Inpex Corporation (1605) Earnings Call Transcript & Summary

I am Ueda, President and CEO of INPEX Corporation. I would like to thank you all very much for attending at a busy time. As you all know, INPEX Corporation is a company that has mainly worked on the development and production of oil and natural gas. As you know, Prime Minister Suga recently announced that Japan, too, would aim to be a net zero carbon society by 2050. Such movements have also been occurring frequently around the world. Many people ask me what will INPEX do going forward? Today, I would like to talk to you about our business development on how we will respond towards a net zero carbon society by 2050. In terms of our basic policy, we have outlined a few points here. We say net zero carbon society, but this does not mean that demand for oil and gas will disappear tomorrow. Therefore, we, over the long term, will need to fulfill our responsibility for the development and stable supply of energy. However, we will, of course, also need to change towards a net zero carbon society by 2050 and reform is demanded of us. Therefore, I would like to talk about some new business initiatives. But before that, as outlined in the second point, I would first like to talk about setting goals towards a net zero carbon society by 2050. After that, as written below, I will discuss how we will respond from here onwards. Of course, we will make the most of our strengths and strengthen collaboration with industry, academia and government. Later, I would like to talk about these 5 business pillars. The first is our upstream business. This is the development of oil and gas, how we will reduce CO2 emissions in this area. The second is how we will engage in the field of hydrogen. The third deals with enhancing and emphasizing renewable energy initiatives. The fourth is promoting carbon recycling and cultivating new business opportunities. And the fifth is promoting forest conservation. I will now talk about these 5 new business pillars which we would like to pursue. Finally, I will discuss how we will finance these initiatives. What we will do with our organization, how we will position our road map to 2050. First, I will talk about setting climate change response goals as a company. We are setting 2 goals. First, by 2050, we will aim to achieve net zero in absolute emissions. This will encompass scopes 1 and 2. As an interim goal, we will set a goal for 2030. As written here, we will aim to reduce our net carbon intensity by 30% or more. This is our interim goal. Net zero is our 2050 goal. These will cover Scopes 1 and 2. In other words, our own emissions. As for Scope 3, it is not easy to set our own goal because this will depend on how our customers will use our oil and gas. But for example, we will market clean LNG and work together with stakeholders. So how will we realize this? For the time being, we will mainly promote CO2 absorption through forest conservation. Later, I will go into the specifics, but this will be based on the acquisition of credit from forest conservation. Of course, and as quickly as possible, we will seek to reduce our CO2 emissions through CCS, CCUS and renewable energy initiatives. These are our climate change response goals. Next, I will talk about the specifics concerning each of the 5 business pillars. First, as I said earlier, we have, until now, fundamentally worked on the development of oil and gas. Therefore, our biggest challenge for the time being is how to reduce the CO2 from oil and gas, particularly gas. How to make natural gas cleaner. Specifically, there are 2 points here. In Japan, we have many gas fields in Niigata Prefecture. In terms of CCS, we already have a track record in conducting various demonstration tests at the Kubiki oilfield in Niigata and others. Using this experience, we will conduct tests on CCS and CO2 EOR, which is a type of CCUS. We have diligently worked on the technical development of CCS and CCUS. It's called CO2 foam technology and involves making CO2 into foam and increasing its viscosity to make the CO2 flow into the ground more smoothly. The CO2 is injected into the ground to increase the production of oil and natural gas. This is what is known as CO2 EOR. And this is what we are seeking to do. Specifically, we will drill 2 new wells in 2022 and conduct various injection tests. Overseas, we have the Ichthys LNG project, our largest project. As many of you know, at Ichthys, we are producing the equivalent of about 10% of Japan's entire LNG import volume. The natural gas produced here is transported by tankers from Darwin in Australia to Niigata. There, it is regasified and some of it is supplied to Tokyo. This is a gigantic project. And here, too, we aim to make the LNG as clean as possible, and we'll engage in CCS initiatives. Specifically, for Ichthys, we will need to begin by considering where the CO2 can be injected, which is a very important issue. Therefore, we plan to select and evaluate suitable locations. These will be our upstream CO2 reduction measures. Next, I will talk about our initiatives concerning the hydrogen business, which has recently attracted much attention. The first point here involves what we will be doing here in Japan. The second point will involve what we will be doing overseas. First, in Japan, a hydrogen society is expected to arrive in the future. What is hydrogen made of? As you know, we have access to a lot of natural gas, including at Ichthys. There is what is called blue hydrogen. Blue hydrogen is derived from natural gas, from which hydrogen is extracted, and the CO2 emitted is buried into the ground through CCS or CCUS, making the hydrogen clean. This