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Bloomberg: Inpex to Boost Spending on Oil, Gas Drilling by 50% (Update2)

By Shigeru Sato and Akira Matsui

Feb. 19 (Bloomberg) — Inpex Holdings Inc., Japan’s largest oil explorer, 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 yen ($2.8 billion) over the next three to five years compared with a year-earlier capital expenditure forecast of about 200 billion, Chairman Kunihiko Matsuo, 72, said in an interview broadcast today on Bloomberg Television.

The Tokyo-based company 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 in Tokyo. “We are expecting to supply more LNG to Japan as Asia faces tight supply fundamentals.”

Inpex’s advanced as much as 3.6 percent to 1.14 million yen in Tokyo trading, and traded 2.7 percent higher at 1.13 million yen as of 10:21 a.m. local time. The stock has declined 7.4 percent this year, compared with a 9.3 percent drop in the Topix index. It rose about 24 percent in 2007.

The explorer can probably finance 300 billion yen of annual capital spending without having to borrow or sell new shares, according to Lalita Gupta, an analyst at Morgan Stanley in Tokyo.

Larger Plant

“They may tap project and equity finance in case they need to spend 500 billion yen a year or more,” said Gupta, who has an “overweight/cautious” rating on Inpex’s shares.

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.

Ichthys Project

Inpex and Total’s existing plan includes building two 3.8 million tons-a-year liquefied natural gas production units on the uninhabited Maret Islands off Western Australia. The Japanese company last year estimated the project may cost as much as A$10 billion ($9.1 billion) and deliveries may start in late 2012 or early 2013.

“Inpex should stick with the original project plan, without reviewing the plant-size, and swiftly embark on construction,” said Hirofumi Kawachi, a energy analyst at Mizuho Investors Securities Co. in Tokyo. “They should find customers for Ichthys LNG before global gas demand and plant-material costs change drastically in the years ahead.”

The project will probably cost the equivalent of 1 trillion yen ($9.2 billion) 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, the Inpex chairman said.

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

Alternative Sites

The plan to build the Ichthys LNG plant on the Maret Islands off the Kimberley coast is being opposed by some 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 taking Royal Dutch Shell Plc. as a partner for the Ichthys project, though 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.

Talks With Shell

“Shell and Inpex should basically develop gas fields on their own, while we are discussing how we can cooperate,” Matsuo said. “We need to speedily comprehend the structure of natural gas and condensate in the Ichthys field.”

Inpex’s latest official estimate of proven and probable reserves at Ichthys is 9.5 trillion cubic feet of recoverable gas and 312 million barrels of condensates.

Inpex Holdings was created in 2006 by Inpex Corp.’s acquisition of Teikoku Oil Co. Matsuo had worked more than 30 years for Japan’s trade ministry before taking his current position in April 2006.

To contact the reporter on this story: Shigeru Sato in Tokyo at [email protected] ; Akira Matsui in Tokyo at [email protected] .

Last Updated: February 18, 2008 22:06 EST

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