, citing Linda Cook, Shell’s executive director for gas and power.

“Shell and Inpex should basically develop gas fields on their own, while we are discussing how we can cooperate,” Matsuo said.