Japan pumps public funds into its energy drive

Posted in Japan | 13-Sep-06 | Author: Hisane Masaki

Resource-poor Japan is pumping no small amount of public funds into its energy drive to secure foreign oil, gas and other resources, in a desperate bid to ensure its energy security amid spikes in oil prices.

Ensuring stability of supply is a matter of life or death for the world's second-largest economy. The country imports virtually all of its oil, with nearly 90 percent of that coming 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). Public financial support in the form of investment, loans, loan guarantees and investment insurance is designed to encourage conservatively-minded domestic firms to venture into high-risk projects abroad.

Alarmed by stubbornly high global oil prices and the global rush for energy -- led by China and India -- Tokyo released in late May a new strategy intended to ensure the country's long term future. The New National Energy Strategy calls for, among other things, strengthening relations with resource-rich countries through measures such as official development assistance (ODA) and free trade agreements (FTAs).

Prime Minister Junichiro Koizumi made a whirlwind tour of Central Asia recently, becoming the first Japanese premier to do so. The historic visit has highlighted how passionately energy-strapped Japan is wooing the region, which is rich in oil, gas, uranium and other resources. Although no deals were signed on specific commercial energy projects, Koizumi's tour has laid the groundwork for increased cooperation in energy and other areas.

In Kazakhstan, Koizumi and Kazakh President Nursultan Nazarbayev agreed to expand political dialogue, personnel exchanges and cooperation on the joint development of uranium mines and other natural resources such as oil in the Central Asian country. In Uzbekistan, Koizumi and Uzbek President Islam Karimov agreed to accelerate information exchanges among both public and private sectors in the two countries in jointly developing uranium resources in the Central Asian country.

Koizumi's visit to Central Asia was one of his last overseas before he steps down later this month, when his current three-year term as president of the ruling Liberal Democratic Party (LDP) expires. To ensure its energy security, Japan is desperate to diversify its hydrocarbon sources in order to reduce its heavy reliance on the Middle East for oil imports. As such, an obvious choice for the country is to turn to the Central Asian and Caucasian nations.

One of the most important pillars of the New National Energy Strategy is the fostering of more powerful domestic energy companies with the ultimate goal of boosting the ratio of "Hinomaru oil," or oil developed and imported by domestic producers, from the current 15 percent to 40 percent of all oil imports by 2030. To achieve this goal, the new 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. As such, the scheme emphasizes the place for the government-affiliated Japan Oil, Natural Gas and Metals Corporation (JOGMEC), among others, to supply cash for this end.

About three months after the release of the new strategy, the government has begun to translate it into specific action. New public funds have begun to flow into the energy development sector.

The government plans to increase the percentage of investments by JOGMEC in combined Japanese investments, including those by private firms, in high-risk oil, gas and other energy projects to 70 percent from the current 50 percent, if necessary. At present, the first target project is a project for an East Siberian oilfield. The subsidy plan is designed to enable Japan to secure concessions linked to these fields, near Lake Baikal, countering Chinese attempts to persuade Russia to send Siberian oil to China.

Japan and China have lobbied for alternative routes for the East Siberia-Pacific Ocean (ESPO) pipeline. Although major Japanese oil explorer Inpex Corp. and a handful of trading houses have considered joining the East Siberian oilfield project, they are waiting for a guarantee from the Russian government that the pipeline will be built to the Pacific coast, from where oil can be tankered to Japan. Tokyo has asked the Russian government to sign an intergovernmental agreement pledging that it will build the entire 4,188-km pipeline from Taishet to a location near Nakhodka, a port city on the Pacific.

However, Moscow has rejected the Japanese request and instead has talked only of the importance of exploring and developing the untapped reserves of East Siberia in order to provide the oil to fill the pipe. The suspicion exists that the ESPO may only reach so far as Skovorodino, the midpoint, which is near the Chinese border. Russian state-run pipeline monopoly Transneft started building the Taishet-Skovorodino phase in late April. It expects to finish this in 2008. No decision has been taken as to when construction on the second half will take place, however.

Government-funded Nippon Export and Investment Insurance (NEXI) decided recently to underwrite Japanese companies' insurance in 13 high-risk countries. This list, which became effective as of mid-August, includes Libya, Angola, Republic of Congo (Brazzaville), Cameroon, Gabon, Dominican Republic, Armenia, Macedonia, Senegal, Tanzania, Tajikistan, Niger and the Central African Republic.

Meanwhile, Inpex Holdings -- Japan's largest oil and gas exploration company, which includes both Inpex Corp. and Teikoku Oil -- has said it is in talks with NEXI on the possibility of an insurance scheme to cover the risks associated with the massive Azadegan oilfield development project in Iran, should economic sanctions against the Islamic state arise over its nuclear program. Iran is already on NEXI's list of countries eligible for underwriting.

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 fossil fuel-fired facilities. Japan is already the world's third-largest nuclear power nation in terms of the number of civilian nuclear reactors in operation.

The government-affiliated Japan Bank for International Cooperation (JBIC) recently signed a loan agreement with APPAK, a subsidiary of Kazakhstan's Kazatomprom. This is the first time that JBIC has provided loans for an overseas uranium project. Kazakhstan has the world's second-largest uranium resources and Kazatomprom is the world's fourth-largest uranium producer. Sumitomo Corp. and Kansai Electric Power Co. have stakes in APPAK of 25 percent and 10 percent, respectively. NEXI has also underwritten insurance for the uranium project. JBIC also recently signed separate agreements with Kazatomprom and Uzbekistan's Ministry for Foreign Economic Relations, Investments and Trade on forging a comprehensive strategic partnership.

The Japanese government's strong backing for domestic energy companies engaged in foreign exploration and production of oil and gas marks a clear policy reversal. JOGMEC was established in early 2004 as a successor to state-owned Japan National Oil Corporation (JNOC), which was set up in the 1960s to pioneer Japan's drive to boost energy security. JNOC was disbanded, however, after piling up an immense amount of debt through loans and investments -- worth a total of about 2 trillion yen (US$17 billion) -- to help domestic firms participate in wasteful exploration projects abroad.

There are some concerns that JOGMEC might fall into the same trap as JNOC. Hopefully, Tokyo will have learned its lesson from the failure of JNOC. The government will never be allowed to throw its money around as carelessly as it once did. It must select target projects for financial support. Also, Japanese firms should take steps to hedge risks themselves -- such as joining forces with each other and with foreign firms -- when investing in high-risk projects, instead of simply replying on public funds.

JOGMEC faces a delicate balancing act of pumping risk money into promising Japanese energy projects abroad actively and effectively while pulling the plug on them without delay if they prove to be unprofitable, in order to minimize losses.

This article originally appeared on Crisscross.