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Energy and Natural Resources Finance Group

As Japan depends on overseas sources for most of its natural resources, the stable procurement of energy resources, such as oil and natural gas and mineral resources from overseas is indispensable for maintaining and strengthening the stable lives of Japanese citizens and the country's industrial infrastructure. The Energy and Natural Resources Finance Group is responsible for promoting the development and acquisition of overseas natural resources which are essential for Japan.

The global environment surrounding energy and natural resources faces important challenges such as: i) development of financing schemes to respond to the changes in the liquefied natural gas (LNG) market, including diversified LNG pricing mechanisms and contracts, ii) establishment of an energy value chain especially in Asia and iii) securing of strategic natural resources to be used for innovation and of new energy sources to facilitate the transition to a low-carbon society.

JBIC focuses on creating an environment which enables the smooth implementation of projects through active engagement in dialogues with the governments of resource countries and major resource companies in the world. JBIC will continue to contribute to securing a stable supply of natural resources essential for Japan by providing long-term funds, while supplementing private-sector funds.

NISHITANI Tsuyoshi
Managing Executive Officer
Global Head of Energy and Natural Resources Finance Group

Business Environment and Key Challenges

Global energy supply and demand balance is affected by macroeconomic trends and various other factors. At present, energy demand in Asia continues to grow steadily. In particular, Indonesia-one of the leading oil and gas producers in Asia-is exporting less energy resources due to its increasing domestic demand for energy as a result of rapid economic growth. As demonstrated by this trend, demand for oil and natural gas is increasing across the entire Asian region. Under the Paris Agreement adopted at the 21st annual session of the Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change, all participating countries are required to submit greenhouse gas reduction targets. Amid increased interest in global warming, attention is directed to the use of natural gas, which produces less CO2 compared to other thermal power-generating fuels.

Under these circumstances, the global crude oil supply and demand balance have temporarily loosened in recent years due to increased shale oil production in the U.S. However, the OPEC's (Organization of the Petroleum Exporting Countries) production cut agreement and regional conflicts have pushed oil prices higher, increasing uncertainty over crude oil supply. Over 80% of Japan's crude oil imports come from the Middle East and such imports remain highly exposed to geopolitical risks in the region. Therefore, from the perspective of Japan's energy security, it is important to diversify its crude oil procurement sources to areas other than the Middle East, while maintaining and strengthening its relationship with oil-producing countries in the region.

The LNG market will continue to have an excess supply over the short and medium terms as the large-scale LNG projects, which have started in the U.S. and Australia, are expected to boost production of LNG. In contrast, on the demand side, China and India are increasing their imports of LNG, and other Asian countries are also moving to commence or increase LNG imports. In view of this trend, Japan is required to create its strategic initiatives in response to global trends in LNG supply and demand, mainly the trends in Asia, in order to ensure Japan's medium- and long-term LNG supply security.

As for mineral resources, which are used for various purposes in Japanese industries, it is increasingly necessary to secure a stable supply of the resources amid growing demand in emerging countries such as China and India, as well as increasing needs for the transition to a low-carbon society and next-generation industries. With regards to iron ore, it is important to secure high-quality iron ore amid the deteriorating quality of that obtained from existing mines, in addition to securing the necessary quantities of iron ore. Furthermore, it is an important challenge to mine high-quality copper ore under current worsening mining conditions such as the development of mining areas which are located in remote, high altitude ranges and deeper underground. While the global supply and demand balance in energy and mineral resources is changing, there is growing uncertainty about the environment surrounding energy supply such as intensifying trade frictions and increasing geopolitical risks. Under such circumstances, in order to secure a stable supply of resources to Japan, it is highly necessary to support Japanese companies not only in acquiring interests in and long-term off-take agreements of energy and mineral resources, but also in making additional investments including infrastructure for resource development, with an aim to eliminate major bottlenecks in existing mine operations.

 

JBIC's Activities

In FY2018, JBIC performed the following activities to secure a stable supply of energy and mineral resources from overseas.

