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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. The recent rapid deceleration of the global economy accompanying the spread of COVID-19 is leading to sluggish global demand for energy and a decline in prices. Looking at crude oil in particular, a coordinated production cut agreement scheduled from April 2020 was postponed at the OPEC Plus meeting on March 6, 2020, sending crude oil prices into a nosedive. Even after a production cut agreement was subsequently reached, crude oil prices remained weak. Turning to energy supply and demand, although demand contracted sharply in the April-June quarter of 2020, it is expected to bounce back moderately thanks to the easing of urban lockdowns implemented in response to COVID-19 as well as to an anticipated resumption of economic activities. On the supply side as well, medium- to long-term production levels are expected to continue based on the assumption that prices will recover to appropriate levels.

Given this market environment, under the Paris Agreement adopted at the 21st Session of the Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change, all participating countries are obliged to submit greenhouse gas reduction targets, reflecting growing attention on energy sources that generate less CO2 amid heightened concerns over global warming.

One such energy source is natural gas. Regarding LNG, which is a means of transporting natural gas, large-scale LNG projects have started in the U.S. and Australia while attention is being focused on Africa, including Mozambique, as a new supply region as the diversification of LNG suppliers progresses. On the demand side, besides China and India, other Asian countries are commencing or increasing LNG imports. While observing global trends in LNG supply and demand, including the trends in Asia, strategic initiatives will be needed to ensure a system for a stable supply of LNG to Japan over the medium- to long-term, and such initiatives include actively supporting projects that assure the diversification of price mechanisms or the flexibility of LNG sales contracts through the relaxation of destination clauses as well as businesses that create demand for LNG.

Another area of focus is new energy sources that include hydrogen. In December 2017, the government of Japan formulated the Basic Hydrogen Strategy as it presented hydrogen as a new energy option. Additionally, the Strategic Roadmap for Hydrogen and Fuel Cells by the government of Japan sets the goal of "developing international hydrogen supply chains" and emphasizes initiatives for securing hydrogen energy toward the realization of a global decarbonized society. In North America and Europe as well as in Japan, governments are preparing to actively support the building of hydrogen supply chains and there is a growing need for proactive support for the hydrogen-related international initiatives of Japanese companies.

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 as well as increasing needs for the transition to a decarbonized society and next-generation industries. With regards to iron ore, it is important to secure high-quality ore, in addition to securing the necessary quantities. 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. Although demand for mineral resources has languished and their prices have tumbled owing to the spread of COVID-19, the demand is expected to recover on the back of a resumption of economic activities, and needs for various mineral resources will also likely expand along with a transformation to new lifestyles; the global supply-demand balance for mineral resources is thus expected to shift. 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 and support in existing mine operations.

JBIC's Activities

In FY2019, JBIC performed the following activities to secure a stable supply of energy and mineral resources from overseas.

Oil and Natural Gas

energy01.jpgJapan Arctic LNG (image courtesy of PAO NOVATEK (Conceptual drawing of completed natural gas liquefaction facility))

The government of Japan sets a goal of increasing its self-development ratio of oil and natural gas to 40% or more by 2030 in the Strategic 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.

JBIC concluded a loan agreement with Japan Arctic LNG B.V., a Dutch entity established by Mitsui & Co., Ltd. (Mitsui) jointly with the Japan Oil, Gas and Metals National Corporation (JOGMEC), to provide a portion of the funds needed to acquire a 10% stake in a Russian LNG project. Under this project, Mitsui plans to offtake LNG and thereby contribute to the stable supply of LNG, which is a vital resource for Japan. In addition, the LNG produced by this project is scheduled to be shipped though the Northern Sea Route and sold both in markets in Asia and Europe, two major areas for LNG demand, and this project will thus contribute to establishing an LNG value chain in Asia.

Also, JBIC participated in the LNG Producer-Consumer Conference 2019, which is held annually to bring together both LNG producers and consumers in Japan. At the conference, JBIC mentioned that the year marked the 50th anniversary of the start of Japan's LNG imports and that as Japan's policy-based financial institution JBIC has supported LNG projects involving Japanese companies for more than 40 years and has thereby contributed to the development of the LNG market. Additionally, JBIC announced that to further develop the LNG market it will support the entire gas value chain, engage in discussions with host country governments, private-sector businesses, and financial institutions, and build bankable schemes.

Mineral Resources

energy02.jpgQuebrada Blanca Copper Mine

The government of Japan formulated the Strategy for Securing Natural Resources in June 2012 based on the Guidelines for Securing Natural Resources (approved by the Cabinet on March 28, 2008). This strategy aims to make strategic efforts to secure mineral resources by maximizing the use of public-private resources based on the recognition that securing a stable supply of low-cost mineral resources is necessary for Japan's high added-value and sophisticated manufacturing technology that is expected to create national wealth. Also, the government of Japan has set a goal of increasing its self-sufficiency ratio for base metals, including iron and copper, to 80% or more by 2030 in the Strategic Energy Plan. 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. Global demand for copper is expected to continue expanding on the back of growing demand for infrastructure in emerging countries and increasing ownership and use of hybrid and electric vehicles.