is what is known as blue hydrogen. We aim to make full-fledged efforts in this field. Specifically in Niigata, we are currently producing natural gas in a place called Minami-Nagaoka. We will use the natural gas produced here in Minami-Nagaoka and transport it by pipeline to a hydrogen production facility which we will construct and produce hydrogen. Then we will construct a small hydrogen power plant and market the electricity as well as the hydrogen we produce to our customers. We will thus build an integrated hydrogen project. Furthermore, there will be lots of CO2 emitted there. And we will inject this CO2 into depleting gas fields we have through CCS and CCUS. This project also has another characteristic listed here. It is called DAC or direct air capturing. It's a technology to extract CO2 from the air. This extracted CO2 will also be injected into the depleting gas fields. Technical research on DAC devices is being conducted worldwide. And these devices require a lot of heat. We will use the heat generated from the production of hydrogen and electricity to extract CO2 from the air and inject it underground. This is what we plan to carry out. This integrated demonstration project of producing natural gas, then hydrogen, then electricity, then injecting the CO2 into the ground in various ways will probably be the first of its kind in Japan. Currently, we are making preparations towards this. Next, I will talk about our initiatives overseas. We are now planning 2 initiatives. The first is a clean ammonia project in Abu Dhabi. As you know, one of the big challenges in creating a hydrogen business is transportation. Various transportation methods are being studied. In Abu Dhabi, we proposed to make hydrogen into clean ammonia and transport this clean ammonia to Japan for use. So why Abu Dhabi? Why ammonia? Let me explain. Of course, we have numerous assets in Abu Dhabi, and there is a lot of natural gas produced in Abu Dhabi. We seek to construct a plant to use this natural gas to first produce hydrogen, then ammonia. The important thing to note is that CCS in Abu Dhabi is already operational. CO2 in Abu Dhabi is, therefore, a resource that is being traded and utilized at cost. There are a lot of oil and gas fields in Abu Dhabi and CO2 is being purchased and injected into these oil fields through CCS and CCUS in order to raise productivity. Most people consider CO2 as a cost, but here, CO2 is, in fact, a valuable resource. So why ammonia? The technology to produce and transport ammonia is already proven. Therefore, our project will involve producing hydrogen from natural gas, injecting CO2 into Abu Dhabi's onshore oil fields, producing clean ammonia from this hydrogen, transporting the ammonia to Japan, and finally, co-combusting the ammonia at coal-fired thermal power stations in Japan owned by utilities, which is something many people are talking about. Of the many hydrogen transportation technologies being studied, we believe that transportation as ammonia is the most proven technology, and therefore, the quickest that can be brought to the market. We plan to work together with the Abu Dhabi government on this project. We are already making progress on talks with the Abu Dhabi government and ADNOC. As well as with Japanese coal-fired power plant operators. To recap, we seek to carry out this project of producing clean ammonia from natural gas, transporting it to Japan and co-combusting it at coal-fired power plants. One other initiative will be in Australia, a carbon-free hydrogen business outside Japan, as it's written here. Australia, too, has abundant natural gas. Here, we will produce clean hydrogen from natural gas, inject the CO2 through CCS, liquify the hydrogen and transport the liquified hydrogen to Japan. This is a project that we plan to consider joining. Looking at blue hydrogen. It is clean hydrogen. But what is required for a blue hydrogen business? Of course, you need natural gas. You also need CCS technology. You need the locations in which to inject the CO2 underground through CCS. Furthermore, in some cases, you need to be able to liquefy the hydrogen for transportation. As you know, we have the natural gas. We also have the CCS technology as well as the locations to an extent. We also have demonstrated liquefaction technology through LNG. Of course, the temperature of liquified hydrogen is minus 250 degrees. And the temperature of LNG is minus 162 degrees, so there is a difference of about 100 degrees, which requires a step-up in technology. But all things considered, INPEX has the capability, the willingness, the assets and the human resources to produce blue hydrogen. Using these resources, we seek to engage in a blue hydrogen business both in Japan and overseas. Next, the third business pillar is enhancing and emphasizing renewable energy initiatives. Our core business, as I said earlier, involves drilling. We have long been engaged in the geothermal business, which involves drilling deep into the ground. There is a very large geothermal project in Indonesia called Sarulla, and in which we are already participating. We are now working on additional developments there. As well as studies and flow tests in Japan in the Oyasu area in Akita Prefecture and Amemasu area in Hokkaido. Using technologies to ascertain geological conditions and oil and water properties several thousand meters underground, we plan to further expand on our current geothermal business initiatives. Another initiative is offshore wind. There are many operators involved in this field, but INPEX has reasonable knowledge in offshore facilities based on its work at Ichthys and other projects. We plan to make