Though its economy is considered the second largest in the world, approximately $5.8 trillion in terms of GDP, after the U.S. and China, Japan is struggling to secure its energy sources as the country is heavily depending on the oil and gas imports to satisfy the local demand.

Japan has very limited domestic oil reserves and relies almost on imports to meet its consumption needs. The Oil and Gas Journal estimated that Japan held approximately 40 million barrels of proven oil reserves, while CIA fact book estimated proved oil reserves in 2008 as 58 million barrels decreased to 44 million barrels in 2009. Japan’s total oil production, including refinery counts for roughly 135,000 barrels per day (bpd). Japan has 145 producing oil wells in 13 fields. The vast majority of Japan’s oil production comes in the form of refinery gain; the country is considered the world’s third largest oil consumer, following the U.S. and China respectively. The following table shows the trend of oil production, consumption simultaneously with oil-proved reserves, according to BP 2008 Statistical Energy Survey:

Oil – production
Oil-proved reserves

Although Japan is open to foreign investment, governmental regulations have historically limited the involvement of international oil companies. Until recently, Japan’s oil sector was dominated by the state-run Japan National Oil Corporation (JNOC), established in 1967. In November 2001, then-Prime Minister Koizumi announced the planned breakup of JNOC. The move was part of Koizumi’s wider reform agenda, designed to spin off JNOC’s profitable business units into new companies and introduce greater competition to the energy sector.
Many of JNOC’s activities were spun off into the Japan Oil, Gas and Metals National Corporation (JOGMEC) in 2004. JOGMEC is a state-run enterprise charged with aiding Japanese companies involved in exploration and production overseas and the promotion of commodity stockpiling at home. Some of JNOC’s most successful business units formed new companies, such as Inpex, Japan’s largest oil company, and the Japan Petroleum Exploration Co., Ltd. (Japex).
In an effort to mitigate the country’s lack of domestic oil resources, Japanese oil companies have sought participation in E&P projects overseas as an attempt to secure a stable supply of oil and natural gas. These overseas oil projects are primarily located in the Middle East and Southeast Asia, held by various companies such as Cosmo Oil, Idemitsu Kosan Co. Ltd., Japan Energy Development Corporation, Japex, Mitsubishi, Mitsui, Nippon Oil, and others.
Japan is carefully observing pipeline developments in neighboring countries, such as the development of Russian plans to build an oil pipeline from Siberia to the Pacific Coast, for which Russia has yet to choose a final destination. Beijing has lobbied for the ESPO (Eastern Siberia-Pacific Ocean) route to pump oil to China, although Russian officials said they favor a route that would allow exports to both China and Japan.

In January 2008,Japan recorded a 4.7 million bbl/d of oil refining capacity at 31 facilities, represented then the second-largest refining capacity in the Asia-Pacific region after China. The refining sector in Japan has been characterized by overcapacity in recent years, as domestic petroleum product consumption has stagnated. The country began to allow imports of petroleum products in the mid-1990s, which placed additional pressures on Japanese refiners to lower costs and become more competitive. Nowadays, many facilities have been upgraded and retrofitted with new technologies on regular baisis. In light of domestic overcapacity, refiners are increasingly looking abroad for markets where they can sell their petroleum products, especially to China. As a matter of fact, some analysts predict that Japan may become a significant exporter of refined products in the long term.
In addition to selling products abroad, Japanese refiners are directly investing in refinery projects overseas. In November 2006, Idemitsu Kosan and Cosmo Oil each acquired a 10% equity stake in a new refinery project located in Qatar. The $800 million planned facility is expected to have a refining capacity of 146,000 bpd. This deal marks Japan’s first overseas refinery investment.  Indemitsu Kosan also has a 35.1 percent stake in a new refinery and petrochemical plant being constructed in Vietnam, which will have a capacity of 200,000 bbl/d and cost an estimated $6 billion to build. The project is expected to come online in 2013.

Natural gas
Japan had 738 billion cubic feet (bcf) of proven gas reserves in January 2008, declined from 1.4 trillion cubic feet (tcf) in 2007. According to preliminary data, Japan produced 132 bcf of natural gas in 2007, down slightly from 174 bcf in 2006.
The country is the largest importer of liquefied natural gas (LNG) worldwide; imports about 40% of global LNG imports. In 2006, Japan imported roughly 3.1 tcf of LNG, which rose by nearly 8% in 2007.
Japan’s sources of natural gas imports are more diversified than the ones of oil, as the country depends on Middle Eastern and African countries for about 22% of its LNG imports, such as Qatar, UAE, Oman, Egypt, Nigeria…etc. In 2006, LNG was imported from 12 countries, with the largest imports coming from Indonesia, Australia, and Malaysia. Imports from these three countries exceeded the 600 bcf each.
Currently, Japan is working closely to secure its long-term import agreements. In 2008, Indonesia, the largest gas supplier to Japan, agreed to renew LNG contracts set to expire in 2010-2011, through which 409 bcf/y to be exported in 2010 and 155 bcf/y in 2011. However, the contracted volumes are likely to be reduced from the previous agreements as Indonesia faces local declining production.
New supply deals were also signed. For example, Tokyo Gas and Kansai Electric signed a deal with Australia’s Woodside Petroleum Ltd for 182 bcf/y of LNG for 15 years, effective from 2010. Furthermore, Inpex, TEPCO, and Tokyo Gas hold a combined 20.5% stake in the 170 bcf/y-Darwin LNG terminal, which came online in 2006. TEPCO and Tokyo Gas have contracted 146 bcf/y of LNG for a 17 years period.

By Mostafa Mabrouk
Assistant Chairman for Economic Affairs, Ganope