Japanese Energy Supply Strategy in the context of Growing Regional Demand Shigeya Kato Senior Managing Director Showa Shell Sekiyu K.K. 1
Contents 2 1. Transition of Japanese Oil Industry 2. Japanese Primary Energy Transition 3. Issues at Stake
1. Transition of Japanese Oil Industry 3
Japanese Oil Supply/Demand Balance 4 Main Product= Mogas, Jet, Kero, GO(Motor/Industrial), Fuel Oil. Excl. Naphtha Mil.bbl/d 6 Era of High Growth Era of Redundancy Era of Deregulation Idle Capacity by Shutdown 5 4 1,400 900 Crude Intake 450 Mainpro Production 3 Domestic Demand 2 1 1 st Oil Shock 2 nd Oil Shock Available Capacity on Stream-day basis 0 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002
Demand is Whitening Mil bbl/d 5 4 3 Japanese Oil Demand Transition by product Total 3.12Mb/D White 2.34 (75%) FO 0.78 (25%) Fuel Oil Industrial Gas Oil AGO 5 Total 3.85Mb/D White 3.49 (91%) FO 0.36 (9%) Forecast 2 Kero/Jet 1 Naphtha Mogas 0 1980F 1985F 1990F 1995F 2000F 2004F 2005F 2009F Data :METI
50 40 30 20 10 - -10 6 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Product Price (1) Domestic Market US$/bbl Japanese Wholesale Market Price (RIM) Crack Spread from JCC+Tax 12Months Moving average Gasoline(Ron90) Middle Distillates LSWR HSFO(S3.0)
Product Price (2) Import 7 RIM Import US$/bbl 20 15 RIM Compared with Import Parity 12Months Moving average Gasoline(Ron90) 10 5 Middle Distillates - LSWR -5 HSFO(S3.0) -10-15 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Import Data : Premium&Freight is estimated by SSSKK Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
Outline of Japanese Oil Industry Transition 8 1. Refinery Capacity -> Adjusted to product demand 2. Product Market -> Margin reduced to international level -> Industry structure has changed from Distorted Local Market Oriented to Ubiquitous Market Oriented
2. Japanese Primary Energy Transition 9
Primary Energy in Japan 700 600 500 400 300 Mil.KL (coe) 1 st Oil Shock 2 nd Oil Shock 417 New Energies Nuclear Hydro 444 Gas Coal 597 10 15 20 METI s Outlook for 2010 Reference Case 14 18 Energy Conservation Case 15 18 18 18 10 200 100 77% 72 Oil 51 43 42 0 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
3. Issues at Stake 11
What are Issues at Stake? 12 1) Social responsibility = Environment 2) Price stability 3) Supply security 4) Investment 5) Return
1) Social Responsibility = Environment 13 a. Low sulfur product b. CO2 reduction c. Land remedy
1) Environment a. Low Sulfur Product 14 ppm 500 Mogas ppm 500 Automotive Gasoil USA Korea 400 300 USA 400 300 Europe China 200 China Europe 200 100 Korea Japan 0 2002 2004 2006 2008 2010 100 Japan 0 2002 2004 2006 2008 2010 Voluntary Rule by Industry Regulation by Government
1) Environment b. CO2 Reduction CO2 kt 50,000 CO2 Reduction CO2 Ton / Refinery Total Throuphput 25 15 CO2 / Refinery Total Throuphput Ton / KKLs 40,000 CO2 Reduction Effect 20 30,000 15 10 5 33,000 35,320 36,870 38,610 40,050 40,470 41,620 43,810 43,220 43,780 43,640 43,830 43,400 43,850 20,000 10,000 CO2 Emission 0-1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: PAJ