Oil and Natural Gas

energy01.jpgAbu Dhabi offshore oil field project (provided by INPEX)

The Japanese government set a goal of increasing its self-development ratio of oil and natural gas to 40% or more by 2030 in the Basic Energy Plan approved by the Cabinet on July 3, 2018. To this end, JBIC provides financial support for securing a stable supply of energy to Japan as well as for increasing Japan's self-development ratio of energy.

For example, JBIC provided a loan to a Japanese company to acquire and extend its interests in offshore oilfields in the Emirate of Abu Dhabi (Abu Dhabi), the United Arab Emirates (UAE), which is a vital country in Japan's resource strategy. JBIC signed a loan agreement with INPEX CORPORATION (INPEX). This loan is intended to provide necessary funds for INPEX to acquire a 40-year interest in the Lower Zakum offshore oil field (approximately 450,000 barrels per day). Additionally, JBIC provided a loan to Japan Oil Development Co., Ltd. (JODCO), a subsidiary of INPEX, to finance the extension of interests in the Satah and Umm Al-Dalkh offshore oil fields for 25 years, respectively. Abu Dhabi, which is a vital country in terms of Japan's resource strategy, allows foreign companies to enter the domestic business based on concession agreements. In light of the policy guidelines of the Abu Dhabi Supreme Petroleum Council's, JBIC has so far signed a memorandum of understanding (MOU) for business cooperation with Abu Dhabi National Oil Company (ADNOC) in order to establish a mutual understanding of the importance of acquisition of new interests in oil fields in Abu Dhabi by Japanese companies. Under these MOUs, JBIC has supported these Japanese companies in acquiring their interests in oil fields in Abu Dhabi through loans.

Turning to the LNG field, JBIC participated in the LNG Producer-Consumer Conference, which is held annually to bring together both LNG producers and consumers in Japan. At the conference, JBIC announced that it had revised its financial framework in order to consider financing LNG projects that will be developed according to the contracts with no destination clauses, provided by Japanese companies develop LNG projects and hold the rights to handle LNG as a product.

In November 2018, JBIC concluded an MOU with Overseas Private Investment Corporation (OPIC), of the U.S., and with the Department of Foreign Affairs and Trade (DFAT) and the Export Finance and Insurance Corporation (Efic), both of Australia, to promote business cooperation for energy infrastructure development in third countries, including those in the Indo-Pacific region. JBIC will consider support for specific projects based on this framework.

Mineral Resources

energy02.jpgLos Pelambres copper mine expansion project in Chile
(provided by Antofagasta Minerals S.A.)

The Japanese government set a goal of increasing its self-sufficiency ratio for base metals, including iron and copper, to 80% or more by 2030 in the Basic Energy Plan approved by the Cabinet on July 3, 2018. In response to this, JBIC provides financial support for securing a stable supply of mineral resources to Japan.

Japan relies on imports for all of its copper concentrates, a raw material for copper metals, and securing a long-term, stable supply of copper resources is an immediate issue. Copper is used for various applications that include electrical wiring, electrical and electronic equipment, automobiles and construction materials, making this an essential metal resource for the Japanese industry. Global demand for copper is expected to continue expanding on the back of growing demand for infrastructure in emerging countries, especially in China and India, and increasing ownership and use of hybrid and electric vehicles. JBIC signed a loan agreement with Mitsubishi Corporation (Mitsubishi) for the Quellaveco Copper Mine Development Project in Peru. Mitsubishi owns a 40% interest in the Quellaveco Copper Mine and will offtake the equivalent proportion of copper ore and supply this to smelters in Japan. JBIC also signed a loan agreement with Chilean corporation Minera Los Pelambres, which is invested by four Japanese companies, to provide funds for building an additional concentrator and desalinated water supply facilities to reinforce the ore processing capacity at the Los Pelambres copper mine.

Strengthening Ties with Resource Countries and Major Global Resource Companies

JBIC continues to hold consultations and dialogues with the governments and governmental agencies of resource countries as well as with major global resource companies in order to encourage Japanese companies to acquire interests in and develop resources in those countries.

