Japan mulls financial support for upstream CCS projects

Market: Crude oil, Metals, Natural gas
19/02/21

Japan is drawing up plans to provide domestic upstream oil and gas developers with financial support for carbon capture and storage (CCS) projects, targeting to reduce potential financial risks in fulfilling costly CCS requirements in upstream operations and lure additional overseas oil and gas investments.

The trade and industry ministry (Meti) recently outlined a policy to continue to seek upstream oil and gas assets overseas after 2030, as part of efforts to enhance the country's energy security during its transition towards a decarbonised society. The ministry is considering measures to support Japanese investors' efforts in decarbonisation, which is becoming an important component in the upstream oil and gas industry.

Development of large-scale CCS projects require huge investments. Shell's Quest CCS project in Canada, the world's first commercial-scale CCS project launched in 2015, was estimated to have cost C$1.35bn ($1.1bn). Norway's Longship CCS project is estimated to cost 25.1bn kroner ($3bn).

Such huge CCS costs may make Japanese upstream firms more hesitant in committing to upstream oil and gas investments, leading to a fall in Japan's equity oil and gas output and harming energy security, Meti said. The government is expected to offer financial incentives, including financial assistance by state-owned financial institutions such as JBIC, Jogmec and Nexi, to encourage CCS investments and active participation in overseas carbon-offset projects and markets.

Japanese upstream developers are much smaller in corporate size than majors and state-owned oil firms. Oil and gas output by Japan's upstream leader Inpex hit 573,000 b/d of oil equivalent (boe/d) in 2020, less than one-fourth of that by oil majors, while its capital expenditure amounted to $1.9bn last year compared with that of oil majors, which hovered at $15bn-20bn.

Japanese oil firms have co-operated with overseas firms to study and develop CCS technologies, but commercialisation has been so far limited to carbon dioxide-enhanced oil recovery (CO2-EOR) projects. Japanese refiner Eneos has teamed up with Indonesia's state-owned Pertamina to explore CO2-EOR opportunities, while carrying out actual CO2-EOR projects in Vietnam and the US.

Meti is also considering enhancing the country's joint crediting mechanism (JCM) scheme to provide additional options for Japanese upstream developers in CCS projects. Japanese plant engineering firm JGC and power producer J-Power are set to start a CCS demonstration project in Indonesia in the April 2021-March 2022 fiscal year. The project, if it materialises, could become the first CCS project under the JCM scheme, targeting to capture and store 300,000 t/yr of CO2 at Indonesia's Gundih gas field.

Japan in 2013 set up the JCM, under which verified emissions reductions and removals through low-carbon projects can be used to quantify participating parties' efforts in greenhouse gas (GHG) mitigation. The country had set up the joint mechanism with 17 countries, mostly in Asia.

By Rieko Suda

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