1) Environment c. Land Remedy Number of Service Stations 16 Number of Depots 60,421 60,000 Number of 292 300 55,000 Service Stations 56,444 275 50,067 50,000 250 45,000 40,000 Number of Depots 202 225 200 35,000 175 30,000 150 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2) Price Stability 17 Utilization of refining capacity in conjunction with widering gap between product demand and refining capacity in the Pan-Pacific a. Standardization of product specs -> Make arbitrage work b. Cooperation between producing and consuming countries to cope with heaving slate of crude oil
2) Price Stability - Japanese Crude Slate 18 API 35.6 Japan s Crude Slate - Lighter and Sourer Refinery modernisation completed 78.7% Diesel sulfur 2,000 ppm API 81.0% 82.4% Diesel sulfur 500 ppm Sulfur White Oil Demand Ratio 83.3% 83.3% 84.2% Diesel 50 ppms 84.9% 86.0% 86.3% 84.5% Sul content (wt%) 35.5 1.50% 35.4 1.45% 35.3 1.40% 35.2 1.35% 35.1 1.30% 35.0 1.25% 34.9 1.20% 34.8 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 1.15% Remark: White Products Ratio is on CY basis. Source: PAJ, IEA
2) Price Stability UK North Sea US Oman Colombia Argentina Yemen Norway Gabon Congo India Turkmenistan Sudan Vietnam Angola Eq. Guinea Canada Ecuador Kazakhstan Chad Russia - Significant Change in Crude Production (2004) Sweet Sour kbbl/d -200-100 0 100 200 300 400 500 600 700 Source: Shell 19
3) Supply Security 20 Enhancement of strategic reserve in light of growing dependency on Middle-East
3) Supply Security Vol Mil. bbl - Japanese Crude Dependency on Mid-East 21 5,000 1 st Oil Shock 2 nd Oil Shock Ratio % 100 4,000 Others 95 90 3,000 85 2,000 1,000 79.5 67.9 ME Ratio Mid-East 88.5 80 75 70 65 0 1973 1976 1978 1980 1982 1984 1986 1988 1990 Source: METI 1992 1994 1996 1998 2000 2002 60
3) Supply Security - Security of Sea Lane 22 Bil.MT 2 1 Malakka Traffic Expectation Oil/Korea Oil/Japan Oil/China(IEA) 40 30 20 10 0 0 1995 99 2003 07 11 15 19 Holmes Strait Philippines Malakka Strait Source: Fujitsu research institute
3) Supply Security Mil.bbl - Japanese Oil Stock Transition 700 23 600 Target (Private+National : Image) 500 400 Crude (National) 90Days 300 200 Obligation (Private) Crude (Private) 100 Product&Feedstock (Private) 70Days (35days) 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: PAJ
4) Investment 24 No more Boom-and-Bust -> Investment for value creation not for volumetric expansion.
4) Investment on Secondary Unit in Japan 25 Japanese CDU Capacity Mil.b/d 6 Upgrading Units Capacity Mil.b/d 3.0 5 2.5 4 Japanese CDU Capacity kb/d 47.4% 2.0 3 28.6% HD Capacity kb/d 1.5 20.4% 2 10.4% FCC Capacity kb/d 1.0 1 1.7% Coker Capacity kb/d 3.0% 0.5 0 1985 1987 1989 1991 1993 Source: PAJ 1995 1997 1999 2001 2003 0.0
5) Return 26 Fair return on investment for the sake of socially acceptable and sustainable growth.
5) Return - foreign capital in Japanese Main Oil Companies 27 500 50% Bil.Yen 400 300 200 100 0 28.3% Foreign Capital Ratio Others Foreign Capital 123 128 2001 2004 Source: financial statement reports 34.8% 40% 30% 20% 10% 0% Foreign Capital Ratio
5) Return - ROE by Industry 28 25% 20% All Manufacturer 15% 10% All Industry 5% 0% -5% -10% Oil/Coal 1995 1997 1999 2001 2003 Source: 財務省法人企業統計
29 Conclusion Acceleratedly growing importance of cooperation among North-East countries