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Interview

with Seiya Ito, INPEX

07.10.2010 / Energyboardroom

Given Japan’s geography and natural resource endowment it is very dependent on energy from the rest of the world, liquefied natural gas (LNG) in particular. As such, Japan is strategically and favorably diversified in its international energy supply. INPEX certainly embodies this diversification with over 70 projects in 27 countries. What is the specific importance of Australia across INPEX’s global operations?

INPEX began its growth from large assets in East Kalimantan, Indonesia. We have a 50% share in a project with Total and are partnering with Chevron in an adjacent block. Those two projects were the start of our current levels of growth.

In 1986 we began to diversify to other international areas and Australia was the first country on our list. From Indonesia we moved to Australia and started off with a small but unsuccessful exploration block. Our second exploration block with BHP Billiton in the Griffin field yielded much success. The Griffin field allowed for a much more aggressive strategy in Australia to grow.

Ichthys was our fourth operated exploration block – the first three being in Indonesia – and our first operated exploration block in Australia. As an operator we have hit two large oil and gas and condensate fields out of five fields. These are Abadi in Indonesia and Ichthys in Australia.
The Ichthys project will produce 8.4 million tonnes of LNG and 1.6 million tonnes of LPGs per annum from the onshore gas plant in Darwin in the Northern Territory, as well as 100,000 barrels of condensate per day at peak.

Australia is very important in terms of our diversification from our original areas. Australia has been regarded as a core area by our corporate HQ for a long time, but because of the large discovery of Ichthys, it is now of top importance to our company.

So the Griffin field was really the turning point for this company in Australia.

Yes, it gave us a lot of motivation and furthered our position here by generating a lot of revenue. It provided the original funds for the corporation to expand its Australian activities. Ichthys was a result of that. Without the success of the Griffin fields, we might not have been able to explore and produce Ichthys. The Griffin fields exploration was one of the most important milestones for our company. It produced for more than 10 years and was a large and very successful project for us.

Looking at INPEX’s body of work in Australia to date, how would you characterize the diversity of its operations?

After Griffin we expanded our capacity here to not only Ichthys. The Van Gogh and Ravensworth projects have come onstream this year and our Bayu Undan project with ConocoPhillips has been in successful operation for several years. All of these fields are very important assets for INPEX. The Kitan field – a joint venture with ENI – reached final investment decision (FID) in the early part of this year and will likely come onstream next year. Both Bayu Undan and Kitan are located in the Timor Sea Joint Petroleum Development Area (JPDA) between East Timor and Australia.

Going down to the Browse Basin we have Ichthys and other exploration blocks.

In the Carnarvon Basin we have the Van Gogh project with Apache and Ravensworth with BHP Billiton and Apache as well as other discovered but still undeveloped fields.

Our current position is that we have eight exploration blocks surrounding the Ichthys field. We still have a lot of opportunities to find additional gas fields around the Ichthys area.

With Ichthys being the first operatorship for INPEX in Australia can we say that this is a “new beginning” for the company here?

Yes, it is a new beginning. Ichthys is an asset that we will grow with towards these new stages of the company.

Final investment decision for Ichthys has been revised to be made in the fourth quarter of 2011. What are the main issues to address that have caused the new FID date?

The revised FID timing was simply for practical reasons. We applied six months for additional offshore front-end engineering and design (FEED) work and five months for the additional tendering period.

There are several reasons for the extended FEED period. First, we want to make sure that our design has the maximum safety level. So we applied some additional period to make sure the safety level of the design is robust.

Second, we went through various improvement plans to keep reduce the cost of our offshore central processing facility (CPF) and floating production storage and offtake vessel (FPSO). If we find any place where we can apply even a tune-up which gives us a little lower cost, without compromising safety, then we will take it up. We went through all the details of the CPF and FPSO, checked part by part to make sure our design complied with this improvement process. We allowed more time into our schedule for additional engineering and tendering simply because the CPF we are designing will be one of the largest semi-submersible platforms in the world. In addition, we want to make sure that for the tendering process, there is a full and common understanding between potential contractors and ourselves.