Under these conditions, JBIC concluded a loan agreement with Compañía Minera Teck Quebrada Blanca S.A., a Chilean company invested in by two Japanese companies, to finance expansion of the Quebrada Blanca copper mine project. This project supports the additional development of the copper mine in which Japanese companies hold interests and secure long-term stable supplies of copper concentrates.

JBIC has also approved a loan to finance the funds necessary for Nippon Steel Corporation (Nippon Steel) to acquire Essar Steel India Limited (Essar) to support the overseas business deployment of Japanese steel companies. Essar is the fourth largest steel company in India and this acquisition will enable Nippon Steel to capture growing steel demand in India in the medium- to long-term.

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

Utilizing the opportunity of Russian President Vladimir Putin's participation in the G20 Summit in Osaka in June 2019, JBIC established an export credit line with State Development Corporation VEB.RF, a Russian government-affiliated financial institution. In Russia, there are expected to be numerous business opportunities, mainly for projects that contribute to improving the standard of living for that country's citizens, primarily in the Russian Far East region, which is in geographical proximity to Japan. Based on this export credit line, at the Eastern Economic Forum in Vladivostok held in September 2019, JBIC concluded a loan agreement for the purchase of equipment from Hokkaido Corporation for a greenhouse vegetable cultivation project carried out by the Russian corporation Sayuri LLC in the Republic of Sakha.

In June 2019, JBIC established an export credit line with SUEK, a leading Russian energy company, to provide funds necessary for purchasing mining machinery manufactured by Komatsu Ltd.

Also, JBIC signed in September 2019 a Cooperation Agreement with PAO NOVATEK (NOVATEK), a leading Russian natural gas production and sales company, and Mitsui O.S.K. Lines, Ltd. for promoting LNG transshipment base projects in the Arctic region. To the present, JBIC has been promoting cooperation in resource and energy fields in Russia by concluding a loan agreement for the Yamal LNG Project being led by NOVATEK and engaging in ongoing dialogue with the government of Russia.

These initiatives are positioned within the cooperation sectors of "Energy," "Promoting industrial diversification and enhancing productivity in Russia," and "Developing industries and export bases in the Far East" under 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 contribute to the deepening of Japan-Russia economic ties promoted by the government of Japan.

Saudi Arabia

Saudi Arabia is an energy superpower boasting the world's largest oil reserves, production, and export volumes, and it is Japan's biggest supplier of crude oil.

JBIC in March 2020 signed a loan agreement to provide funds necessary for the continuation of a methanol manufacturing and sales business being jointly undertaken by Japan Saudi Arabia Methanol Company, Inc., whose largest shareholder is Mitsubishi Gas Chemical Company, Inc., and Saudi Basic Industries Corporation (SABIC). A portion of the methanol produced at this project is sold in Japan and thus contributes to the diversification of methanol procurement sources for Japan, which relies entirely on imports for its methanol. This loan is intended to contribute to maintaining methanol production bases where Japanese companies are participating as well as to the promotion of downstream energy fields in Saudi Arabia.

African countries

energy03.jpg Signing ceremony with the West African Development Bank

Taking the opportunity of the seventh Tokyo International Conference on African Development (TICAD 7) held in Yokohama, in August 2019, JBIC further strengthened relations with African countries and development finance institutions and exchanged opinions on the possibility of providing specific financing. JBIC also signed memorandums of understanding on business cooperation with the West African Development Bank and the Development Bank of Southern Africa respectively to promote participation by Japanese companies in businesses in Africa.

In addition, JBIC has launched the JBIC Facility for African Investment and Trade Enhancement 3 (FAITH 3). Under FAITH 3, a total of $4.5 billion in support for Africa is expected during the three-year period from 2019 to 2021 and this will further strengthen support for investments by Japanese companies in Africa, including for resource development projects, and will contribute to enhancing societies and the environment in Africa.

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 growing uncertainty such as an increase in geopolitical risks. 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 forecasted 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 utility 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 government of Japan published the Strategy for LNG Market Development in May 2016, highlighting the creation of the LNG market with high liquidity. The Strategic Energy Plan and the New International Resource Strategy (March 2020) also emphasize the continuing effort to create high liquidity in the LNG market. Against these backdrops, Japanese utility 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*1 and LNG receiving 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 materials for innovation and new energy sources including hydrogen to transform into a decarbonized society. In particular, with regard to hydrogen, based on the January 2020 Cabinet Order for Partial Revision to the Enforcement Order of the Japan Bank for International Cooperation Act, JBIC's eligible sectors were expanded to provide support through export loans and overseas investment loans in projects involving the production, transportation, supply, and utilization of hydrogen in developed countries. Also, JBIC has newly added hydrogen as an important resource, which enables the application of energy and natural resources finance to the acquisition of interests, development and importing of hydrogen. Looking ahead, the Fourth Industrial Revolution driven by robotics and AI, as well as innovation derived from next generation 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, for example, cloud services for data and automated mining operations, as well as projects for securing new strategic resources and stable supply chain required to support innovation.

Strengthening Strategies on Frontier Markets

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 offtake of natural resources. These regions are viewed as "The Last Frontiers" as the regions are expected to be a source of natural resources, particularly oil, natural gas, and minerals.

Resource development projects especially in Africa contribute not only to job creation and acquisition of foreign currencies by the 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 sophistication, job 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. *1Development and operation power generation facilities and gas-related facilities as single units.
Introduction of the Finance Groups