Japan banks on energy, environment
TOKYO - The government-affiliated Japan Bank for International Cooperation (JBIC), one of the world's biggest international financial institutions, is revving up its energy- and environment-related business activities, apparently reflecting growing government concerns over energy supplies and global warming.
Resource-poor Japan is pumping no small public financial support into its drive for oil, gas and other energy resources abroad, in a desperate bid to ensure national energy security amid stubbornly high oil prices and also in response to the intensifying global rush for resources, led by China and India.
The public financial support takes the form of investment, loans and loan-guarantee and investment insurance. It is provided mainly through government-affiliated financial institutions, including JBIC.
Ensuring stable oil supplies is a matter of life or death for the world's second-largest economy. Japan imports almost all of its oil, nearly 90% of which comes from the volatile Middle East. Japan also buys almost all of its natural gas from abroad, making it the world's largest importer of liquefied natural gas (LNG).
Meanwhile, JBIC is rushing to sign partnership agreements with many developing countries on the so-called Clean Development Mechanism (CDM) projects. In recent months alone, JBIC has signed such agreements with many countries, including Singapore, El Salvador, Sri Lanka, Malaysia, Thailand, Indonesia, India and Brazil.
The CDM partnership agreements are aimed at helping Japanese firms participate in CDM projects and thereby acquire emission rights for greenhouse gases such as carbon dioxide. CDM is a key mechanism designed to help industrialized countries achieve their greenhouse-gas reduction targets under the Kyoto Protocol on curbing global warming.
JBIC is among the world's largest international financial institutions. Its outstanding loan and other financing total 19.5 trillion yen (nearly US$170 billion) and its outstanding guarantees total a little over a trillion yen.
Energy security concerns
Highly alarmed by stubbornly high global oil prices and the red-hot global rush for energy resources, led by China and India, Japan released in late May a new strategy aimed at ensuring stable energy-resource supplies in the long term.
The new national energy strategy calls for, among other things, strengthening relations with resource-rich countries through such measures as official development assistance (ODA) and free-trade agreements. It also calls for securing energy resources abroad through the fostering of more powerful domestic energy companies with the ultimate goal of boosting the ratio of "Hinomaru oil", or oil developed and imported through domestic producers, from the current 15% to 40% by 2030. Hinomaru is Japan's national Rising Sun flag.
To achieve the numerical target for "Hinomaru oil", the new national energy strategy stresses the importance of "drastically strengthening the supply of risk money" related to the exploration and development of overseas oil and natural-gas reserves by domestic development companies. In this connection, the document specifically emphasizes the need for Japan Oil, Natural Gas and Metals Corp and other government-affiliated organizations to play the role of an effective risk-money supplier.
But Japan has suffered a spate of setbacks in its energy-security strategy recently.
In September, Japan gave up its controlling interest in the $2 billion development of Iran's massive Azadegan oilfield amid tensions over Tehran's nuclear program. Indonesia, Japan's current No 1 supplier of LNG, is considering cutting in half shipments to the country from 2010 - when long-term contracts expire - to boost the availability of natural gas for domestic industries amid decreasing oil and natural-gas production at home. At the same time, Japan and Russia remain at odds over the Sakhalin-2 oil and gas project in Russia's Far East.
Comprehensive partnership agreements
Since the current fiscal year began in April, JBIC has so far signed comprehensive partnership agreements with South Africa, Indonesia, Brazil, Oman, Qatar, Brunei, Uzbekistan and Kazakhstan in the hopes of ensuring stable supplies.
South Africa is rich in resources such as gold, platinum and diamonds. Indonesia is the biggest supplier of LNG to Japan, accounting for 25% of the 58 million tons Japan purchased from abroad in 2005. Brazil is a promising supplier of ethanol. Oman and Qatar are members of the six-nation Gulf Cooperation Council, which also includes Saudi Arabia, the United Arab Emirates, Bahrain and Kuwait. The GCC accounts for more than 70% of Japanese crude-oil imports. Brunei is also an oil and gas producer.
Uzbekistan and Kazakhstan are rich in resources, especially uranium, as well as oil and gas.
"JBIC is making efforts to strengthen relations with the governments of oil- and gas-producing countries, as well as state-owned oil and gas companies, which play a crucial role as a supply source of energy resources for Japan," JBIC said. "JBIC is committed to securing a stable supply of energy resources for Japan by strengthening its ties with oil- and gas-producing countries."
Late last month, JBIC signed an agreement with Indonesia's state-owned oil-and-gas company PT Pertamina to strengthen financial cooperation and thereby to secure stable supplies of energy resources. Under the agreement, JBIC will use various financial instruments to realize comprehensive support for projects that Japanese firms undertake jointly with Pertamina. JBIC pledged $1.2 billion of a 15-year, $2.6 billion loan from international lenders in August for the BP-led Tangguh LNG project in Indonesia's Papua province. Some of the LNG from the project, which also involves Japanese firms, will be shipped to Japan.
