Message from the President

Toshiaki
Kitamura
President & CEO

024

INPEX CORPORATION Annual Report 2013

To Our Stakeholders
For the year ended March 31, 2013, we took steady strides toward developing
the Ichthys LNG Project, a central growth driver, and saw progress at every stage ofbusiness development, including the successive acquisition of upstream interests.
Consolidated net income totaled ¥183.0 billion, exceeding our initial forecast.
In the Message from the President section of the Annual Report 2013,
I cover in detail the topics that matter the most to our shareholders and investors.

2

Please describe the Companyʼs perfor-

last year, ﬁnancial forecasts for thisQ. mance
year, and cash dividend plans.
INPEX recorded consolidated net income of¥183.0 billion for the year ended March 31, 2013,
partially reﬂecting gain on transfer of interestsof the Ichthys. Assuming zero gains on the transfer
of interests going forward, ﬁnancial forecasts arefor net income of ¥142.0 billion for the year ending March 31, 2014. Nevertheless, the Company
plans to slightly increase cash dividends per share.
Consolidated net income of ¥183.0 billion for the year
ended March 31, 2013, exceeded our initial forecast at the
beginning of the year. The value of our interests in the Ichthys LNG Project contributed to earnings for the year ended
March 31, 2013, as net income included approximately ¥50.0
billion in gains on the transfer of interests to LNG buyers/
partner in the Ichthys LNG Project. Moreover, INPEX decided
to distribute an annual cash dividend of ¥7,000 per share.
As announced on August 2, 2013, we forecast negligible growth in net sales for the year ending March 31, 2014,
and we expect net income of ¥142.0 billion on account of
the disappearance of the aforementioned one off gains on
the transfer of interests in the Ichthys LNG Project. INPEX
plans to pay a slightly higher annual cash dividend of ¥7,200
per share for the year ending March 31, 2014 (calculated
prior to the planned stock split). INPEX emphasizes a balanced approach to shareholder returns and proﬁt growthover the longer term, because the Company is at the stage
where it is investing in growth mainly by developing two
world-scale LNG projects, Ichthys and Abadi.

A.

With business development advancing

Factors relaxing the balance of supply and demand havegiven rise to expectations for a fall in energy prices. These
factors include projections for an increase in the supplyof energy based on expectations for higher production of
shale gas in North America, as well as opinions that energy
demand may be weaker than the outlook for emerging countries. I believe factors such as these have applied downward
pressure to the share prices of all resource-related companies around the world, including our own. Taking a closer
look at each individual stock, however, we can see thatthe market has reacted positively to companies that havepromising development and production projects compelling stories, and companies with compelling stories such as
production starting on major LNG projects. The share pricesof companies that ﬁt this description have remained strong.
Our compelling story begins with the start of production at the large-scale Kashagan oil ﬁeld (Kazakhstan) during
the year ending March 31, 2014, and full-term contributions
from production at the Angola Block 14 area, in which we
acquired an interest last year. In addition, INPEX plans tocommence production at the Lucius oil ﬁeld in the Gulf of
Mexico in the latter half of 2014. The most compelling partof our story is the smooth and steady progress being madeto move development forward on the Ichthys LNG Projectin Australia toward the launch of production. We expect themarket to recognize this steady progress in a timely fashion going forward. As we progress through each chapter ofour compelling story, we expect our share price to be reassessed at an appropriate level.

Management
Message

The Year in Review

are your thoughts on stock splits andlowering the minimum investment unit?
Q. What
Conditions are now conducive to setting a shareprice threshold that would facilitate investing.
On October 1, 2013, INPEX plans a 1:400 stock split
for shares of common stock. At the same time, the Company
will adopt the share unit system and set its basic investment
unit at 100 shares of common stock. As a result, investors
will be able to buy and sell one investment unit at onequarter of the current share price. INPEX has received comments in the past, especially by individual investors, that its
minimum investment unit in common stock was too high.
By making it easier for investors to invest in the Companyʼsstock, INPEX believes liquidity in its shares will increase andlead to a fairer evaluation of its share price.

and earnings and dividends doing
Q. steadilyA.
well, what is your take on the Company sʼshare price?