Taking everything into account, we decided in May of this year to give an additional 11 month deadline for FID. Everything has been done for very practical reasons and nothing is related to difficulties of the project itself. It is a matter of the practical work duration required.

Can you give us a sense of the technical challenges that you are encountering working in the offshore that the designs will overcome?

All of the technology to be applied is field proven. We are not going to use FLNG yet, while Shell, our neighbor in the surrounding block, is. The Ichthys field is large enough to have an onshore plant so we applied conventional field-proven technology for the CPF, FPSO, pipeline, and onshore liquefaction plant.

One of the most challenging factors is the size of our CPF. It wil be one of the largest in the world, measuring approximately 100 meters by 100 meters. There are similar sized CPFs existing in the world, and I believe Chevron is now constructing another one which might ultimately be the biggest. The large size of the CPF is already challenging, and we will need time for us to make a robust design.

When assessing a joint venturer for Ichthys what were you looking for, what did you see in Total, and what are the synergies between the two companies?

Total and INPEX have been partners in the offshore Mahakam Block, one of the largest oil and gas field in East Kalimantan, Indonesia since 1970 and together we supply more than 80% of the feed gas for LNG to the Bontang LNG plant, one of the largest in the world. INPEX has enjoyed a very good relationship with Total for more than 35 years. Both companies know each other very well, starting with top management, which is fundamentally important. We know each others’ ways of doing business and we have enjoyed a strong relationship for a very long time.

Having said that, Ichthys is our first operator development project. We have the Minami-Nagaoka Gas Field, one of the largest gas fields in Japan with about 1400km of pipeline network that supplies gas to domestic city gas companies and industrial users. But we have never tried an LNG project by ourselves. Total, on the other hand, is a supermajor company with excellent experience in developing these types of projects, both as an operator and with other supermajor companies around the world. Their expertise and experience are very important for the project.

The reasons for accepting Total as a joint venturer are simple: we know them very well; we have had a very special alliance for a long time; and Total is a strong participant giving us the benefit of their expertise, experience, and people.

As you procure buyers of Ichthys gas is it a foregone conclusion that the long-term LNG contracts will be signed with Japanese companies? Or is there possible diversity in end user markets?

We are now talking with potential Japanese buyers. Our primary case is to supply our LNG to Japanese users. At the same time, we are also having talks with other East Asian buyers. But the majority of our cargo will probably go to Japan.

Looking at global issues affecting the industry, China has once again made big headlines by surpassing Japan to become the second largest economy in the world. A voracious appetite for energy will undoubtedly accompany further economic growth. From a Japanese perspective, how concerning is the future energy security picture of Japan given the continued growth of China?

We do not see any competition between China and Japan. When looking at crude oil, for example, even though a Chinese company enters in a long-term contract with another company, they are not taking up all the oil in the world. But it is a balance of supply and demand. If demand grows globally and supply shrinks globally, it will have a serious impact on Japan as a whole. But it is not a competition between China and Japan in the oil and gas trading world. There are many users and many producers and it is a total balance which should be taken into account by Japanese users. It is not because of China that you are short on oil or gas. It is however due to Chinese demand that consumption will grow and world energy supplies will become tighter. That is the problem and a serious issue especially as China and India both grow. Who knows, there might be a large oil discovery somewhere in the world that will change the global supply and demand situation. This has been the pattern for the past 40-50 years. China will contribute to the increasing demand; that’s for sure. In that respect, we have to carefully watch the security of supply.

You began as Managing Director in November 2008 when commodity prices were extremely volatile and the worst of the financial crisis was coming to fruition. How did your long term experience with INPEX and familiarity with the company ease the transition into the new position?

I have been engaged in the Ichthys project since 2006. I spent two years in the head office and moved here to Perth two years ago. Right after that came the Lehman Brothers shock. I started my career with INPEX when I was 23 years old. I am an INPEX guy and have been through many up and down economic situations throughout my career. Oil prices at the time that I started were $10 per barrel, then went up to $40, and dropped down to as low as $8. Since becoming Managing Director oil prices have shot up to over $100 and dropped down to even the $30s. I am used to it and it has little impact on me.

