Japan has very limited domestic oil reserves and relies almost totally on imports to meet its consumption needs. As of January 2008, Oil & Gas Journal (OGJ) estimated that Japan held approximately 40 million barrels of proven oil reserves. In 2007, Japan’s total oil production, including refinery gain, was roughly 130,000 barrels per day (bbl/d), of which just 6,000 bbl/d was crude oil. Total oil production has historically trended upwards and is expected to increase slightly in 2008 and 2009. Japan has 145 producing oil wells in 13 fields, according to OGJ. The vast majority of Japan’s oil production comes in the form of refinery gain, resulting from the country’s large petroleum refining sector.

Japan maintains government controlled oil stocks to ensure against a supply interruption. Total strategic oil stocks in Japan were 328 million barrels at the end of April 2008, according to the EIA.

Preliminary data indicates that Japan consumed nearly 5 million barrels per day (bbl/d) of oil in 2007, making it the third largest petroleum consumer in the world, behind the United States and China. Oil demand in Japan has declined since 2005 with the exception of a slight projected increase in 2008. EIA forecasts further decline in 2009. This decline stems from structural factors, such as fuel substitution, an aging population and energy efficiency targets. In addition to the shift in the industrial sector to natural gas, fuel substitution is occurring in the residential sector as high prices have decreased demand for kerosene in home heating.

The Japanese government’s 2006 New National Energy Strategy emphasizes that the country should reduce the share of oil consumed in its primary energy mix as well as the share of oil used in the transportation sector. Oil as a percentage of total primary energy demand has fallen from roughly 80 percent of the energy mix in the 1970s to roughly 50 percent today, made possible by increased energy efficiency and the expanded use of nuclear power and natural gas. By 2030, the goal is to reduce this share to 40 percent. This is consistent with Japan’s targets for increased energy conservation and efficiency. Among the large developed world economies, Japan has one of the lowest energy intensities, as high levels of investment in research and development of energy technology since the 1970s substantially increased energy efficiency in the country. The industrial sector in particular has become much more efficient.

Due to its gap between domestic consumption and production, Japan remains the second-largest net importer of oil after the United States, having imported just under 5 million bbl/d in 2007. The country is primarily dependent on the Middle East for its oil imports, as roughly 90 percent of Japanese crude oil imports originate in the region, up from 70 percent in the mid-1980s. The country was able to diversify away from the Middle East briefly following the 1973 oil shock but this regional dependency has returned. Japan is currently looking towards Russia, Central Asia, and Africa in order to geographically diversify its oil imports and promote domestic energy security.

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) 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.

Private Japanese firms dominate the country’s large downstream sector, 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.

Japan has limited domestic oil reserves and production, concentrated primarily along the country’s western coastline. Offshore areas surrounding Japan, such as the East China Sea, contain oil deposits (see East China Sea Report for more information). 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. The government’s 2006 energy strategy plan urges Japanese companies to increase energy exploration and development projects around the world to secure a stable supply of oil and natural gas. Furthermore, the plan contains the goal of importing 40 percent of the country’s oil requirements from Japanese-owned concessions by 2030, up from the current level of about 15 percent.

Japan’s overseas oil projects are primarily located in the Middle East and Southeast Asia (see Inpex 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 high profile upstream projects that Japanese firms have pursued abroad have faced obstacles and other setbacks. Below is a table of some of the major investments in overseas projects that Japan has made in recent years.

As Japan seeks a secure supply of oil, it is carefully observing pipeline developments in neighboring countries. Japan is watching 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 have said they favor a route that would allow exports to both China and Japan. In addition, JOGMEC and the Irkutsk Oil Company recently signed a joint venture agreement to explore the Severo-Mogdinsky oil and gas block in Eastern Siberia, roughly 90 miles south of the ESPO pipeline (see the Russia Country Analysis Brief and Sakhalin Island Brief for more information).

According to OGJ, Japan had 4.7 million bbl/d of oil refining capacity at 31 facilities, as of January 2008, and has 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. Today many older facilities are being upgraded and retrofitted with new technologies. In light of domestic overcapacity, refiners are increasingly looking abroad for markets for their petroleum products, especially to China, and 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 percent equity stake in a new refinery project located in Qatar. The planned facility is expected to have a refining capacity of 146,000 bbl/d and cost of $800 million and marks the Japanese industry’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. Also involved in the Vietnam project are Kuwait Petroleum International Ltd. (35.1 percent stake), Petrovietnam (25.1 percent stake), and Mitsui (4.7 percent stake).

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.