Efficiency costs in spotlight at APPEA

The head of Inpex, the Japanese giant building the $US34 billion Ichthys LNG project to develop a "strategic gas Silk Road", has warned of a lose-lose unless suppliers and buyers can close the gap on opposing views on gas contract pricing.

In a surprisingly frank address from one of Japan's most influential corporate leaders, Inpex chief executive Toshiaki Kitamura said he was concerned about the gulf in views between LNG suppliers and gas buyers on the key issues of the supply- demand outlook and pricing mechanisms.

In his address to the Australian Petroleum Production & Exploration Association conference in Perth this morning, the Inpex boss urges closer relations and better co-operation "through mutual understanding" and encourages buyers to take upstream equity positions.

But Mr Kitamura, who is overseeing Japan's biggest investment in Australia, also concedes LNG project proponents had to make their developments "cost effective and competitive through the application of new technologies, discovery of new gas resources and efficient project management".

In addition to Inpex's upstream ambitions headlined by Ichthys, the company is one of Japan's biggest domestic distributors of gas.

Mr Kitamura's views are especially pertinent because it is Japan's LNG buyers who have been the most vocal about wanting a change to the traditional oil-linked pricing mechanism that underpins long-term LNG contracts and instead incorporate a Henry Hub US domestic gas price that remains low because of America's abundant shale resource.

There is industry concern that the gulf in views on pricing is delaying the sanctioning of some LNG projects at a time of uncertainty over whether the promised flood of US shale gas export projects will eventuate.

PwC also urges more collaboration between suppliers and buyers and says LNG proponents need to shift from a project-based mindset to one of a manufacturing-based operation as a way of reducing costs and becoming more competitive.

APPEA president Rob Cole said: "It is clear the Australian LNG industry must reduce costs and improve productivity if we are to maintain, let alone increase, our prosperity. Our challenge is to re-examine our operational practices and seek ways to cut costs and enhance productivity."

Mike Lynn, Deloitte's national oil and gas leader, said the high-cost environment had made Australia a "somewhat fickle investment destination".

"There is a real risk that we get passed by," Mr Lynn said.

Inpex's Ichthys project is Japan Inc's first attempt at operating an LNG development. Mr Kitamura refers to the project's 2012 final investment decision as "the most important event in our corporate history" and says Ichthys will supply 5.7 million tonnes of LNG a year to Japan, or about 7 per cent of the gas-dependent country's 2013 import volumes.

The West Australian

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