International travel between the countries recommenced in October which served as a turning point for investment activity as site inspections and face-to-face meetings resumed.
“Australia has the advantage of sunlight, a large land mass and strong winds conducive to large-scale solar and wind projects. Japan, by contrast, has limited land availability and is limited in developing large-scale offshore wind projects due to typhoons and deep seabeds.”
Many Japanese companies have internal rules which prevent investment without physical due diligence being undertaken. In 2022, there were 50 merger and acquisition (M&A) deals and 51 new partnerships.
- The highest value transaction was Tokyo Gas’ US$2.15 billion (A$3.3 billion) sale of its interest in four liquid natural gas (LNG) projects (Woodside’s Pluto LNG, Chevron’s Gorgon LNG, QGC’s Queensland Curtis LNG and INPEX’s Ichthys LNG) to MidOcean Energy, a subsidiary of institutional investor EIG. The proceeds of the sale are to be redirected to renewable energy and hydrogen production.
- Of the 50 M&A transactions:
- 15 were in mining (including critical minerals), traditional energy (such as LNG) or renewable energy (including hydrogen)
- 12 related to companies with software intellectual property or technology know-how
- 23 were a mix of financial services, real estate, consumer, infrastructure, construction/housing and services
- Japanese companies with an established presence in Australia were not only investing in new opportunities but also expanding on existing investments (such as capital upgrades to production facilities) which is a testament to their long-term commitment to Australia.
- 39 of the 51 partnerships were related to energy transition or energy security.
- New energy-related memorandums of understanding (MOUs) and joint feasibility studies signed in 2019-2021 are now progressing to proof of concept and implementation phases as the projects aim for commercialisation by 2030.
Natural partners in the energy transition
LNG and coal (together with iron ore) have always been the centrepiece of the Japan-Australia trade relationship. However, Japan is now embarking on an energy transition, driven by a domestic energy strategy to achieve net zero carbon emissions by 2050.
The challenge for Australia is how it can remain the chosen exporter of energy to Japan. An opportunity for Australia is to use its natural resources advantage to develop export technologies for sustainable fuels such as hydrogen, ammonia and methanol.
Promisingly, a milestone was reached in the blue hydrogen sector last month. The Japanese Government’s Green Innovation Fund committed A$2.35 billion to Japan Suiso Energy (a joint venture between Kawasaki Heavy Industries and Iwatani Corporation) and ENEOS to lead a project to export blue hydrogen in Victoria’s Latrobe Valley to Japan through the Port of Hastings.
Under this project, a joint venture between J-Power and Sumitomo Corporation will supply 30,000 tonnes of hydrogen a year. This was a direct commercialisation of the Hydrogen Energy Supply Chain (HESC) Pilot Project which concluded on 31 December.
Critical minerals are an important component of this transition as they are required for many new energy storage technologies (such as batteries and high-powered magnets). In October the Australian and Japanese trade and industry ministries announced a partnership to develop and promote a critical minerals supply chain.
Opportunities for Australia
Australia has the advantage of sunlight, a large land mass and strong winds conducive to large-scale solar and wind projects. Japan, by contrast, has limited land availability (due to being mountainous) and is limited in developing large-scale offshore wind projects due to typhoons and deep seabeds.
While Australia possesses many advantages, factors influencing competitiveness in renewable energy trade are complex and establishing a competitive advantage will require significant up-front effort.
Australia currently supplies Japan with about 75 per cent of its thermal coal and 43 per cent of its LNG – as well as 60 per cent of its iron ore. While these traditional energy sources will continue to play a part in Japan’s energy strategy in the short to medium term, the long-term energy transition to net zero will have serious implications for the Australian economy.
There is little room for complacency if Australia is to seize the opportunity to remain Japan’s natural partner in decarbonisation and energy security. Sudden and unpredictable changes in Federal and State government policies in 2022 caused concern among the Japanese Government and Japanese companies.
Although there have been reassurances from senior government figures about the importance of the export market to Japan, an increase in the risk profile will potentially reduce Australia’s competitiveness as an investment destination.
What’s to come
- Recent visits to Australia by the chair or CEO of major Japanese corporations (in alphabetical order): All Nippon Airways, Dai-Ichi Life, INPEX, ITOCHU, Marubeni, Mitsubishi Corporation, Mitsui & Co, Mizuho Bank and Sumitomo Corporation, will likely result in further investment.
- Forthcoming Asia-Pacific Economic Cooperation (APEC), G20, G7 (which will be hosted in Hiroshima and to which Australia is likely to be invited) and Quad meetings in 2023 will identify further avenues for cooperation and partnerships between Australia and Japan.
- Partnerships will continue to evolve from ‘agreements to agree’ through the feasibility, design and ultimately to commercialisation.
- The key areas of focus for Japan and Australia this year will be “energy security, food security and defence security”.
- Critical minerals will be a key focus for Japanese investors, supported by Japan Bank for International Cooperation (JBIC) and Japan Organization for Metals and Energy Security (JOGMEC), as Japanese government agencies seek to establish and maintain stable supply chains.
- Increased collaboration between Australia and Japan to drive decarbonisation projects in third party regional countries, with the support of Japanese Government institutions like JBIC.
- Australia is increasingly recognised for its innovation, technology and R&D capability and Japanese investment in Australia’s technology sector will continue to grow strongly in 2023 and beyond.
Herbert Smith Freehills has published the sixth annual report on Japan-Australia M&A and partnerships, analysing, and the prevailing trends driving cross-border investment. Click here for the full report.
Ian Williams is a Senior Adviser, Damien Roberts is a Partner and Edward Watson is a Solicitor at Herbert Smith Freehills.