Japan to provide P&I, compensate cargo, hull cover for crude, oil products, LNG transport

Japan is set to provide protection and indemnity cover and partially compensate cargo and hull insurance payments for the transportation of crude oil, oil products and LNG, as part of a bill approved by the Cabinet on Oct. 13, a senior official at the Ministry of Economy, Trade and Industry said.

The bill is one of three approved by the Japanese Cabinet earlier Oct. 13 to enhance the security of the country's crude oil supply, among others, amid the conflict in the Middle East.

"The Ministry of Land, Infrastructure, Transport and Tourism will revise the existing specified tanker act. The current law covers crude oil, and the scope will be expanded to include petroleum products such as naphtha, as well as liquefied natural gas," the METI official told a press briefing.

METI will also introduce similar support measures for hull insurance and cargo insurance, the official added.

In response to the Middle East situation and to ensure a stable supply of energy to Japan, METI said the government will establish a program under which it will partially compensate non-life insurance companies for the funds required to pay insurance claims under marine property insurance, such as cargo and hull insurance, covering the transportation of crude oil, oil products and LNG, even in cases where the provision of reinsurance is prohibited.

"In the event foreign insurance companies become unable to provide reinsurance coverage, a situation could arise where the cargo is available but cannot be transported," the official said. "To address such circumstances, the government will establish a mechanism to fill the gap left by the unavailable foreign reinsurance coverage."

Japan introduced a law in 2012 to compensate P&I cover as a sovereign guarantee for each tanker carrying Iranian crude amid EU sanctions against Iran — an initiative that remains in effect to date. However, Japan suspended its imports of Iranian oil in May 2019.

The Japan P&I Club, formally known as the Japan Ship Owners' Mutual Protection & Indemnity Association, provides insurance cover of up to about $9.8 billion per tanker.

METI Minister Ryosei Akazawa said earlier Oct. 13, "Today, the Cabinet approved three bills: a bill concerning the rationalization of the use of designated sea lanes to ensure the stable transportation of crude oil among others; a bill on special measures to secure the fulfillment of specified cargo insurance contracts and specified vessel insurance contracts; and a bill to partially amend the Act on the Japan Organization for Metals and Energy Security."

"In light of the structural changes taking place in the global energy landscape, including the recent situation in the Middle East, it is necessary to strengthen the resilience of Japan's energy supply and demand structure," Akazawa told reporters.

"Through these three bills, we aim to fundamentally enhance the stability of procurement by diversifying the sourcing of crude oil and other fossil fuels and reducing associated risks," he added.

The Cabinet's approval comes after Japan formulated an energy policy package on Aug. 26, under the direction of Prime Minister Sanae Takaichi, to bolster the resilience of the country's energy supply and demand system through Green Transformation (GX) initiatives known as POWERR GX.

Other bills

The first bill, which concerns the rationalization of the use of designated sea lanes to ensure the stable transportation of crude oil and oil products, importers such as refiners, petrochemical producers and trading houses will receive grants when they procure crude oil and oil products from suppliers located outside the Strait of Hormuz region, the official said.

To receive the grant, these companies will be required to formulate a designated sea lane rationalization plan that sets out details such as procurement targets, the types of crude oil covered, shipping routes and the duration of the plan, the official added.

The government will then review and certify the plan, after which JOGMEC will provide grants covering a portion of the costs associated with supply diversification, the official said.

The funding for these grants will come from contributions paid by refiners and other importers, which JOGMEC will use to finance the grant program, the official added.

Regarding the bill amending the JOGMEC Act, the official said the recent situation in the Middle East has underscored the critical role that alternative pipelines can play in ensuring Japan's crude oil procurement.

The proposed measure would allow JOGMEC to provide equity investments and debt guarantees for such pipelines, which are not associated with specific oil and gas fields, as it can currently provide equity investments and debt guarantees only for pipelines associated with oil and gas fields, the official added.

As part of the amendments to the JOGMEC Act, JOGMEC's mandate will also be expanded to include equity investments and debt guarantees for projects involved in overseas biofuel production, the official said.

"Demand for biofuels and other alternative fuels is expected to increase due to regulations in Japan and overseas," the official said. "It is important to ensure ample supply so that biofuel supply and demand can be brought into proper balance."

JOGMEC's functions will also be expanded to include equity investments and debt guarantees for smelting and refining projects that process used materials, such as spent batteries and other recyclable metal resources, the official said.

JOGMEC will also be given the additional function of administering subsidy programs for carbon capture and storage projects, the official said, adding that the subsidies will be provided in accordance with grant criteria established by METI and are intended to support projects by addressing the gap between CCS costs and the prevailing carbon price.