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Examples of Applying the Equator Principles

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Supporting the Largest LNG Project in Japan's History of Energy Development

Large–Scale Project that Could Supply 10% of Japan's LNG Import Volume

Natural gas produces less CO2 and NOx during combustion than other fossil fuels and also has a smaller environmental impact throughout its entire life cycle. Therefore countries around the world are accelerating the shift from oil to natural gas and demand for natural gas is soaring. Japan has been the world's largest importer of LNG (liquefied natural gas), and the import volume is increasing sharply due to the tight supply–demand balance of energy following the Great East Japan Earthquake in March 2011.

In such an environment, one large–scale LNG development project that will have a particularly large impact on the stability of Japan's energy supply is now under way. This is the Ichthys LNG Project (hereinafter, "the Project") off the coast of Western Australia, which is being implemented by INPEX Corporation (hereinafter, "INPEX") and its partners.

The Project involves drilling in natural gas fields off the coast of Western Australia, construction of a subsea pipeline extending about 889 kilometers from the location to Darwin, Northern Territory, and construction of an onshore LNG liquefaction plant in Darwin. This is a large–scale project producing 8.4 million tonnes of LNG per annum, which represents about 10% of Japan's total annual LNG import volume, and an important project for securing energy supply to Japan. This is also a groundbreaking project from the point of view that a Japanese company is serving as the project operator.

Supporting the Project as a Financial Advisor

Due to the size of the Project, the project cost would amount to USD 34.0 billion. A financial advisor plays a particularly important role in financing such large–scale projects, working closely with the project developer from the planning stage and coordinating the interests of a number of financial institutions involved to achieve optimal financing. This advisory role requires not only considerable expertise and experience in financing, but also a wealth of knowledge related to the management of resource–development projects.

MHBK has played the extremely important role of financial advisor for this Project. After INPEX confirmed the natural gas reserves through exploratory drilling, MHBK, from the Project's development stage, has had continued discussions with the company about the financing. MHBK signed a financial advisory agreement in 2009, and, in a bid to secure optimal financing, has provided comprehensive advice, including review of the project development plan, LNG sales contracts and construction contracts and advice related to environmental regulations.

Consequently, in December 2012 MHBK has successfully arranged a USD 20 billion project finance package involving eight export credit agencies and 24 commercial banks, which is the largest ever in the international financial market, and achieved a significant milestone for the successful development of the Project.

Environmental and Social Considerations as a Key to the Project's Success

One of the most important points in arranging project finance is minimizing the project risk to encourage financial institutions to provide loans. While this, of course, requires rigorous investigation on profitability and reliability, it is also critical to ensure that the Project is a "sustainable project" in harmony with the natural environment and the local community.

MHBK became the first Asian bank to adopt the Equator Principles in 2003 and now plays a leadership role as a member of the Steering Committee for the Equator Principles Association. Leveraging the knowledge and expertise gained from our experience, we offered advice to INPEX as the project operator regarding appropriate strategies and considerations related to environmental and social issues.

INPEX has, for many years, been involved in a number of resource development projects in Japan and overseas, and has accordingly established high standards of environmental and social impact management from its own perspective. MHBK checked the measures which the Project had already taken from the financing viewpoint against the Australian environmental regulations and the International Finance Corporation (IFC) standards on which the Equator Principles are based, and supported INPEX to develop action plans to close the gaps. Then MHBK negotiated with lenders on how to reflect the action plans in the loan agreements with a view to balancing the interests of the operator and the lenders. In this manner MHBK arranged the large–scale financing step by step.

Supporting Efforts to Promote Sustainable Economic Development and Minimize Environmental Impact

The environmental and social impact management for this Project covers very broad areas. In addition to conducting detailed hearings on the management plans, MHBK supported INPEX's initiative drawing on its expertise in environmental and social matters and more than 30 years of experience in LNG development projects.

Considering the nature of offshore resource development, the Project has given special consideration to biodiversity. For example, to protect rare marine animals, such as dugongs and dolphins, the Project decided to avoid underwater blasting in dredging operations and to employ a specialized cutter to scrape away the bedrock.

In addition, the Project has plans to minimize green–house gas emissions in the LNG production process and offset the CO2 emissions by forestation.

Photo: Dolphins in Darwin Harbour

Dolphins in Darwin Harbour

Photo: Forestation Efforts

Forestation Efforts

From the viewpoint of social impact management, the Project aims to limit its impact on fishing areas. As part of this, it agreed to reduce the length of the jetty located nearby local fishing areas. Additionally, by providing assistance in the construction of vocational schools, the Project is actively supporting the creation of employment opportunities and the fostering of human resources that can contribute to the development of the local economy. The Project is taking a variety of actions to promote the development and sustainability of the local community in a broad context, including preservation of the cultural heritage of the indigenous peoples.

The basis of these considerations is mutual understanding with the local community through close communication. As part of the implementation of this Project, INPEX has actively promoted information sharing and discussions with the local community since the planning stages, through consultation with local representatives and briefing sessions. This approach has helped the Project to take actions closely fitted to the needs of the local community and won positive recognition of the Project. In a recent survey, more than 80% of the local residents showed support for the Project.

Photo: Vocational Training School

Vocational Training School

Continued Monitoring throughout the Project Life

Following the construction work of the Project facilities, drilling of production wells and commissioning, the Project will start production by the end of 2016. Sales and purchase contracts have already been signed for 100% of the expected LNG production volume, and approximately 70% of it will be supplied to Japan.

The Project is expected to remain in operation for about 40 years, and MHBK intends to conduct monitoring of the operations on an ongoing basis. Specifically, MHBK intends to review reports from the operator and the lenders' environmental consultants and provide advice on an appropriate course of action as necessary, to support the Project which contributes to a stable supply of energy for Japan.

Image: The Ichthys LNG Project

Employee Voices

Photo: Kentaro Sakaguchi Vice President Project Finance – Energy and Natural Resources Global Structured Finance Division Mizuho Bank

Kentaro Sakaguchi
Vice President, Project Finance – Energy and Natural Resources,
Global Structured Finance Division, Mizuho Bank

The Ichthys Project is a very significant project as it serves to ensure a stable supply of energy that is indispensable to Japanese industry. We are not only proud but grateful to have been given the opportunity to contribute toward the success of the Project.

MHBK was able to carry out the important responsibilities of financial advisor thanks to its expertise and long experience in project finance as well as the expertise of the Sustainable Development Department as an environmental and social specialist division within MHBK.

In this Project we have gone through various negotiations with financial institutions on how to minimize project risks, including environmental and social impacts, and how to reflect that in loan agreements. We believe Mizuho's keener eye toward recognizing risks made a big difference in this area.

With this accumulated knowledge, we would like to make contributions from the financial side to the success of projects which promote sustainable development of economy and society, and also to provide the best support to our customers.

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