Japan's Reactor Crisis May Help Total, Inpex Win Customers for LNG Project

Japan’s projected increase in natural gas demand after the crisis at a nuclear power plant may help Inpex Corp. (1605) win customers and improve returns of its proposed Ichthys project in Australia with Total SA.

Inpex, whose shares have risen 15 percent in Tokyo since the March 11 earthquake and tsunami hit Japan and crippled the Fukushima Dai-Ichi station, will likely be able to sign accords with Japanese liquefied natural gas customers at a higher price, closer to parity with crude oil, David Hewitt, a Tokyo-based analyst at CLSA Asia-Pacific Markets, said by phone.

“This was already a massively important project for Japan Inc.,” he said. “It’s a project with Japanese leadership, and Australia is the supply point the Japanese prefer. It ticked all the boxes before. It ticks the boxes even more strongly now.”

Inpex, Japan’s largest energy explorer, and Woodside Petroleum Ltd. (WPL), Australia’s second-biggest oil and gas producer, are among companies set to benefit as countries rely more on gas and less on nuclear power, analysts including Deutsche Bank AG’s John Hirjee have said. Inpex and partner Paris-based Total aim to make a decision to proceed with the $33 billion Ichthys LNG project in the fourth quarter of this year.

Chevron Corp. (CVX), Royal Dutch Shell Plc (RDSA), BG Group Plc (BG/), Santos Ltd. (STO), ConocoPhillips (COP), Origin Energy Ltd. (ORG) and Oil Search Ltd. are also proceeding with LNG projects in Australia and Papua New Guinea to meet a predicted increase in Asian demand for cleaner- burning alternatives to coal to curb carbon emissions.

‘Seller’s Market’

“Ichthys still has to compete with the other projects on the drawing board in Australia, and we have seen the Japanese utilities bypassing Inpex and signing contracts with the other guys,” Brynjar Eirik Bustnes, a Hong Kong-based analyst at JPMorgan Chase & Co., said in a phone interview. “But the likelihood of it happening increases as this moves toward somewhat more of a seller’s market.”

Tokyo Gas Co., Osaka Gas Co., Chubu Electric Power Co. or Kansai Electric Power Co. may agree to buy LNG from the Ichthys development in northern Australia, Hewitt said. Qatar is likely to provide most of the “heavy lifting in the short term” by delivering LNG to Japan to meet the demand and will likely seek to convert those sales into longer contracts, he said.

“What they never agreed on previously was the price,” he said. “The buyers said ‘I want to support the national interest, but I’m not going to overpay. I think it’s now more realistic that Qatar will achieve crude price parity, and therefore more likely that Inpex and Ichthys could as well.”

Nuclear Disaster

Japan, already the world’s biggest buyer of LNG, may now need a further 14 million metric tons of the fuel by 2020, he said. That demand may help Ichthys get a price better than his previous estimate of a 15 percent discount to crude, he said.

Japan is likely to delay the building of new nuclear power plants and accelerate the decommissioning of older reactors after the disaster, Neil Beveridge, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in a report last month.

The world may require a further 25 million to 50 million tons of LNG a year by 2020, according to the Bernstein report. Beveridge said that he was already predicting LNG demand to double to 400 million tons a year during the next decade.

Ben Wedmore, an analyst at MF Global FXA Securities Ltd. in Toyko, said he is skeptical that Japan will scale back plans to expand nuclear power generation or that Inpex will have a post- quake advantage making the project more “economic.”

“The project is going ahead, but the question is how much value is there in it,” said Wedmore, who has a “neutral” rating on Inpex. “I don’t think my view of Inpex has changed.”

Ichthys, given a Japanese company is leading the venture, may gain the most of any Australian LNG development, Hirjee of Deutsche Bank in Melbourne said last month. The project may cost A$32 billion ($33 billion) to build, he estimates.

“Any Australian project not yet fully contracted may benefit from the market tightening because Japan will be looking to lock in both medium- and longer-term supplies,” he said.

To contact the reporter on this story: James Paton in Sydney jpaton4@bloomberg.net.

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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