JAPAN HUNTS FOR ENERGY
Ohmy News
Published 2006-09-13 15:26 (KST)
[Commentary] Resource-poor nation builds links with Central Asia
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.