Japan has very limited domestic oil reserves and relies almost totally on imports to meet its consumption needs. As of January 2006, Oil & Gas Journal (OGJ) estimated that Japan held 59 million barrels of proven oil reserves. During the first three quarters of 2006, Japan produced about 125,000 barrels per day (bbl/d) of oil, of which less than five percent was crude oil. The vast majority (83 percent) of Japan’s oil production comes in the form of refinery gain, resulting from the country’s large petroleum refining sector. For 2006, EIA forecasts that Japan will consume 5.3 million barrels per day (Mmbbl/d) of oil. Japan remains the second largest net importer of oil behind the United States and the third largest consumer of oil behind the United States and China.

Although Japan is not a major oil producing country, it has a robust oil sector, comprised of various state-run, private, and foreign companies. Although the country is open to foreign investment in the energy sector, government restrictions and regulations have historically limited the involvement of international oil companies in Japan.

Until recently, Japan’s oil sector was dominated by the Japan National Oil Corporation (JNOC), which was formed by the Japanese government in 1967 and charged with leading oil exploration and production domestically and overseas. 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 into Japan’s energy sector. Many of JNOC’s activities were spun off into the Japan Oil, Gas and Metals National Corporation (JOGMEC), which was formed 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. Two of the largest to be formed through this process are Inpex, now Japan’s largest oil company, and the Japan Petroleum Exploration Co., Ltd. (Japex). Both companies carried out successful initial public offerings (IPOs) on the Tokyo Stock Exchange, although the Japanese government maintains an equity stake in each firm.

Japan’s large downstream sector is dominated by private Japanese companies, as foreign companies have faced regulatory restrictions that limit market entry. Over the last several years, these regulations have been eased, which has led to increased competition in the petroleum refining sector. The country’s refiners also went through a long period of consolidation beginning in 1999, which saw the merger of many large downstream companies. While Japanese companies such as Nippon Oil remain the largest players, international firms, such as Shell and ExxonMobil, also have a sizeable market share in Japan.

Japan has limited domestic oil reserves and production, concentrated primarily along the country’s western coastline. During the last several years, Japan’s crude oil production (which excludes refinery gain) has hovered around 6,000 bbl/d, covering only a tiny portion of the country’s oil consumption. Offshore areas surrounding Japan, such as the East China Sea, contain oil deposits. However, development of these zones has been held up by competing territorial claims with China (see the China Country Analysis Brief for more information).

In an effort to mitigate the country’s lack of domestic oil resources, Japanese oil companies have sought participation in exploration and production projects overseas. In May 2006, Japan’s Minister of Trade, Economy and Industry announced a long-term strategy that urges Japanese companies to increase energy exploration and development projects around the world to help secure a stable supply of oil and natural gas. Furthermore, he announced a goal of Japan importing 40 percent of its oil needs from Japanese-owned concessions by 2030, up from the current level of about 15 percent.

One of Japan’s largest investments in oil projects overseas was in the Neutral Zone (sometimes called the “Divided Zone”) between Kuwait and Saudi Arabia. However, the Japanese-owned Arabian Oil Company (AOC) lost its concession in the Saudi portion of the Neutral Zone in 2000. AOC also controlled 40 percent of the Kuwaiti portion of the project, as the operator of the Khafji and Hout oil fields. However, this concession expired in January 2003, although AOC continues to operate in the Kuwaiti portion of the Neutral Zone under a service contract. While AOC does not hold an equity stake in the project, it continues to receive about 50,000 bbl/d of oil from the joint development, although this figure is much smaller than the previous offtake received from the Saudi concession (see the Kuwait and Saudi Arabia Country Analysis Briefs for more information).

Inpex was awarded a $2 billion contract to develop the large Azadegan oil field in Iran in 2004, which is estimated to hold 6 billion barrels of recoverable oil reserves. Inpex was the operator of the project and held a 75 percent stake. However, in October 2006, the state-owned National Iranian Oil Company (NIOC) slashed Inpex’s share to 10 percent, after the Iranian government complained the Japanese company had not developed the oil field quickly enough. The future status of the Azadegan project remains unclear, and NIOC is reportedly in discussions with other oil companies to develop the oil field (see the Iran Country Analysis Brief for more information).

