Finding Oil Is Japan's New Priority
March 09, 2005Wall Street Journal
By Martin Fackler
TOKYO -- Japan's search for overseas energy sources has long been run by powerful bureaucrats who operated with little transparency or outside accountability. In four decades, they mostly found hundreds of dry oil and natural-gas wells -- and billions of dollars in red ink.
Now, as the rise of China, India and other countries heats up global competition for fossil fuels, Japan is hoping to get better results by relying more on market discipline. In a major policy shift, Tokyo is disbanding its state-run company at the end of this month, and shifting its support to a commercially run company that Japan hopes can better compete with foreign oil titans.
"There has been a large mentality change" in Japan, says Paul Bernard, head of Asian energy research in Hong Kong for Goldman Sachs Group Inc. "The government realized it just has no business being in the petroleum-exploration business."
As its new national champion, Japan has anointed Inpex Corp., a state-owned exploration company created by the government in 1966 to drill for oil and natural gas in Indonesia. To assume its new role, Inpex is being restructured to act more like a private company. In November, the Tokyo-based company was listed on the Tokyo Stock Exchange, when the government reduced its stake to 36% from more than half. But to ensure that Inpex also acts in the national interest, the government will retain special veto power over company decisions.
The government has sold Inpex some of the most prized assets of its failed bureaucrat-run predecessor, Japan National Oil Corp., or JNOC, including a stake in a large Persian Gulf oil field off the coast of the United Arab Emirates. The new assets give Inpex rights over proven oil and natural-gas reserves totaling 1.6 billion barrels. That makes it not only the largest energy exploration company in Japan, but also catapults it into the ranks of midsize international exploration companies such as Unocal Corp. of the U.S. and China National Offshore Oil Corp.
Clipping the wings of Japan's powerful but ineffective bureaucrats reflects how governments around the world are increasingly anxious about securing energy resources. Much of this concern was set off by China, which has quickly risen to become the world's No. 2 importer of energy supplies after the U.S. Japan is feeling the pressure as China's state-owned energy companies aggressively scour the globe looking for new oil and natural-gas fields. Resource-poor Japan is particularly sensitive to this growing competition, because it relies on imports for almost all its fossil fuels, helping make it the world's No. 3 importer of energy.
While China's oil demand had been expected to slow from last year's torrid pace due to its attempts to cool its surging economy, some are now forecasting a big increase this year. The U.S. Department of Energy said yesterday that Chinese oil demand will grow by 33% more than previously forecast this year. It cited higher-than-expected demand for diesel fuel used to run generators as power shortages persist.
JNOC is scheduled to be disbanded by March 31, with 720 billion yen ($6.84 billion) in losses. In 38 years of operation, less than one- quarter of its more than 300 exploration projects ever found profitable quantities of oil and gas.
The abysmal record made it an easy target for Prime Minister Junichiro Koizumi, who since taking power four years ago has vowed to shrink the size of government and rely more on the private sector. Reformers hope a more market-based approach will prove more effective, and less costly, in securing energy resources. The government will take a more limited role via a newly created agency called the Japan Oil, Gas & Metals National Corp., which will provide risk capital for large new exploration projects by Inpex and other Japanese companies.
"The idea is to create a core company in the private sector, which the government will support," says Kazuma Ito, a spokesman for JNOC.
Japan is relatively late in spawning a large private exploration company that serves the national interest by securing energy resources. Most developed countries have either created such a national flag company, or are home to major oil companies that fulfill the same function. Japan's insistence on putting the quest for energy resources in the hands of bureaucrats had relegated its private exploration companies to being minor players globally.
In its search for a national oil champion, Japan may have picked a winner in Inpex. The company is widely praised by analysts for being well run, a legacy of having been managed as a for-profit company since its creation. It also has built up a wealth of expertise in the risky exploration business, helping it make wise investments in some of the world's most promising new oil and gas fields, from Australia to the Caspian Sea off Azerbaijan. It also has taken some risks, such as the vast Azadegan oil and gas field in Iran, which Japan is helping develop despite U.S. concerns that Tehran might be trying to develop nuclear weapons. Inpex also might acquire JNOC's stake in a massive oil and natural-gas development project led by Exxon Mobil Corp. off Sakhalin, an island in Russia's Far East.
Andrew Dowell of Dow Jones Newswires in New York contributed to this article.
Playing Catch-Up
Japan's Inpex lags behind the biggest private companies in proven reserves
COMPANY (COUNTRY) OIL AND NATURAL-GAS RESERVES*
ExxonMobil (U.S.) 22.2
Lukoil (Russia) 20.1
BP (U.K.) 18.1
Yukos (Russia) 16.0
Royal Dutch/Shell
(U.K., Netherlands) 12.0
Chevron Texaco (U.S.) 12.0
Total SA (France) 11.0
ConocoPhillips (U.S.) 8.5
Inpex (Japan) 1.6
Sources: A.G. Edwards; WSJ research
*Figures are most recent available, for 2003 or 2004, in billion barrels of
oil equivalent