Russia

JBIC established an export credit line with Sberbank of Russia (Sberbank), the largest commercial bank in Russia, at the annual International Economic Forum held in St. Petersburg, Russia, in May 2018. There are expected to be numerous business opportunities in Russia, particularly in infrastructure and energy sectors. The purpose of the export credit line is to promote Japanese exports to Russia and its neighboring countries, including the countries of the Commonwealth of Independent States (CIS) and Central Asia.

JBIC also provided a guarantee for yen-denominated foreign bonds issued in the Japanese bond market (Samurai bonds) by Public Joint Stock Company Gazprom (Gazprom). To the present, JBIC and Gazprom have concluded an MOU aimed at building long-term cooperative relationships, while having promoted collaboration in resource and energy fields in Russia through continuous dialogue with the Russian government. The guarantee for the Samurai bonds issued by Gazprom is provided as part of cooperation in "promoting industrial diversification and enhancing productivity in Russia," which is one of the initiatives in the "Eight-point Cooperation Plan" proposed by Japanese Prime Minister ABE Shinzo to Russian President Vladimir Putin during the Japan-Russia Summit in May 2016. This will also help further deepen Japan-Russia economic relationships, which is pursued by the Japanese government.

In addition, at the Eastern Economic Forum in Vladivostok held in September 2018, JBIC concluded MOUs with State Development Corporation VEB.RF (VEB), a Russia's state financial institution, and with the Republic of Sakha, respectively for cooperation on promoting business with Japan. These MOUs are aimed at undertaking discussions on financial support for projects involving Japanese companies that help to improve quality of life mainly in the Far East and Siberia regions and in the Republic of Sakha. This is also expected to contribute to "developing industries and export bases in the Far East," one of the initiatives of the previously mentioned "Eightpoint Cooperation Plan," as well as to strengthening relationships with the Republic of Sakha, which is blessed with natural resources.

Argentina

energy03.jpgSigning ceremony with BNA (provided by BNA)

With abundant mineral resources such as copper and lithium, Argentina is an important country for Japan in terms of strengthening relationships. JBIC set an export credit line to Banco de la Nación Argentina (BNA), the largest commercial bank in Argentina, under its "Special Operations*1" at the G20 Leaders' Summit held in Buenos Aires, Argentina in November 2018. There are expected to be numerous business opportunities in Argentina, mainly in infrastructure and energy fields. This export credit line intends to support an expansion of Japanese exports to Argentina and an increase of business transactions between Argentina and Japanese companies with operations in Argentina. JBIC also concluded separate MOUs with BNA and Corporación Andina de Fomento (CAF), respectively, with the aim of promoting the development of natural resources and infrastructure in Argentina. The MOUs help to further increase cooperation between Japan and Argentina, including cooperation on identifying specific projects which are supported under the above-mentioned export credit line.

Mexico

energy04.jpgSigning ceremony with PEMEX (provided by PEMEX)

On the occasion of the seventh annual policy dialogue meeting with the Mexican Government, JBIC signed an MOU with Petróleos Mexicanos (PEMEX) for strengthening cooperative relationship in oil and natural gas, energy-related infrastructure and environment fields. The aim of the MOU is to further strengthen cooperation and partnership with PEMEX through regular consultations, while encouraging Japanese companies to participate in upstream development and the oil refinery improvement projects in Mexico implemented by PEMEX.

Angola

energy05.jpgSigning ceremony with the government of Angola

Angola is one of the largest countries in Africa that is well endowed with natural resources such as oil, iron ore and diamonds. JBIC signed loan agreements to finance the Namibe Port container terminal expansion project and the Sacomar Port export terminal rehabilitation project, which are both executed by the government of Angola. The loans will provide necessary funds to export construction materials, equipment and services by Toyota Tsusho Corporation and Toa Corporation. In Angola, acquiring foreign currencies through greater logistics efficiency and the promotion of mineral resource exports is an important issue. Therefore, these port projects are positioned as the highest-priority projects under Angola's public investment plan.