use of this knowledge to implement an offshore wind business as one of our key business initiatives. In Japan, we plan to take part in a fixed-bottom wind project offshore, Noshiro, Mitane and Oga in Akita Prefecture. In addition, there is floating offshore wind power generation, which is an up and coming technology. As I said earlier, in terms of floating offshore facilities at Ichthys where we lift natural gas to the surface from several thousand meters below ground, we have deployed a very large offshore production facility, measuring 500 meters by 40 meters. We would like to engage in a floating offshore wind business, making use of our know-how in designing and operating floating offshore facilities. Let me next talk about carbon recycling and new business opportunities. Recycling carbon is an important initiative we plan to take. You may have heard a lot about methanation. Methanation, from our perspective, involves reacting large volumes of CO2 from gas fields with clean hydrogen to regenerate methane. Recently, many operators have begun working on this, but we have been engaged in this technology for quite some time now. Currently, we have a small methanation plant at a location called Koshijihara that is already operational. In future, we have ambitions to scale up this plant by several tens of times and take it to the next level, bringing it close to practical application. For this next stage, and bear in mind, this is still being studied, the target is to expand the current scale by 50x. Also, there currently is a carbon recycling cooperation memorandum entered between Japan and Australia, and we are evaluating opportunities with an eye to conduct the practical application of this technology in Australia. We are also involved in the technical development of artificial photosynthesis. Artificial photosynthesis is the electrolysis of water and involves producing clean hydrogen from solar energy instead of electricity using a catalyst. Already, we are in charge of the technical development of solar hydrogen production. For this technology to be applied practically, the solar energy conversion efficiency needs to be elevated to about 10%. We're now at about 7% or 8%. This will be our target. We have installed a small artificial photosynthesis panel in Darwin in Australia, which gets a lot of sunlight, and we are now therefore engaged in initiatives both in Japan and Australia with plans to continue pursuing these initiatives. We will also work on new business opportunities with growth potential. This applies to digital transformation in various other fields. To give an example, we have written here, improved operational stability and security through pipeline management utilizing drones. We are now in the process of working with a small venture company specializing in drone technology on commercialization initiatives. By tactfully combining their drone technology with our plant maintenance technology, we can develop new solutions for plant maintenance using drones. This is just one example. But other than this, we seek challenges in feels like digital solutions, direct methane cracking technology and others. The last business pillar is forest conservation. Here too, as is outlined here, we have already been engaged in eucalyptus tree planting and Savanna Fire Management in Australia. We will expand on these activities, and we have positioned REDD+ as a future initiative. REDD+ promotes forest conservation and tree planting through which we plan to acquire CO2 credits and use these to reduce our CO2 emissions. We plan to conduct such forest conservation initiatives on a large scale in Indonesia and other places. As I stated earlier, to realize our CO2 reduction goals of reaching net 0 emissions by 2050 and the reduction of net carbon intensity by 30% or more in 2030, CCS technologies are, of course, important. However, these cannot be implemented immediately. These forest conservation activities can be started this year. Therefore, first, we will begin reducing our CO2 through these activities and thereafter, further utilize CCS and other technologies I raised earlier. To summarize all this, the question is, what kind of a company will INPEX become? This slide is divided into a blue section and a green section. The blue section denotes the upstream oil and gas development business that we have conducted until now. The lighter blue section denotes CCUS and hydrogen initiatives. And this section will gradually expand. For the time being, by applying CCUS technologies at Ichthys in our Abu Dhabi operations, we will work on reducing CO2 while conducting our upstream business operations. Then gradually, the commercialization of hydrogen will appear on the horizon, and we will seek to shift our focus from CCS to hydrogen. To rephrase, at this stage, natural gas is considered a fuel that we are bringing to Japan and marketing to the world. When we reach the hydrogen stage, natural gas will change from being a fuel to a raw material of hydrogen. The upstream business itself will first be made cleaner and then gradually shift to hydrogen. Therefore, internally, I am positioning this as an evolution of our upstream business. It is a domain in which we can make full use of our human resources, knowledge, technologies, our various resources around the world and our reputation. Furthermore, this green section here denotes the renewables and new business fields. We will gradually expand our geothermal and wind power initiatives, starting from our Oyasu operation in Japan. And from the offshore fixed-bottom sector to the offshore floating sector and to the further expansion of our geothermal business. In the