A.

Our share price is also affected by macroeconomic
factors to a certain degree, and we are focusing
on steadily achieving milestones in the Ichthys
LNG Project and other promising projects in order
to be given fair assessment by the market.

INPEX CORPORATION Annual Report 2013025

Management in Review: Progress on Major Projects
is the level of production at the
Mahakam Project in Indonesia?
Q. WhatA.

Under the project, measures were implemented
to slow diminishing production, and they worked.
The Mahakam Project is a main source of earnings
for INPEX until production commences at the Ichthys Project.
The Mahakam Project has been producing oil and gas formore than four decades, and production volume began todiminish in 2011. In addition to this natural decline, technical problems for the year ended March 31, 2012, resulted ina drop of about 20% in production volume compared withthe previous year. Under the project, measures were implemented, including additional development, to counter thisdecline. These measures were successful in effectively slowing the decrease in production from autumn 2012. We expect
the rate of decline in production to stay at a moderate levelgoing forward.

Can you give us a progress report on

Q. the Ichthys LNG Project in Australia?
A.

INPEX has ﬁnalized a project ﬁnancing agreement
to secure funding. Development is on schedule,
and costs are in line with initial projections.
The Ichthys LNG Project is a crucial medium- to long-term
growth driver for INPEX. More than 10 years have passed
since the discovery of gas and condensate in 2000, during
which we have carefully moved ahead with preparations
for development. In January 2012, INPEX made the Final
Investment Decision (FID) for the project. In December
2012, INPEX took a major leap forward on fund procurement, reaching a project ﬁnancing agreement for US$20
billion, one of the largest such agreements in the world, forthe deve lopment of the Ichthys Project. INPEX has worked
long and hard collaborating with the banking group thatsigned the agreement, composed of eight export credit
agencies and 24 commercial banks, and the fact that wereached an agreement without incident underlines the conﬁdence placed in the project by the ﬁnancial professionals.

026

INPEX CORPORATION Annual Report 2013

Development work is on schedule and on budget
according to initial projections, and I believe the next threeor so years before production starts will be a time that tests
the mettle of INPEX as an operator. With a great sense ofurgency and responsibility, our employees are unifying as
one to take on the challenges that each day brings.

Q. How is progress on the Abadi LNG Project?
A.

For the previous year, INPEX started front-end
engineering and design (FEED) work on the project, placing orders with two groups in a bid to foster competition and maintain quality.
The Abadi LNG Project is a large project on par with the
Ichthys LNG Project. We have been making steady progress on the Abadi LNG Project, starting up FEED work on
facilities from November 2012 through January 2013. For
FEED work on FLNG facilities, INPEX placed orders with
two groups, one led by JGC Corporation and the other bySaipem S.p.A. (Italy), to foster a competitive environment
and improve work quality to the greatest extent possible.
In 2011, INPEX welcomed oil major Shell as a strategic
partner in the Abadi LNG Project, and this successful partnership has been a major force propelling progress on various fronts, including FEED work.

Development work is on scheduleand on budget according toinitial projections, and I think
the next three or so years before
production starts will be a time thattests the mettle of INPEX
as an operator.

The Medium- to Long-Term Vision of INPEX
2

I would characterize the ﬁrst year as a “jumpstart” as the Company spared no effort working
toward the growth targets of the vision. In particular, we took bold steps forward in upstream
businesses.
The year ended March 31, 2013, was the ﬁrst year of theMedium- to Long-Term Vision of INPEX, which takes alook at where we want to be in ﬁve and 15 years. We got
off to a “jump-start” during the year, making progressin all areas covered by the vision. We made concerted
efforts toward attaining our ﬁrst growth target, the continuous enhancement of our E&P activities, by acquiring
more than 10 upstream interests in the 14 months since
the vision was unveiled (in May 2012). The second gro wth
target is strengthening our gas supply chain. On this front,A.