Given the product that you are delivering, the relationships which you are forging, and energy supply that you are providing, do you in some ways approach your role as an unofficial ambassador to Australia?

As a member of Japanese industry engaged in talks with Japanese gas buyers, contribution to the security of energy supply of Japan is one goal for this company. But, importantly as a company listed on the Tokyo Stock Exchange our primary target is to give full value to our shareholders. That is our number one stated purpose. If Japanese buyers take our LNG for a long term, it will of course contribute to energy security. Perhaps having supply from a Japanese project operator for a long-term may add a little more certainty.

But a lot has to do with Australia where everything is very stable. It means a lot to Japan. Australia is a very reliable supplier to Japan in its security and stability and I am confident that Australia values INPEX as an operator and supplier.

The Australian oil and gas industry has many crucial targets and timetables to hit over the next 5-7 years. How do you see INPEX growing in conjunction with the industry over this time period?

We are firmly proceeding with our goals. We just raised approximately US$6 billion equity from the market, most of which is intended to be invested in the Ichthys project. On top of Ichthys we also have the Abadi LNG project in Indonesia and participate in the massive Kashagan project in Kazakhstan. All of these three large investments are waiting for us. We have already set up the plans to realize those three projects with sufficient funds to be prepared.

Within seven years all of these projects will come onstream. Our current daily production level is 400,000 barrels of net oil equivalent. Our company’s target is to increase production of net oil equivalent up to 800 thousand to 1 million barrels per day by 2020. Also, our proven reserves will triple from the current levels. The next seven years are a very exciting time for INPEX globally. Particularly with Ichthys coming on stream our company’s portfolio will jump to another level. It does not put us in the category of supermajor, but perhaps next to supermajors.

How will the Ichthys project benefit the Australian community, particularly in Darwin, where you will build the onshore gas plant?

We have been very engaged with the local community and the traditional land owners in Darwin from the beginning. We have held a lot of talks with Aboriginal groups and signed a memorandum of understanding with the Larrakia Development Corporation last November in Tokyo confirming both sides’ cooperation throughout our project in Darwin.

As the first contribution to honor that agreement, INPEX and Total donated A$3 million for the construction of the Larrakia trade training centre. The training centre is a very positive project which will provide life skills and job training for young and mature people in the Northern Territory who may otherwise have struggled to find meaningful employment. We are very pleased and proud to be supporting this excellent initiative for the community in which we operate. I am very pleased to advise that the centre construction will be completed on schedule allowing the first students to begin their specialist trade training by early next year.

We are fully committed to being a good corporate citizen in Darwin and we have established a program of support for community activities which will grow in the future as we move into construction and then operation of the LNG plant.

The Ichthys project will bring enormous economic benefits, particularly to the Northern Territory. We signed an industry participation plan with the Northern Territory government to maximize business opportunities for local people.

The Northern Territory government and the community in Darwin have been extremely supportive and accommodating of the project coming there. There has not been a day since deciding on Darwin that we have regretted the decision.

Can you comment on the Environmental Impact Statement (EIS) for the Ichthys project that was recently released for public comment?

We want to be very transparent and open to all of our stakeholders because the environment, along with safety, is the most important aspect of the project. Many stakeholders are paying close attention to our environmental care. We took a long time and had lengthy discussions with government and finally released a final version of the Draft EIS on July 15, 2010. The Draft EIS document is over 2,000 pages and has 24 technical appendices supporting the two main volumes. We are very proud to be releasing the Draft EIS to the public and believe it sets out the environmental management plan that will allow the Northern Territory and Australian governments to support approvals for the project.
We had an intensive 8-week communication program for the Draft EIS starting from July 15. At the time of release we had a media launch and three different community forums to take up all questions and concerns from the community. Also, our team members have had face-to-face presentations with many stakeholders including government personnel, community representatives, environmental groups, tourism groups, and the business community.

Environmental approval is very important for the project. We continually strive to be transparent and open to all stakeholders in order to achieve our target of environmental approval. We do not underestimate anything with regards to the environment. Without the proper and firm public support, the project would not be able to proceed. This is very important for us.

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