Disputes cloud Japan’s LNG ambitions in Australia

Disputes cloud Japan’s LNG ambitions in Australia

Inpex’s $37bn Ichthys project threatened with further delays and cost overruns

A series of contractual disputes at the $37bn Ichthys liquefied natural gas project near Darwin are threatening further delays and cost overruns to Japan’s largest single investment in Australia. 

On Wednesday, UK engineering company Laing O’Rourke fired 800 workers because of a dispute over unpaid work on the project, which is operated by Japan’s Inpex Corp and is rushing to meet a revised deadline to start shipping gas by September. 

“Kawasaki Heavy Industries, which leads this phase, has not paid Laing O’Rourke for its work on this complex and resource-intensive remote engineering project for several months,” said the UK engineering company. 

It added it had made direct approaches to the Japanese company, one of the largest contractors on the project, in recent weeks but without a satisfactory outcome. 

The demobilisation of workers building the cryogenic tanks that will store liquefied gas at Ichthys comes after engineering company CIMIC in January terminated its contract to build a power plant at the facility. 

“Ichthys has been plagued by challenges during construction,” said Saul Kavonic, analyst at Wood Mackenzie. “It would be a Herculean feat for Inpex to get Ichthys properly started up by September,” he added. “We currently model the project with a development cost of $39.5bn.”

JKC Australia, a consortium of engineering groups leading construction of Ichthys’s onshore facility, said in a statement that the cryogenic tanks were 91 per cent complete. “JKC remains committed to delivering this scope of work and overall Ichthys project onshore LNG facilities,” it said. 

Inpex, which is developing Ichthys along with joint-venture partner Total of France, said its target for starting production was still the third quarter of 2017. It said it sees “no impact” from the latest developments, and “no impact on our cost projections”.

KHI did not immediately respond to a request for comment.

Ichthys is part of a $200bn LNG construction boom in Australia that is expected to propel the country past Qatar as the world’s biggest LNG exporter next year. But the rush to build has pushed up construction costs and led to cost blowouts at facilities operated by Chevron, BP and ConocoPhillips, among others. 

The scale of the LNG expansion is contributing to gas shortages at home, where prices are rising as producers divert supplies for export. At a crisis meeting between industry and politicians on Wednesday Malcolm Turnbull, Australia’s prime minister, warned the government would intervene to safeguard supplies.

“Australia has enormous gas resources,” said Mr Turnbull. “It is not acceptable for Australians, families and businesses, to be short of gas.”

Ichthys is already nine months behind schedule, but Neil Beveridge, analyst at Bernstein, said it had not been hit as hard as many other Australian LNG projects. 

“If  and it remains an if  management are able to maintain the current project date, Ichthys will be one of the best performing projects in the Australian LNG space where cost over runs have typically been in excess of 30 per cent and delays of greater than 18 months,” he said. 

He said Ichthys had a “last mover advantage” due to falling local currency exchange rates, service industry deflation and an opening up of the supply chain as other big projects were completed. 

https://www.ft.com/content/81b47a4e-0928-11e7-97d1-5e720a26771b