construction on the Naoetsu LNG Terminal in Niigata
Prefecture is on schedule, and we have entered the ﬁnal
adjustment stage prior to initiating operations. We also
concluded contracts for two new vessels in June 2013.
One vessel will service the offtake and delivery of LNG for
Naoetsu LNG Terminal. Another vessel will be operated asa time charter. The third growth target under the vision isreinforcement of our renewable energy initiatives. We built
a mega solar power plant on our idle land at the site of anold oil reﬁnery in Niigata Prefecture and began generating
electricity there in March 2013. At our geothermal energy
projects under way in Hokkaido and Akita prefectures, we
completed ﬁrst-stage geological surveys and a re drilling
three exploration wells as part of second-stage activities inthe year ending March 31, 2014.

INPEX CORPORATION Annual Report 2013

Management
Message

le
a
s
d
e
scrib
e
in
d
e
ta
il
th
e
p
ro
g
e
s
for the ﬁrst year of the MediumQ. Pmade
to Long-Term Vision of INPEX.

027

Strategy for acquiring interests
U Investment budget framework is ¥3.5 trillion
U Hurdle rate (IRR: 10-15%)
U Target regions (core areas, hot areas, frontier areas)

was INPEX able to acquire interests in
so many upstream assets in the short space
Q. Whyof a year?
One major reason is the greater trust placed in
INPEX internationally as it began development
work on the Ichthys LNG Project.
Of the more than 1,000 E&P companies around the world,
there are only 10 or so companies with sufﬁcient ﬁnances andtechnologies to warrant the trust placed in an LNG operator.
Since INPEX is the LNG operator responsible for the Ichthys
Project, on which development work has only just begun, agreater degree of trust has been earned on the international
stage. And we are receiving increased number of partnership proposals from oil companies around the world. This is
the main reason why we have been able to acquire interests
in so many excellent projects.

A.

Please talk about the strategies manage-

when deciding whether to acquire
Q. ment
an interest.

premium, we would accept a minimum IRR of 10%. INPEX
also considers regional characteristics. INPEX categorizes
the strategic areas that it targets as core areas, hot (promising) areas, and frontier areas. Core areas center on Indonesia and Australia, mainstay regions where the Company has
accumulated know-how and extensive experience over theyears. When obtaining an interest in core areas, INPEX can
expect synergies by using facilities that are already in place
there. Hot areas are regions with strong potential reservesof oil and gas, such as Africa, Brazil and the Gulf of Mexico,
but entry costs are so high that a careful examination of economic viability and ﬁnances are essential. Frontier areas are
unexplored regions such as the Russian Far East, the Arctic
Ocean and South America. From a long-term perspective
these areas hold future potential, and projects mainly consist of exploratory activities.

Assuming the interests align with our growthstrategy, we base our evaluation on ﬁnancial
analysis, economic viability, regional characteristics, and other criteria.
INPEX has a medium- to long-term target for net production volume of 1 million boed by the early 2020s. Based on
existing projects alone, we estimate production volume will
increase to 700 thousand boed from 2017 onward, indicating that we need to make up the remaining 300 thousand
boed through the acquisition of new interests. Assuming
the interests align with this medium- to long-term growthstrategy, we have set a hurdle rate that targets an internalrate of return (IRR) of 15% within an investment budget
framework of ¥3.5 trillion, and if an interest has a strategicA.

Of the more than 1,000
E&P companies around the world, there are
only 10 or so companies that are LNG operators.
While it is still in the development stage,
INPEX is the LNG operator responsible for
the Ichthys Project, raising the Company’s
visibility on the international stage.
028

INPEX CORPORATION Annual Report 2013

Medium- to long-term
production volume targets

1 million boed
700
thousandboed

New
projects

300
thousandboed

408
thousandboed

Year ended
March 31, 2013(actual)Existing
projects

Existing
projects

2017
onward

Early
2020s

The Business Environment for Energy Development
2“”

LNG projects?

