Energy and Natural Resources Finance Group

A Message from the Global Head of the Group

As Japan is poorly endowed with natural resources, the stable procurement of energy resources, such as oil, natural gas and other mineral resources from overseas is indispensable in order to maintain and develop Japan's economy.

Among JBIC's four business fields, the Energy and Natural Resources Finance Group — which consists of the Oil and Gas Finance Department and the Mining and Metals Finance Department — is responsible for promoting efforts to develop and acquire overseas natural resources which are essential for Japan. Projects for overseas natural resource development require massive, long-term investments and entail various risks, including geopolitical and price fluctuation risks. JBIC provides long-term funds through financing and equity participation to supplement private-sector funds and, as a policy-based financial institution, focuses on creating an environment which enables smooth implementation of projects by actively engaging in dialogues with local governments and state-run oil companies.

JBIC will continue to contribute to securing a stable supply of natural resources through such efforts.

 

Kazuhiko Amakawa
Managing Executive Officer
Global Head of Energy and Natural Resources Finance Group

 

Business Environment and Priority Issues

The global balance of energy supply and demand is affected by macroeconomic trends and various other factors. In recent years, oil production has come to exceed demand, mainly due to two factors: the tapping of unconventional energy sources that has boosted oil production in the U.S., and OPEC's strategy emphasizing market share. By contrast, energy consumption in Asia is growing at a faster pace than in any other region. Thus, for example, in the case of Indonesia — one of the leading oil and gas producers in Asia — it is exporting less energy resources because of its increasing domestic demand for energy, as a result of its remarkable economic growth. For the entire Asian region, this means a surge in imports of oil and natural gas.

Meanwhile, because Japan imports from the Middle East over 80% of the crude oil it requires, such imports continue to be exposed to high geopolitical risks. Thus, from the perspective of energy security, it is critical that Japan should maintain and strengthen its relationship with Middle East countries, while also securing stable oil imports from other regions.

With Japan being the largest global importer of liquefied natural gas (LNG), and both China and India having increased their imports of the gas in the past few years, Asia now accounts for more than 70% of global LNG transactions. Thus, it is imperative that Japan, which currently relies heavily on natural gas as an energy source, ensure it has access to a stable supply of LNG. To this end, it is important that the participation of Japanese companies in overseas LNG projects be supported and linked to long-term LNG deals. In addition, it is important that Japan keeps the medium and long-term purchase prices of LNG in check by diversifying the pricing system for imported LNG.

Japan also faces a major challenge in the mineral resources sector. Despite a temporary slowdown, demand in China, India, and other emerging countries continues to increase, and thus it remains vital to secure a stable supply of those mineral resources which have a broad range of applications in Japanese industries.

In terms of iron ore imports, besides attaining the required volume, an increasingly critical issue is securing high-quality ore, since the overall quality of the ore from existing mines is deteriorating. Meanwhile, recent prices of copper have caused a slowdown in the development of new copper ore mines, and the supply of copper is expected to tighten over the medium to long term. Thus it is essential that Japan secure a steady supply of copper ore.

Despite the greater challenges involved in the securing of natural resources as a result of the changes in the global balance of the supply and demand of energy and other resources, the increased activity of extremists and heightened geopolitical risks, it is becoming increasingly important to proactively support Japanese companies in acquiring interests in, and securing the long-term purchase of, natural resources.

 

JBIC's Activities

During FY2015, JBIC took on the following efforts to address the issue of securing a stable supply of energy and mineral resources from overseas.

Oil and Natural Gas

By providing the necessary funds — through project finance*1 — for shipping business of LNG carriers to be used for transporting LNG from the U.S. Cameron and the Freeport LNG Projects to Japan, JBIC has supported both projects, the first projects to export LNG based on long-term contracts from the U.S. mainland to Japan.

Traditionally the LNG price for Japanese buyers has been calculated based on crude oil prices. On the other hand, the price of the LNG in both of these projects is based on a formula linked to the U.S. gas market index. Thus, supporting these projects should contribute to the diversification of both LNG sources and prices.

LNG carriers to transport gas from the U.S. Freeport LNG Project.
Source: Artist's rendition.

JBIC will strengthen ties with countries that are vital for Japan's resource strategy, and will make available financial support to secure energy resources and a stable energy supply. In FY2015, JBIC provided the necessary funds for Japanese companies to secure a long-term, steady supply of crude oil from the Emirate of Abu Dhabi, one of the United Arab Emirates (UAE), and funding to Russian Sakhalin-I Odoptu Field Stage-2 development. Approximately 60% of the oil field concession rights owned by Japanese companies in Abu Dhabi are scheduled to expire in 2018, and JBIC's funding will indirectly support the renewal of the rights for these concessions. Further, the Japanese company participating in the Sakhalin-I project is entitled to receive a quantity of crude oil produced from the project in proportion to its participating interest. It is expected that this crude oil will be sold primarily to Japan.

At present, Japan depends on the Middle East for over 80% of its crude oil, but JBIC's support to develop the Sakhalin-I project further is expected to contribute to the diversification of Japan's energy supply. The project is also considered vital to Japan's energy security, given that the fields are located in the Russian Far East, which is geographically close to Japan.