JBIC also signed a partnership agreement with Qatar's state-run oil firm Qatar Petroleum in mid-November, which is aimed at developing a more favorable environment for Japanese companies hoping to get involved in energy-resource development projects in the Persian Gulf country. Under the agreement, JBIC will also extend loans for those projects on condition that Japanese energy developers are allowed to participate in the projects.
Qatar was Japan's fourth-largest LNG supplier in 2005, after Indonesia, Malaysia and Australia, accounting for about 11% of Japan's total imports. Qatar, which has the world's third-largest proven gas reserves after Russia and Iran, with 25.78 trillion cubic meters, is set to become the world's top exporter of LNG. Qatar is also Japan's fourth-biggest crude-oil supplier, after Saudi Arabia, the UAE and Iran.
Qatar is expected to emerge as a country that holds the key to Japan's future energy security as it is set to become the country's biggest supplier of LNG around 2010. During his recent visit to Tokyo, Qatari Energy and Industry Minister Abdullah bin Hamad al-Attiyah said the Gulf state plans nearly to double Japan-bound LNG exports to more than 11 million tons a year in 2010 from the current 6 million tons.
Oil and gas are not the only resources that whet Japan's appetite. Japan is also stepping up its drive to secure uranium abroad as global demand for nuclear power rises amid spikes in oil and gas prices and growing environmental concerns.
Nuclear power plants generate much less carbon dioxide, the primary greenhouse gas widely blamed for global warming, than coal-fired facilities. Japan is already the world's third-largest nuclear-power nation in terms of the number of civilian reactors in operation.
Uranium prices are climbing as energy-hungry China and India are stepping up construction of nuclear power plants to fuel their high-flying economies, while some industrialized countries, including the US and Britain, are moving to build new nuclear power plants after many years of suspension after nuclear accidents at Three Mile Island in the US in 1979 and Chernobyl in Ukraine in 1986. The new national energy strategy adopted this year by the Japanese government calls for promotion of nuclear-power generation.
JBIC signed comprehensive partnership agreements with Uzbekistan's Ministry for Foreign Economic Relations, Investments and Trade and Kazakhstan's Kazatomprom in August to support an increase in uranium-related business with financing through an exchange of information on the two countries' medium- and long-term strategy for uranium development, as well as on various financing facilities available at JBIC. Uzbekistan has the world's 10th-largest proven uranium reserves. Kazakhstan has the world's second-largest proven uranium reserves, and Kazatomprom is the fourth-largest producer of uranium in the world.
In June, JBIC also signed a loan agreement with APPAK LLP, a subsidiary of Kazatomprom. It was the first time that JBIC had provided loans for an overseas uranium project. In January, two Japanese firms - Sumitomo Corp and Kansai Electric Power Co - invested in APPAK LLP for the development of the West Mynkuduk mine. Sumitomo and Kansai Electric Power acquired stakes in APPAK LLP of 25% and 10%, respectively. APPAK LLP will start commercial production of 1,000 tons of uranium by 2010. The uranium produced by APPAK will be sold in the Japanese market.
Meanwhile, Tokyo invited Iraqi Oil Minister Hussain al-Shahristani to Japan recently. The two countries issued a joint communique pledging Japanese assistance for improvements to the oil-and-gas infrastructure in the war-torn country. Japan has committed $3.5 billion in low-interest yen loans. These loans are part of Japanese official ODA and will be extended through JBIC. Early last month, JBIC inaugurated its representative office in Amman, the capital of Jordan, to facilitate the implementation of reconstruction projects in Iraq financed by ODA loans.
Iraq is believed to have the world's third-largest oil reserves, after Saudi Arabia and Iran. Despite its huge potential, however, the country is relatively unexplored because of years of sanctions and war. Only a quarter of its 80 discovered fields are pumping oil at present. By extending loans and increasing involvement in the reconstruction process, Tokyo is hoping it can acquire a good share of these massive oil reserves.
Rush for CDM projects
The Kyoto Protocol came into force in February 2005, more than seven years after it was adopted at the third Conference of Parties to the United Nations Framework Convention on Climate Change, or COP3, in the ancient Japanese capital in late 1997.
Under the protocol, industrialized countries must reduce their emissions of several greenhouse gases by an average of 5.2% from 1990 levels during the first commitment period of 2008-12. The protocol sets separate gas-reduction targets for individual industrialized countries - 6% in Japan's case.
Despite its firm commitment to the Kyoto Protocol, however, Japan's emissions have actually risen by about 8% from 1990.
Japan has made strenuous energy-saving efforts and technological innovations since the two oil crises of the 1970s. The country is now the most energy-efficient in the industrialized world and faces great difficulties making further dents in greenhouse-gas emissions through domestic measures alone, such as further energy-saving efforts and carbon "sink" plantation projects. According to one estimate, it costs Japan about $110 to eliminate a ton of carbon dioxide, compared with about $80 for Europe and $50 for the US, on average.
Although the Environment Ministry has tenaciously pushed for the introduction of an environment tax on fossil fuels - which would be equivalent to 1.5 yen (about 1.3 cents) per liter in the case of gasoline - the Ministry of Economy, Trade and Industry (METI) and domestic industry have opposed the idea, claiming that any such extra tax burden would erode corporate Japan's international competitiveness. Therefore, the government and businesses are increasingly turning to the so-called Kyoto mechanisms as attractive means of achieving the reduction target at a lower cost while maintaining international competitiveness.