Future Business Strategy

In the natural resources sector, of which market environment is approaching a big turning point, there is concern about a tightening supply and demand balance of resources in the medium to long term. As resource countries are faced with national financial difficulties, they expect foreign companies to promote investment in resources. On the other hand, there is rising uncertainty such as an increase in geopolitical risk. Under these circumstances, capitalizing on its status as Japan's policy-based financial institution, JBIC will contribute to securing the stable supply of natural resources to Japan by proactively supporting Japanese companies which plan to acquire interests in and develop resources overseas.

Structuring Financing Schemes to Respond to the Changing LNG Market

Global supply and demand balance of LNG is forecast to remain loosened for the time being. Also, there is uncertainty over the outlook for LNG demand due to the mix of energy sources in the future and the deregulation of electricity and gas markets. In light of these situations, Japanese electric power and gas companies diversify their supply sources of LNG, seeking flexibility and liquidity in the LNG market such as diversification in pricing mechanism and removal of destination clauses from LNG contracts.

Under this environment, the Japanese government published the Strategy for LNG Market Development in May 2016, highlighting the creation of the LNG market with high liquidity. The Basic Energy Plan approved by the Cabinet on July 3, 2018 also emphasizes the continuing effort to create high liquidity in the LNG market. Against these backdrops, Japan's electric power and gas companies have started new businesses to spur LNG demand in Asian countries. JBIC will consider providing financial support not only to upstream investments and LNG projects by Japanese companies, but also to their new businesses to boost LNG demand in Asia.

Building an Energy Value Chain and Securing New Resources and Energy Sources

To promote resource projects in response to the new market environment, it is important to make investment in growth areas and new fields. In particular, JBIC will support infrastructure development projects, including construction of Gas-to-Power and LNG terminals in order to ensure energy security mainly for the entire Asian region. In addition to conventional resources such as oil, natural gas and mineral resources, JBIC will also support the activities of Japanese companies for securing strategic natural resources to be used for innovation and new energy sources to transform into a low-carbon society. Looking ahead, the Fourth Industrial Revolution driven by robotics and AI, as well as innovation derived from nextgeneration vehicles, are expected to spur a realignment of the global manufacturing industry and a transformation of the industrial structure. Under such circumstances, JBIC will consider financing projects for increasing productivity through the use of cloud services for data and automated mining operations, as well as projects for securing new strategic resources required to support innovation.

Strengthening Strategies on Economic Frontiers

To diversify resource supply sources, JBIC will proactively provide financing to natural resource development projects particularly in Africa and the South Asia region, that involve Japanese companies for acquiring interests in and purchasing natural resources. These regions are viewed as "The Last Frontiers" for foreign exploration as the regions are expected to be a source of extraction of natural resources-particularly oil, natural gas and minerals. There are countries which have started investing in resource development projects in these regions. Resource development projects especially in Africa contribute not only to job creation and acquisition of foreign currencies by the project host countries, but also to the promotion of related infrastructure and industrial development which drives sustainable growth of Africa. JBIC will support Japanese companies in expanding their business to Africa, including resource development, by proactively taking risk in projects as well as collaborating with international organizations and third countries.

The key to strengthening the relationship with resource countries lies not only in the cooperation in resource development projects, but also in the establishment of comprehensive and sustained partnerships while meeting the needs of these countries in relation to various fields such as: infrastructure development, industrial diversification, employment creation, technology transfer and reduced environmental burden through the use of renewable energy and energy saving technology. JBIC will maintain and strengthen the multi-layered and positive relationships with the governments of resource countries by making comprehensive efforts to support projects in infrastructure development and manufacturing sectors of the resource countries.

 

Note
  1. *1This is JBIC's financing operations which reinforce its risk-taking mechanism in further supporting Japanese companies in participating in overseas infrastructure projects with higher-risk profiles.
Introduction of the Finance Groups