Oil-hungry Japan looks to other sources

Posted in Japan | 21-Feb-07 | Author: Hisane Masaki| Source: Asia Times

TOKYO - After decades of struggling to reduce its excessively heavy reliance on the Middle East for its crude oil, Japan imported 2% less of the commodity from the region in 2006. Does this herald a lasting change in the nation's oil-import structure or represent just a statistical quirk?

Resource-poor Japan's dependence on crude oil from the Middle East declined for the first time in four years year on year in 2006 - albeit by a paltry percentage - amid increased imports from the rest of the world, especially Russia and Africa.

Japan's total 2006 crude-oil imports fell 0.8% from 2005 to 1.53 billion barrels, or 4.19 million barrels a day, after rising 0.7% in 2005, according to figures from the Natural Resources and Energy Agency, which is affiliated with the Ministry of Economy, Trade and Industry (METI).

What is more noteworthy is that although the ratio of imports from the Middle East to the total had risen above 90% for the first time in 37 years in 2005, the percentage declined 1 point to 89.2% in 2006 from 90.2% in 2005. The Middle East oil-dependence rate for December - the latest month for which figures are available - was even lower, at 88.6%.

This in itself must be good news for Japan, which has striven for decades to reduce its dependence on oil from the volatile Middle East and thereby ensure stable supplies by diversifying oil sources. Japan imports almost all of its oil, and is the world's third-largest oil consumer after the United States and China.

After switching some of its imports to those from outside the Middle East, such as Indonesia, Mexico and China, Japan saw its dependence on Middle Eastern oil decline to 67.9% in 1987 from more than 80% in 1972, the year before the first oil crisis shook the world and sent panicked Japanese consumers rushing to stock up on toilet tissue and detergent, among other goods, amid rumors that they would run out of stock.

As a result of the first oil crisis, the Japanese economy experienced its first negative growth since the end of World War II in 1974 after years of high-flying growth from the early 1960s. Japan survived the two oil crises of the 1970s through strenuous energy-saving efforts and technological innovations. The oil crises are commonly remembered as "oil shocks" by Japanese people.

But oil imports from China, Indonesia and Mexico began to shrink around 1990 as those countries kept more of their oil for domestic consumption to meet increased demand at home, rather than for export. As a result, Japan's dependence on Middle Eastern oil began to climb again.

Japan's 2006 overall oil-import figures show signs of possible structural changes in the nation's oil sources in the medium and long terms.

Oil suppliers in the Middle East cut back on production after world oil prices hit nominal all-time highs of more than US$78 a barrel last July, and Japan's monthly imports from the region declined by about 10% year on year in the second half of 2006. As a result, Japan's dependence on oil from the region declined for four months in a row on a year-on-year basis in December, at 88.6% of the nation's oil-import total, down 3.2 percentage points from the same month of the previous year.

On the other hand, Japan's imports from other regions, especially Russia and Africa, began to increase. To be sure, the percentages of imports from Russia and Africa in Japan's total imports - 0.7% and 4.4% respectively - pale before those from the Middle East. But they are expected to rise this year and beyond, as Japanese oil companies are revving up their drive to diversify sources.

Japan's oil imports from Russia rose 3.5% to a little more than 11 million barrels in 2006, while those from Africa surged 30.5% to nearly 70 million barrels.

Nippon Oil Corp and other Japanese oil wholesalers have begun to purchase crude oil from the Sakhalin-1 project in Russia's Far East. The project, which is managed by an international consortium led by US oil giant ExxonMobil Corp, began oil shipments last October. Other consortium participants include Tokyo-based Sakhalin Oil and Gas Development Co, owned by the Japanese government and private sector, and Russia's state-owned oil firm Rosneft.

The growth in imports from Africa was led by robustly increased imports from Sudan and Angola. Japan imported 39 million barrels of oil from Sudan last year, up 36% from 2005, and a little more than 11 million barrels from Angola, up a whopping 1,172.2%. Imports from Sudan almost equal those from Indonesia and far exceed those from Oman.

Central Asia and the Caspian Sea are also regions Japan is eyeing with growing eagerness as promising suppliers. Idemitsu Kosan Co, Japan's second-biggest refiner, bought a million barrels of crude oil from Azerbaijan last month, becoming the first Japanese fuel producer to import crude oil from that country.

Idemitsu purchased 1 million barrels of Azerbaijani light-grade crude oil from Inpex Holdings Inc, Japan's biggest oil explorer, for March delivery to the Aichi refinery in central Japan. The Azerbaijani crude will be loaded from the BP Plc-led ACG project in Azerbaijan, in which Inpex Holdings has a 10% stake. The Azerbaijani light crude oil will be carried through the Baku-Tbilisi-Ceyhan pipeline to Turkey's Ceyhan port, from where it will be loaded on to a ship for delivery to Japan.

Saudi Arabia, the United Arab Emirates and Iran remained Japan's three biggest oil suppliers last year. Saudi Arabia shipped 458 million barrels to Japan, or 30% of Japan's import total. The UAE shipped 387 million barrels, or 25.4% of Japan's import total. Iran came third, exporting 176 million barrels, or 11.5% of the total.

But Japan's oil imports from Iran plummeted 16.9% in 2006 from the previous year amid growing international tensions over the Persian Gulf nation's nuclear programs. If this declining trend continues, Iran will very likely cede third position as Japan's oil supplier to Qatar this year. Qatar shipped 156 million barrels to Japan in 2006, or 10.2% of Japan's import total.

Japan agreed last autumn to give up its controlling interest in the $2 billion development of Iran's massive Azadegan oilfield amid tensions over Tehran's nuclear program. Inpex Holdings Inc, Japan's leading energy developer fully backed by the government, reduced its stake in the southwestern oilfield from 75% to 10%. Officially, Inpex Holdings maintained that the deal went awry because of insufficient efforts by Tehran to de-mine the project area on the border with Iraq, but the firm was widely believed to have reduced its stake in the oil project in the face of formidable US pressure on Japan.