The "credits" firms earn in return for gas-reduction investments in developing countries can be counted as cuts for their own emissions - and in turn, for Japan - under CDM, one of the three mechanisms introduced under the Kyoto Protocol to help industrialized countries meet their reduction targets. Developing nations that take part can receive technology transfers from their industrialized partners. The two other mechanisms are Joint Implementation (JI) and international emissions trading. JI is a scheme similar to CDM but it covers gas-reduction projects in industrialized countries that can afford to cut more gases than required by the protocol, such as Russia and some former Soviet republics. In international emissions trading, greenhouse-gas emission credits are traded.
At an international conference in Montreal last December, delegates finalized a rule book for implementing the Kyoto Protocol, including CDM and other mechanisms, formally making it fully operational after years of negotiations and ratification. Taking their cue from the agreements reached at the Montreal conference, Japanese firms have begun to step up investment in CDM projects.
METI and the Environment Ministry have supported CDM projects conducted by Japanese companies and approved by the government. As of last Friday, the government had approved a total of 95 CDM and JI projects since the end of 2002; almost all the approved projects are in the CDM category. The number of CDM projects approved by the government has been rising sharply since the Kyoto Protocol came into force nearly two years ago. And the number has been growing at an accelerated pace in recent months. Of the 95 projects approved by the government, 76 have been approved since October last year, many of them CDM projects in Asian countries. Some of the projects approved so far by the government have already been registered with the United Nations' CDM executive board, which screens and approves CDM projects.
Japan's CDM projects in China are rising sharply, reflecting the fact that Japanese firms are becoming increasingly interested in implementing CDM projects in the world's second-largest carbon-dioxide emitter after the US. Of the 46 CDM projects approved in the past six months since June, 20 are in China.
Many Japanese companies not only feel the necessity to hedge against future risks but also see new - and potentially lucrative - business opportunities in CDM, since demand for the right to emit greenhouse gases is growing. Firms that earn greenhouse-gas emission credits through CDM projects abroad can count them in their reduction efforts, and surplus credits can be sold through an emissions transaction on the market. Firms that buy cheap credits only to sell them off for a higher price would reap profits.
Energy-related firms such as electricity, oil and gas companies are not alone in rushing to gas-reduction projects abroad. Major Japanese trading firms are also intent on cashing in on the new business bonanza.
The Japanese government began to make full-scale use of the CDM and other Kyoto mechanisms starting in the current 2006 fiscal year. The government-affiliated New Energy and Industrial Technology Development Organization (NEDO) began to acquire greenhouse-gas emission credits. The credit-purchase expenses will come from the government's special oil account. The government earmarked 5.4 billion yen (about $46 million) in the fiscal 2006 budget for purchasing credits. Maximum funds of 12.2 billion yen are available for credit acquisition for fiscal 2006. Japan plans to achieve 1.6% of the 6% greenhouse-gas reduction target through the Kyoto mechanisms.
To support Japanese firms in acquiring emission credits through CDM projects, JBIC is rushing to sign partnership agreements with developing countries. In recent months alone, JBIC has signed such agreements with Singapore, El Salvador, Sri Lanka, Malaysia, Thailand, Indonesia, India and Brazil.
The CDM partnership agreements seek to promote CDM projects through JBIC financing and to support acquisition by Japanese firms of emission credits generated from such projects. JBIC will promote information sharing with the developing countries on candidate CDM projects there, provide such information to Japanese firms and consider financial support for those candidate CDM projects.
"JBIC is making active efforts to promote the Kyoto mechanisms by making maximum use of its long-cultivated ties with developing country governments through loan and guarantee operations and its overseas network of representative offices," JBIC said.
JBIC was created in October 1999 through a merger between the Export-Import Bank of Japan and the Overseas Economic Cooperation Fund, a government-affiliated aid organization in charge of implementing ODA loans.
Although JBIC is to be split up again in 2008, its current main functions, including ODA loans and export-import finance, will not only be maintained but continue to be placed under government supervision. This means the government will not lose a key vehicle to pump public funds into Japan's drive for oil, gas and other resources, and also for CDM projects.
The cabinet of then prime minister Junichiro Koizumi decided last December to streamline eight government-affiliated financial institutions, including JBIC, through merger, privatization and abolition. Koizumi's Liberal Democratic Party-led coalition pushed bills promoting administrative reform, including one to streamline the public lenders, through the Diet, Japan's parliament, in May.
JBIC 's ODA loan operation is to be taken over by the Japan International Cooperation Agency (JICA), a government-affiliated aid organ under the jurisdiction of the Foreign Ministry. Japan's ODA extended bilaterally to developing countries consist of yen loans, grant aid and technical assistance. JICA currently provides only technical assistance but also will extend ODA loans and grant aid after taking over JBIC's ODA loan operation.
While maintaining the rest of its operations, including export loans, JBIC, along with four other public lenders, is to become part of a new wholly government-owned special corporation to be established in October 2008.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is [email protected]y.com .