Oil is at the heart of Japan's relations with the Middle East. The region provides almost 80 per cent of Japan's needs and this pre-eminent position is not about to be challenged. On the contrary, Tokyo's largely fruitless attempts to reduce the reliance on the Middle East and seek out alternative oil suppliers and energy sources have only highlighted the extent of the reliance on the region.
The growth in oil demand in Japan is one of the highest in the industrial world. A hot summer, strong automobile sales and the growing taste for larger cars helped raise Japanese fuel demand in 1994 and 1995. The growth in demand continues apace, with a 1.5 per cent rise in the first four months of this year alone.
The Middle East remains the country's foremost supplier of crude oil. In 1995 the region accounted for 79.8 per cent of Japan's imports, up from 77.6 per cent a year earlier. The UAE is the main Middle East source, accounting for almost 27 per cent of Japan's imports, with Saudi Arabia, the second largest supplier, accounting for almost 20 per cent. Despite US pressure to sever ties with Tehran, Iran remains Japan's third biggest source. In the first six months of this year, Iran accounted for 9.7 per cent of oil imports, up from 8.6 per cent in the same period last year.
Efforts to secure supplies from outside the Middle East have paid few dividends. Outside the region, only Indonesia and China account for more than 5 per cent of the Japanese oil market and even their ability to export is being eroded. 'These countries will see an increase in domestic demand and will have less available to export to Japan,' says Shigeru Sudo, Deputy General Manager at the Petroleum Association of Japan. 'We have steady growth in our oil demand and have no choice but to keep looking for new suppliers in the Middle East...There are no other candidates for alternative sources.'
According to the Ministry of International Trade & Industry (MITI), oil will account for a smaller proportion of total energy supply in the future. In 1992, it held a 58.2 per cent share which MITI expects to drop to 47.7 per cent by 2010. These MITI demand predictions have come in for criticism, however. The estimate that nuclear power will account for 16.9 per cent of the country's energy supply in 2010 - an increase from 10 per cent in 1992 - looks particularly fanciful and has been widely dismissed as unrealistic. Public anxiety about nuclear power has intensified in recent years, and the leak at an experimental fast-breeder reactor in 1995 pushed the issue to the top of the political agenda.
The government's energy plan calls for the building of 15 nuclear power stations over the next 14 years, in addition to the existing 47 plants. There is little expectation that this target can be reached as many of the utility companies are bowing to the popular mood and abandoning plans to build new reactors.
There are few other viable alternatives to oil as Japan's prime energy source. MITI estimates that gas will account for 12.8 per cent of market share by 2010, up from 10 per cent in 1992. But in the absence of a domestic gas grid, consumption will be confined to large industrial users. Moreover, a switch from oil to gas will have little impact on Tokyo's efforts to end its reliance on Middle East energy supplies. The region is set to become Japan's primary supplier of liquefied natural gas (LNG) as the liquefaction trains come on stream in Qatar. The first of three gas trains was completed this November and the first shipment is due to arrive in Japan in January next year.
The domestic oil sector in Japan has been radically restructured over the past nine years. The first phase of the deregulation began in 1987 and included reforms in the construction of refining facilities and the elimination of administrative guidance on crude oil processing quality. The most radical initiative came into force in the spring of this year when the government ended the oil companies' monopoly on imports.
As yet the oil companies' monopoly has remained largely unchallenged. The strict regulations on the import of petroleum products, as well as the poor margins on the refining of crude oil, have acted as strong deterrents to potential new importers.
The liberalisation process is starting to take its toll on the Japanese oil companies. The bulk of their profits have traditionally come from gasoline sales, but the exposure to new competition, especially from supermarkets, has pushed down prices. In an attempt to counter the impact of lower gasoline prices and recoup some of their losses the oil companies have attempted to raise the price of middle distillates, but analysts still expect the profits of the oil majors to drop by an average of 50-80 per cent this year.
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