Management
Message

Regarding these hurdles that must be

what impact will the so-called
Q. cleared,
shale gas revolution have on existing

There are hurdles to making LNG from shale gas.
We take a conservative view due to the challenges
involved in expanding the production of shale gas
and turning it into LNG for mass export from theUnited States. We also do not expect prices to bemuch different compared with a regular LNG project.
We often hear talk about the so-called “revolution” in shale
gas in North America, but we think a bit of caution is warranted with regard to the feasibility of ramping up production and turning the shale gas into LNG for mass export.
There are critics warning about the impact LNG exports will
have on the industry in the United States, and the amountof shale gas that can be exported as LNG to Japan andAsia is unknown. Natural gas prices in the United States rose
temporarily above US$4 per million Btu entering 2013, andfutures prices for ﬁve years out, when exports to Asia would
presumably begin, are above US$5 per million Btu. Adding to this the cost of liquefaction and transportation, which
we estimate totals about US$7 per million Btu, there is little
difference in the price of shale gas LNG and that from a
regular LNG project linked to the price of crude oil. In thislight, shale gas would not replace existing LNG projects. We
think that only the best individual projects will be competitive and prosper.

A.

What is your view of macroeconomic con-Q. ditions in relation to natural gas in Asia?
A.

We project robust demand for natural gas over the
medium to long term. We think there are potential
to supply for this growing market, but see highhurdles that must be overcome before full-ﬂedged
supply operations can begin.
With regard to macroeconomic conditions, over the shortterm we anticipate higher natural gas production volumes
in the United States, which means the LNG that had been
destined for the United States is now available for othermarkets. Over the medium to long term, we expect threepotential supply sources to fulﬁll growing demand for LNG
in Asia, especially India, China and the ASEAN countries.
One potential supply source is new LNG supplies fromexisting producer countries such as Australia, and anotherpotential source is LNG supplies from new regions such as
Mozambique. The third potential source is LNG made fromshale gas in North America. However, the majority of these
supply sources have not reached FID status yet. As such,
I believe there are considerable hurdles that need to be
overcome to start as development projects. before full-scale
supply from them can begin.

Outlook for the price of shale gas produced in the United States andturned into LNG for export to Asia
（U.S.$/MMBtu）

14
12
10

Transportation cost

LNG

8Henry Hub price6(dotted line is futures price)

Liquefaction cost

4
2

U.S. natural gas prices

0
2013

2014

2015

2016

2017

2018

2019

INPEX CORPORATION Annual Report 2013029

are considered to be the attributes
The terrorist incident in Algeria in January
of a quality LNG project with supply
2013 is still a fresh memory. What is the
Q. WhatQ.
capacity?
Company s approach to country risk?
ʼ

The most important attribute is a project thatcan realistically create a stable supply of LNG
from a geographical characteristic view.
Launching an LNG project requires a massive investment.
To procure funds for these investments, we must gain thetrust of ﬁnancial institutions and win the conﬁdence of LNG
buyers to reach long-term LNG sales contracts with them.
Until there is a clear path to collecting a return on the investment, the project stays on the drawing board. East Asian
countries, including Japan, depend almost entirely on LNG
for their natural gas imports, an important geographicalcharacteristic to consider. For countries like these that haveno viable alternative to LNG, the focus is on price fairness
and the probability that a project can stably supply LNG.
We think an important attribute of a quality project is it
being able to earn the trust of LNG buyers in terms of supply stability.

A.

In the energy development business, it is difﬁcult to completely eliminate country risk. We
frequently reevaluate security risk while incorporating the opinions of local staff and the residentofﬁcer.
The heart-wrenching terrorist incident symbolizes the various risks involved in the energy development business indifferent regions around the world. While carrying out our
mission of developing natural resources, we must continually deal with country risk. In its biannual review of security
risk, INPEX incorporates the opinions of local staff and resident ofﬁcers that know the region best, and spares no effort
to ensure the safety of all staff working on a project.

A.