Aside from the Persian Gulf, Japanese companies have also sought equity participation in oil projects in the Caspian Sea region. In 2002, Inpex acquired a 10 percent stake in the Azeri-Chirag-Guneshli (ACG) Project in Azeri territory of the Caspian Sea. The ACG oil fields currently produce around 420,000 bbl/d of oil and hold between 5.4 – 6.9 billion barrels of recoverable reserves. While Inpex holds a 10 percent stake in the ACG project, Japan does not currently import any crude oil from Azerbaijan or the Caspian region (see the Azerbaijan Country Analysis Brief and the Caspian Sea Regional Analysis Brief for more information). Inpex has also held an 8 percent interest in the North Caspian Sea Block of the Kashagan offshore oil field in Kazakhstan since 1998.

Another region where Japanese companies have been involved in exploration and production activities is the Russian Far East, primarily through the Sakhalin-I and -II oil and natural gas projects. Japan’s Sakhalin Oil and Gas Development Company (SODECO), a consortium of public and private Japanese oil companies, holds a 30 percent interest in the Sakhalin-I project. Oil production at Sakhalin-I began in 1999, and is expected to reach 250,000 bbl/d by year-end 2006. Japanese officials are keeping a close eye on ongoing projects in Russia. The Sakhalin-II project, in which Mitsui and Mitsubishi hold a combined 45 percent stake, recently experienced problems with its environmental license. Russian authorities have also complained about Sakhalin-I’s escalating costs (see the Russia Country Analysis Brief and Sakhalin Island Brief for more information). Japan is also carefully observing Russian plans to build an oil pipeline to the Pacific Coast, for which Russia has yet to choose a final destination. Beijing has lobbied for the “ESPO” (Eastern Siberia Pacific Coast) route to pump oil to China, although Russian officials have said they favor a route that would allow exports to both China and Japan.

Japanese companies are involved in numerous other exploration and production projects, primarily in the Middle East and Southeast Asia (see the Inpex Exploration and Production website for more information on their ongoing projects). Apart from Inpex, Japanese oil companies involved in exploration and production projects overseas include: Cosmo Oil, Idemitsu Kosan Co. Ltd., Japan Energy Development Corporation, Japex, Mitsubishi, Mitsui, Nippon Oil, and others. Many of these companies are involved in small-scale projects that were originally set up by JNOC. However, many of the highest profile projects being carried out by Japanese firms, some of which are described above, have faced obstacles and other setbacks.

According to OGJ, Japan had 4.7 Mmbbl/d of oil refining capacity at 31 facilities as of January 2006, down from 5 Mmbbl/d in 2001. The refining sector in Japan was characterized by overcapacity in recent years, as petroleum product consumption stagnated. In addition, 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. This resulted in a period of consolidation, with many large refiners merging with and/or acquiring middle market players. There is little new refining capacity planned or under construction, as oversupply remains a problem. Some older facilities are being upgraded and retrofitted with new technologies, however. In November 2006, Idemitsu Kosan and Cosmo Oil each agreed to take a 10 percent equity stake in a new refinery project located in Qatar. The planned facility, which is expected to have a daily refining capacity of 146,000 bbl/d and a cost of $800 million, marks the Japanese industry’s first overseas refinery investment.

Japan’s Refining Sector as of January 2006
Company	Number of Refineries	Refining Capacity (bbl/d)
Nippon Oil	6	1,157,000
Idemitsu Kosan	4	608,000
TonenGeneral	3	590,000
Cosmo Oil	4	565,250
Others	16	1,751,690
Total	31	4,671,940
Japan’s Largest Refineries
Operator	Location	Refining Capacity (bbl/d)
Nippon Oil	Negishi	340,000
TonenGeneral	Kawasaki	296,000
Nippon Oil	Mizushima	250,000
Cosmo Oil	Chiba	228,000
Showa Sekiyu	Yokkaichi	222,000
Idemitsu Kosan	Ichihara, Chiba	209,000
Fuji Oil	Sodegaura	192,000
Japan Energy Co.	Mizushima	190,190
Source: OGJ (January 2006)

Currently, private refiners in Japan are required to maintain petroleum product stocks worth 70 days of consumption, which imposes large additional costs to these companies. The government is reportedly considering reducing this level by five to ten days in order to provide relief to the country’s downstream sector.