INPEX CEO flags impact on Ichthys LNG economics from Australia's Safeguard Mechanism

The president and CEO of Japan's INPEX admitted Aug. 9 that costs for its Ichthys LNG project in Australia are expected to increase due to the country's reforms to its Safeguard Mechanism, and flagged up that schedules at Abadi LNG in Indonesia will have to be reviewed after the recent shakeup in the project's ownership structure.

The 8.9 million mt/year Ichthys LNG project, which is operated by INPEX and came online in 2018, will now have to buy Australian Carbon Credit Units (ACCUs) to offset emissions above the regulatory baseline until carbon capture and storage starts up in the late 2020s, Takayuki Ueda told a press conference in Tokyo.

Under reforms to the Safeguard Mechanism that came into effect July 1, industrial facilities, including oil and gas production and mining operations, that emit more than 100,000 mt/year of CO2 equivalent must offset CO2 emissions through steps such as purchasing carbon credits or carbon capture and storage.

The mechanism requires affected facilities to cut net emissions by 4.9% annually through 2030, while new facilities, including gas fields, are expected to have a baseline of net-zero emissions from the start of operations.

"Following the enhancement of regulations by the Australian government, Ichthys would also be required to cut 4.9% of CO2 [emissions] every year as determined by law," Ueda said, adding that the company intends to respond by using CCS.

"However, CCS cannot be introduced today, or tomorrow, regardless of our efforts to have it introduced as quickly as possible," he said. "Despite our efforts, actual [CO2] injections for CCS would begin in the late 2020s, or around 2029."

"That means we would have to buy Australian carbon credits for CO2 emissions above the regulatory limit," he added.

Ueda's comments follow a number of Japanese buyers of Australian LNG expressing concerns that the Safeguard Mechanism reform will have a significant impact on LNG business and import costs for Japan, which sources over 40% of its LNG imports from Australia.

Asked about the longer-term impact on a potential expansion at Ichthys, Ueda noted some uncertainty over the price exposure to ACCUs, but said that it "would deteriorate economics to some extent."

The scale of the impact would depend on how much ACCUs cost in the future, as well as the volumes that need to be purchased. "We are in the stage of closely monitoring ensuing situations and considering [the impact]," he said.

Ichthys maintenance deferred

At the press conference, INPEX's managing executive officer Daisuke Yamada said that the company was working to catch up with planned sales volumes from Ichthys after it suffered offshore production issues in April-June that had reduced sales volume by around 5%.

Production has now been fully restored and steps to get back on plan include deferring a scheduled maintenance program, Yamada said.

An INPEX spokesperson confirmed that the Ichthys project does not currently plan to carry out scheduled maintenance in 2023, referring to a 10-day maintenance in September.

Ichthys shipped nine LNG cargoes in July, compared with 11 cargoes in June, and 10 cargoes each over April-May, with offshore condensate shipments at two cargoes in July, flat from June, compared with three cargoes in May and two cargoes in April, according to the spokesperson.

Over January-June, the Ichthys project shipped 65 cargoes of LNG, 11 cargoes of plant condensate, 15 cargoes of offshore condensate and 17 cargoes of LPG, according to the spokesperson.

The Ichthys project involves piping gas from the offshore Ichthys field in the Browse Basin in Northwestern Australia more than 890 km to the onshore 8.9 million mt/year LNG plant near Darwin. Alongside LNG, it also has capacity to produce 1.65 million mt/year of LPG and 100,000 b/d of condensate.

Abadi schedules

Following the recently announced takeover of Shell's 35% stake in the Abadi LNG project by Indonesia's Pertamina and Malaysia's Petronas, Ueda said that INPEX intends to review the project schedules after holding discussions with its new partners.

"While keeping in mind our earlier schedules, we hope to review the schedules once again upon holding various discussion with new partners," Ueda said.

INPEX earlier said that a final investment decision was expected in the latter half of the 2020s with the start of production in the early 2030s.

The Abadi LNG project, operated by INPEX with a 65% stake, comprises an onshore LNG plant that will be fed with gas from the Abadi gas field in the offshore Masela block being developed as part of the project.

The project is expected to produce about 9.5 million mt/year of LNG and up to around 35,000 b/d of condensate. It will also supply 150 MMcf/day of natural gas by pipeline to the domestic market.

Pertamina and Petronas on July 25 signed agreements to take over Shell's 35% stake in the Masela block for around $650 million. Pertamina will own a 20% participating interest in the Masela PSC, while Petronas will own 15%.

Pertamina CEO Nicke Widyawati said at the time that the state-owned company expects the Masela block to be on stream by 2029.

On April 4, INPEX submitted a revised plan of development (POD) for the Abadi LNG Project, incorporating a CCS component, to the Indonesian government and plans to revise the PSC to reflect the incorporation of CCS following approval of the POD.

"Speaking of Abadi, we hope to be able to sell clean LNG via installing CCS from the day one of production," Ueda said. "We also have a basic agreement on the course of action for having CCS with Abadi from the Indonesian government," he said, adding that the company is still working with the Indonesian government to revise the POD.