future, we will utilize artificial photosynthesis technology, as I mentioned earlier, to build a green hydrogen business based on renewables. It remains unclear now how quickly and in what form a hydrogen society will take shape, leading up to 2050. But by evolving our upstream business and realizing new business endeavors, we seek to respond to the transition to a low-carbon society. This is what we're planning now. In terms of structure internally, we have decided to establish the hydrogen and CCUS development office, which will report directly to the President and CEO and focus on hydrogen and CCUS business opportunities. Furthermore, we have renamed the Renewable Energy and Power Business Division as the Renewable Energy and New Business Division, which will pursue new business opportunities. There is a matter of personnel and funds. In terms of personnel, we will implement in-house recruitment in multiple roles so that any younger employees aspiring to new challenges can make use of these resources. We will also seek to deepen our collaboration with external human resources, such as R&D ventures. Industry, academia and government ties will also be needed. In terms of funds, particularly for new business opportunities, we will allocate internal venture funds where we plan to make funds available within a certain range so that business activities can be pursued freely. Also in order to pursue new and/or clean opportunities, we plan to issue green bonds. Of course, we plan to make full use of government support measures through organizations like NEDO and JOGMEC. Up until this point, I have talked about new areas and how we plan on reducing our carbon footprint. Let me now return to our roots and talk about what we plan to do with our core business of developing oil and natural gas. Achieving a net zero carbon society is a challenging goal. But it will not come immediately. We believe that demand, particularly for natural gas, will grow significantly in Asia. Therefore, as a company responsible for the stable supply of energy, we plan to continue the full-fledged execution of this business, but its direction will be somewhat different. Here, we have written more resilient and cleaner. Making the business cleaner will first involve conducting a gas shift. Also, energy saving, streamlining operations and zero flaring, or getting rid of the planes that you typically see in the exploration of oil and gas. Also, particularly for oil and gas, we will strive for the early-stage development and production of assets. Preference will be given to assets that can be started up quickly over long-life assets. Also, oil prices are now in an extremely volatile state. Therefore, we will pursue businesses with a resistance to low oil prices of the kind we witnessed last year. Our oil and natural gas development activities continue to be necessary, particularly for the Asian market. So we will fulfill our responsibility of providing a stable supply of energy, while generating profit and allocating a portion of this profit to new business deals. So how much money are we planning to allocate to these new business fields? We have outlined our general viewpoint on this slide here. Our profit is largely determined by oil prices. And here, the assumption is that the Brent oil price will range between USD 50 and USD 60 per barrel. The average annual scale of investment over the next 5 years is expected to be between approximately JPY 250 billion and JPY 300 billion. Of this amount, we foresee allocating around JPY 20 billion to JPY 30 billion annually to the 5 business pillars I have outlined. At the initial stage, the bulk of the work will involve feasibility studies. So investments will not reach these levels but will gradually increase over time. If the hydrogen society were to rise much sooner than expected, we would consider increasing these investments flexibly to respond to this. My presentation for our business development strategy ends here, but there is one final matter I wish to share. As I told you, INPEX will transition into a 2-dimensional business where it will continue to pursue its core business of oil and natural gas development, but also engage in the challenge of building new business, including hydrogen and CCS. We have decided to change our corporate name so that all employees may collectively engrave this transition commitment in their hearts and minds. Until now our official Japanese corporate name was Kokusai Sekiyu Kaihatsu Teiseki Kabushiki Gaisha. Overseas, we are known as INPEX. We have decided to make INPEX, our corporate name, which will officially be changed to Kabushiki Gaisha INPEX. Of course, this change of name is subject to the approval of a partial amendment to the company's articles of incorporation at the ordinary General Meeting of Shareholders, which is scheduled to be held this March. We would like to implement our business endeavors under the name Kabushiki Gaisha INPEX. Sometimes we are asked, what does the P in INPEX stand for? While not an official abbreviation, many associated INPEX with words international petroleum exploration. If I am to answer this question today, I will say that the P stands for pioneer. Furthermore, the I-N stands for innovative, and the E-X stands for energy transformation, similarly to D-X, which is short for digital transformation. The new Kabushiki Gaisha INPEX can, therefore, be interpreted as an innovative pioneer of energy transformation. We will change our name and will significantly change the shape of our company. And in this capacity, we are poised to make a bold challenge looking to a new era. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]