With the largest concentration of reserves in the world, the Persian Gulf region is likely to continue to play a pivotal role as Japan's main supplier. Moreover, although it is difficult to predict with any certainty, Iraq could also eventually be a major supplier to Japan, and Tokyo is eager to get its hands on at least some of the beleaguered country's oil eventually. Japan imported about 15 million barrels of oil from Iraq in 2006, up 76.2% from 2005 but still just 1% of its total oil imports.

Tokyo invited Iraqi Oil Minister Hussain al-Shahristani to Japan last autumn, soon after Inpex Holdings lost its controlling interest in the Azadegan project in Iran. Japan and Iraq issued a joint communique pledging Japanese assistance for improvements to the oil-and-gas infrastructure in the war-torn country. Japan specifically pledged to provide loans of about 20 billion yen ($170 million) to Iraq as part of the $3.5 billion aid package already committed. Japan is the largest aid donor to Iraq next to the US.

Iraq is believed to have the world's third-largest oil reserves, after Saudi Arabia and Iran. Despite its huge potential, however, the country is relatively unexplored because of years of sanctions and war. Only a quarter of its 80 discovered fields are pumping oil at present. By extending loans and increasing involvement in the reconstruction process, Tokyo is hoping it can acquire a good share of these massive oil reserves.

Imports from Russia and Africa are on the rise, but there are many uncertainties over whether they will keep humming along.

METI adopted the New National Energy Strategy last May, which calls for, among other things, increasing the ratio of "Hinomaru oil", or oil developed and imported through domestic producers, from the current 15% to 40% by 2030.

Until recently, there had been growing expectations in Japan of Russia's Far East, a region not only rich in oil and gas reserves but much closer to Japan geographically than the Middle East, which means lower transportation costs. But Russia recently put a damper on such expectations.

Russia's recent wresting of a majority stake in the huge Sakhalin-2 gas project, which had previously been led by Royal Dutch/Shell and involves two Japanese firms, Mitsui & Co and Mitsubishi Corp, has raised concerns in Japan about the future energy policy of Russia - and stable supplies from that country.

That's why although Japanese oil wholesalers have recently begun to purchase crude oil from the ExxonMobill-led Sakhalin-1 project, they are making spot purchases of the oil and remain cautious about buying it under long-term contracts.

Japan is also different from China, another energy-hungry Asian nation. China does not seem to be fussy about where its oil comes from. China has made aggressive forays into the African continent's energy sector in recent years in pursuit of oil and gas to feed its red-hot economy. Flush with foreign reserves - now the world's largest at more than $1 trillion - earned through robust exports, China has offered generous aid to African countries, using it as a lever to win energy interests there.

Many critics say that Beijing's interest in Africa is driven by self-interest and that it is prepared to ignore political, environmental and humanitarian considerations in its search for energy resources. They also say that oil wealth could entrench corruption in countries where natural resources are controlled by small elites.

Unlike China, Japan, the self-proclaimed champion of democracy in Asia, cannot turn a blind eye to poor records on democracy and human rights in many African countries. Japan has applied strict criteria for aid provision to developing countries in Asia, Africa and elsewhere in the world, with democracy and human-rights protection as basic conditions.

There are many other ways to boost Japan's energy security other than just lowering its dependence on Middle East oil.

The New National Energy Strategy also calls for stepped-up energy-saving efforts and the development of energy-saving technologies to cut the ratio of energy consumption to gross domestic product, or GDP, by 30% by 2030 to ensure the nation will have a stable energy supply amid intensifying competition for energy resources.

This goal is far from a cakewalk, however. Japan's ratio of primary energy consumption to GDP is already the world's lowest after improving 30% over the past three decades because of conservation measures spurred by the oil crises of the 1970s.

The New National Energy Strategy calls for a reduction in the oil-dependency rate to 40% or less by 2030 from the current 50% and promotion of nuclear energy, including a nuclear fuel cycle, as well as securing of energy resources abroad.

The new strategy calls for lowering Japan's dependence on oil as a primary energy source from the current 50% to 40% or less by 2030 - to 80% in the transportation sector - through promotion of alternative energy sources such as solar and wind power.

Among other alternative energy sources, Japan is turning to ethanol as a promising new fuel amid high oil prices and growing environmental concerns. The Environment Ministry will require all new cars to be able to run on a blend of 10% ethanol, an alcohol fuel made from corn or sugar, and 90% regular gasoline, starting in 2010. Japan currently allows ethanol mixtures of up to 3% at the nation's pumps, but in practice only a handful of cars are actually running on ethanol blends in the country.

The new strategy also calls for raising the percentage of nuclear power in the total national electricity supply from the current 30% to between 30% and 40% or more in 2030. Japan also sees promotion of nuclear energy as crucial if it is to slash carbon dioxide and other greenhouse gases widely blamed for global warming.

Japan is obliged by the 1997 Kyoto Protocol to reduce such gases by 6% from 1990 levels between 2008 and 2012. But the target date of 2030 for boosting nuclear power to 40% or more of the total electricity supply appears very difficult, if not impossible. Many of the nation's 55 nuclear reactors are now 20-30 years old. However, Japanese power companies, facing tougher competition due to deregulation as well as damaged public confidence in nuclear-plant safety in the wake of a spate of accidents and other problems - and their cover-ups - will face difficulties in building new nuclear power plants to replace the aging ones in the future.

To achieve the nuclear promotion goal, a lot of work remains to be done, especially by the power industry.

Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is [email protected]

Hisane Masaki is WSN Editor Japan.