Attention has focused on domestic

resources from the viewpoint
Q. energyof supply stability. Are there potential
oil and natural gas resources in Japan?
For the past two years, INPEX has scoured promising areas in Japan. From 2013, INPEX is starting
exploration work in speciﬁc areas.
Although limited in volume, there are still some promisingareas in Japan. The development of energy resources inJapan has the advantage of not having any of the foreign
currency and country risk that comes with overseas projects.
INPEX has spent the last two years looking to all over Japanfor promising areas. Based on these results, we are ﬁnally
starting exploration work in speciﬁc areas in 2013.
Backed by more than 70 years of operational experience in the development of oil and natural gas in Japan,
INPEXʼs domestic business division is the largest in Japan.
INPEX will continue to develop oil and natural gas resources
in Japan, leveraging its technical capabilities, ﬁnancial position and experience.

A.

Our focus ison price fairness andthe probability that a project
can stably supply LNG.

030

INPEX CORPORATION Annual Report 2013

Our Relationship with
Stakeholders
2
Management
Message

Please describe the Companyʼs relation-

ship with stakeholders shareholders and
Q. investors
in particular.
­

INPEX aims to further enhance its ongoing communication with shareholders and investors.
The oil and natural gas business is exposed to considerable risks and operates on extremely long timelines.
For this reason, it is imperative that projects are promotedwith business partners that share the same values and havemutual trust and respect for one another. With this kind of
relationship, it becomes possible to deal head on with problems in lockstep with business partners. Like these business
partners, we hope to build long-term relationships of trustwith our shareholders and investors.
As the Company has expanded operations in recent
years, so too has the amount of information that should beshared between management, shareholders and investors.
In these circumstances, we think it is important to follow a
process where management respectfully discloses the Companyʼs conditions to its shareholders and investors, engages
in a candid discussion with its shareholders and investors
and listens sincerely to their opinions, and reﬂects these
opinions in management. I attend results brieﬁngs twice ayear and an IR presentation for individual investors at least
once a year. Moreover, I travel overseas to meet with institutional investors twice a year. This is just an example of how
important I think direct communication is. For the year ending March 31, 2014, we will proactively disclose information and engage in discussions with our shareholders andinvestors.

A.

We hope to build
long-term relationships of trust with
our shareholders and investors.
We will continue to emphasize
ongoing communication.

INPEX CORPORATION Annual Report 2013031

Outlook
How are you going to lead the Company
the year ending March 31, 2014?
Q. forA.

We aim to take bold strides forward as a company this year, building up our portfolio of quality
projects.
Building on the “jump-start” we had for the year ended
March 31, 2013, we want this year to be one of bold strides
forward for the entire company as a number of projects comeon stream, including the Kashagan oil ﬁeld that is slated tostart production, and the Angola Block 14 area that will
have a full-year contribution to production. We went over
our earnings forecasts and dividend plans at the start of thisinterview. Development work on the Ichthys LNG Projectis in its second year, putting it at the central stage of its
development, and we will continue to make safe and steadyprogress according to schedule. While ﬁrmly pushing these
existing projects forward, there is also the possibility that we
could see major results from exploratory projects in which
we acquired an interest.

In last yearʼs annual report, I said that INPEX would gain
trustworthiness from an international perspective as it accumulates experience in the Ichthys LNG Project and otherprojects, and that this would lead to more opportunities toform partnerships in a wider selection of projects. With theshift to development operations at the Ichthys LNG Project,
opportunities for INPEX to participate in projects have infact increased dramatically. Since energy development projects are “living things,” a promising area that will suddenly
come to the scene must be pursued. On the other hand, it
is also necessary to make steady progress on basic work.
We are committed to steadily advancing the developmentof the Ichthys LNG Project and other projects while building
up our portfolio of quality projects. We strive for sustainablegrowth as a company by applying a stronger spin to thevirtuous cycle of growth.

July 2013
President & CEO

Toshiaki Kitamura

We strive for sustainable growth
as a company by applying
a stronger spin to
the virtuous cycle of growth.

032

INPEX CORPORATION Annual Report 2013