  Production of methanol and dimethyl ether in Trinidad and Tobago

Turning to the Caribbean, JBIC has provided a project financing loan to support a joint venture in the Republic of Trinidad and Tobago. The company will produce methanol and dimethyl ether,*2 two raw materials derived from natural gas. Methanol is used as a gasoline additive, fuel for fuel cells, and raw material in chemical products, such as adhesive agents and synthetic resins. Since Japan depends entirely on imported methanol, it is vital that its procurement sources be diversified. The project is expected to result in expanding and diversifying those methanol production bases in which Japanese companies invest, and securing a stable supply of energy resources for Japan.

Mineral Resources

JBIC supports the overseas business deployment of Japanese companies in the steel industry, and has financed Japanese companies in Indonesia that manufacture and sell steel products for construction and automotive steel sheets. Given that demand for these products is expected to expand, driven by the country's economic growth, JBIC supports the expansion of Japanese companies' sales bases, and endeavors to contribute to maintaining and strengthening their global competitiveness. JBIC has also provided a loan to finance Japanese companies' joint venture business of manufacturing and sales of large-diameter welded steel pipes for oil and gas pipelines in the UAE. JBIC expects that, by producing high-quality steel pipes for pipelines locally, Japanese companies will enhance their ability to respond to customer needs and improve cost competitiveness in the Middle East, the world's leading producer of oil and natural gas.

Manufacturing and sales business of cold-rolled and hot-dip galvanized steel sheets for automobiles in Indonesia.
Manufacturing and sales business of large-diameter welded steel pipes for oil/gas pipelines in the UAE

Strengthening Ties with Resource-rich Countries

  Signing of an MOU with ADNOC to cooperate in the oil and gas sectors.

To secure stable supplies of natural resources, it is necessary to strengthen relationships with the countries and major companies supplying the resources. Leveraging its status as Japan's policy-based financial institution, JBIC holds discussions, and works to strengthen bilateral ties, with the governments and government agencies of resource-rich countries. It thereby facilitates the acquisition of interests in resources and resource development projects by Japanese companies.

Specifically, JBIC concluded a memorandum of understanding (MOU) with state-run oil company wholly owned by the Abu Dhabi government, Abu Dhabi National Oil Company (ADNOC), which has been Japan's stable source of crude oil for more than 30 years. This MOU is intended to reinforce cooperation in the oil and gas sectors. The MOU reaffirms for both parties the importance of extending existing oil field concessions held by Japanese companies operating in Abu Dhabi, and the significance of their acquiring new concessions.

Looking Ahead

In both the Strategic Energy Plan and Japan Revitalization Strategy, endorsed and revised in FY2014 and FY2015, respectively, the Japanese government sets "diversification of natural resources and the sources of such resources" as a measure to secure a stable and inexpensive (economical) resource supply. JBIC, in its FY2015-2017 Medium-term Business Plan (announced in June 2015), lists supporting Japanese companies' energy and natural resources business as a priority task in the area of natural resources, and has committed itself to focusing on promoting projects that secure and diversify the supply of resources as well as promoting projects that reduce LNG procurement costs.

Following a sharp drop in, and the stagnation of, natural resource prices, investment in natural resource development by major resource companies and Japanese companies came to a standstill, and there is concern that the supply of natural resources could tighten in the medium- to long-term. This situation has squeezed the finances of resource-producing countries, but it has also created a favorable opportunity for the acquisition of valuable resource interests. JBIC has been supporting the acquisition and development of such resource interests by Japanese companies, thereby contributing to the securing of a stable supply of natural resources.

To enable Japan to diversify its procurement sources, JBIC is willing to support natural resource development projects in connection with the interests and transactions of Japanese companies, particularly those in Africa which is viewed as the last frontier for natural resources. Non-African countries have started investing in those projects. As acknowledged at the Tokyo International Conference on African Development (TICAD), natural resource development projects in Africa help support African countries' economies. They create domestic employment where the project is implemented, facilitate foreign currency inflows, and promote related infrastructure and industry development.

LNG production currently outstrips demand, and uncertainty lingers regarding future demand. In response, Japanese electric and gas companies are seeking to diversify their LNG procurement sources and the pricing system for LNG transactions, and to withdraw from destination clauses to realize the liquidity and flexibility of the transaction.

In addition to the previously mentioned Cameron and Freeport LNG projects in the U.S., there are also plans for shale gas-based LNG projects in other parts of North America which will be exported to Japan and other Asian countries. Since the projects are expected to satisfy the needs of the Japanese electric and gas companies mentioned above, JBIC will proactively consider support for these projects.

JBIC will also continue its efforts to create an environment which enables the formulation and smooth implementation of resource development projects by holding dialogues with various parties, including the governments and governmental agencies of resource-rich countries. The key to strengthening the relationship with these countries lies in the cooperation in resource development projects, but also in the establishment of comprehensive and sustainable cooperative relationships that meet the needs of these countries in various fields, including infrastructure construction, industrial development, employment creation, technology transfer, and reduced environmental burden through the use of renewable energy and energy efficiency.

JBIC will not only maintain, but also work to strengthen, its multilayered and positive relationships with governments of resource-rich countries through comprehensive efforts that encompass support for infrastructure, manufacturing, and various other projects in the countries.

Major Projects over the Last 10 Years

Major Projects over the Last 10 Years

 

Note
  1. *1Project finance is a financing scheme in which repayments are made solely from cash flows generated by a project and secured only by project assets.
  2. *2Dimethyl ether can be used as a substitute for LPG or diesel in automobiles, or for power generation. The gas has been receiving a significant amount of attention as a next-generation source of clean energy.