JAPAN'S GROWING PETROLEIUM NEEDS AND ITS SEARCH FOR OIL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020045-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: March 2, 2010
• Sequence Number: 45
• Publication Date: October 1, 1971
• Content Type: IM

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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
October 1971
INTELLIGENCE MEMORANDUM
JAPAN'S GROWING PETROLEUM NEEDS
AND ITS SEARCH FOR OIL
Introduction
1. Petroleum became Japan's major source of primary energy a
decade ago. Without an adequate supply of crude oil or petroleum products,
Japan's rapidly growing economy soon would be crippled. Consequently,
Tokyo is particularly, sensitive to developments in the world oil industry.
The recent increase in world oil prices, the constant threat of interruptions
in oil shipments from the Persian Gulf, which provides about 85% of Japan's
supply, and the dependence on international oil firms for most of its crude
oil, all have been of particular concern. This memorandum discusses the
importance of oil to Japan, describes the industry's existing policy and
practices, and assesses the options available to Tokyo during the 1970s to
provide a secure source of crude oil.
Discussion
Petroleum's Growing Importance
2. The 1960s witnessed a tremendous growth in Japan's petroleum
consumption as petroleum's share of total energy consumed rose from 30%
in 1960 to about 70% in 1970. This was the largest share contributed by
petroleum in any major developed country. By comparison, the United
States derives 45% of its energy needs from petroleum, and other Free
World developed countries average about 55%. Petroleum consumption will
continue to grow rapidly. By 1975, Japan is expected to consume about
7.5 million barrels per day (b/d) of petroleum products, a nearly 83%
increase over the 1970 level of 4.1 million b/d. Nuclear power and liquid
natural gas are also expected to show substantial gains during the period
but will still account for only a very small share of the total in 1975 --
probably not more than 4%. Coal, the most important source of energy
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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until 1961, has declined steadily in importance and in 1975 probably will
account for only about one-sixth of all energy consumed.
3. Demand for all major petroleum products increased sharply during
the 1960s (see the table). The most rapid growth occurred in the
consumption of naphtha which increased at about 40% annually between
1960 and 1970. By 1970, naphtha's share of total petroleum consumed
had grown to l1% compared to only 3% in 1960. This increase reflects
the tremendous expansion of the petrochemical industry which uses naphtha
as a feedstock. Consumption of heavy fuel oil, used primarily by
manufacturing and utility companies for heating and power generation, grew
about 19% each year, rising to 1.8 million b/d in 1970. While demand
for gasoline increased to 366,000 b/d, the rate of increase was much slower
than for other petroleum products. As a result, gasoline's share of the
petroleum maiket dropped from 19% in 1960 to 11% in 1970. About
259,000 b/d of kerosine were consumed in 1970 -- about the same share
as in . 1960. These trends are expected to continue over the next several
years as naphtha consumption continues to expand rapidly and gasoline
consumption grows rather slowly. Fuel oil's share of all petroleum consumed
is expected to remain at about its present 60%.
Million Barrels
Product
1960
1965
1970
1975
Gasoline
36.9
68.5
133.7
212.1
Naphtha
5.4
49.5
161.6
265.5
Kerosine
12.0
33.0
94.5
1,3.9
Gas oil.
'13.4
35.2
74.4
126.0
Heavy fuel oil
117.0
304.0
655.0
1,085.3
4. Japan's petroleum industry 11L., expanded rapidly to keep pace
with growing demand. Capacity for topped crude oil almost doubled from
1.7 million b/d in 1964 to about 3.3 million b/d in 1970 -making Japan's
refining industry the second largest in the Free World. In 1970 the Ministry
of International Trade and Industry (MITI), which regulates the oil industry,
approved an increase in capacity of 733,000 b/d to be completed by the
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end of 1973. This was the lamest single expansion program yet approved.
Despite the industry's rapid growth, refineries have been hard pressed to
meet demand, and construction programs are being pushed to completion
ahead of schedule.
5. Japan must import crude oil to meet most of its needs (see Figure
1). Domestic crude oil production has averaged only about 16,000 b/d in
the past decade, while crude oil imports soared from about 535,000 b/d
in 1960 to more than 3.4 million b/d in 1970, valued at some $2.2 billion.
In addition to imports of crude oil, net imports of petroleum products,
valued at $510 million, were required to meet consumer demand. Persian
Gulf countries accounted for about 85% of Japan's crude oil imports in
1970, with 43% coming from Iran alone. Indonesia, which has increased
its share of Japan's market rapidly in recent years, now accounts for about
13% of Japan's oil purc1i es. Petroleum product imports come mainly from
Singapore and the Persian Gulf.
Foreign Role in the Oil Industry
6. The petroleum industry is one of the few industries in Japan of
which foreign companies own a significant share. Western participation
began shortly after World War II, when large amounts of capital and
advanced technology were neede,l to rebuild the devastated facilities.
Foreign companies were the most obvious source of capital and technology
and, in addition, controlled the supply of crude oil. Western companies,
especially American companies, invested heavily.
7. Foreign participation grew rapidly in the 1950s, with relatively
little direct effort by the Japanese government to discourage it. Government
interference was directed principally to protecting the nation's coal interests,
which were rapidly losing ground to the growing petroleum industry.
Restrictions were placed on crude oil imports, and duties were put on fuel
ou in an effort to force prices higher to make coal more competitive. The
government also limited foreign exchange allocations for oil imports, and
restrictions were placed on conversion of power generating boilers from
coal to oil.
8. As foreign domination grew, however, the government became
increasingly concerned. In the late 1950s, Tokyo restricted new foreign
investment to joint ventures, limiting foreign participation to a maximum
of 50%, and encouraged Japanese firms to prospect for oil abroad to lessen
dependence on foreign suppliers. In a related move, the quantity of crude
oil an affiliate could buy from its parent company was limited to the
proportion of the parent company's equity in the firm.
9. The government assumed far reaching control of the industry in
.he early 1960s through MITI. While this may have been done it part
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because of concern over foreign domination of much of the industry, the
move was in keeping with Japanese economic philcoophy regarding
government participation and control of almost every important aspect of
economic activity. MITI, whose authority continues to the present time,,
regulates refinery construction, sets domestic petroleum prices and import
allocations, and even passes on new service station construction and sales
quotas for retailers. Indirectly, MITI exercises considerable control over the
growth of foreign investment, reviewing all foreign investment applications
and applications for foreign loans. These also must be approved by the
Ministry of Finance.
.10. Although Japan continues to show concern over the participation
of foreign firms which have an equity share in more than half of refining
capacity and in nearly 55% of total product sales, the government has
avoided taking strong measures to reduce foreign holdings. This may be
due in part to the importance of the parent companies as crude oil suppliers.
Also, Japan may realize that foreign participation in the oil industry does
not constitute a threat. Foreign influence is negligible because of pervasive
government control. Even profit remittances abroad are small since refinery
earnings in Japan are quite low. The large return to foreign oil companies
is from crude oil sales to refineries rather than from refinery profits, and
these would not necessarily be affected by a reduction in foreign equity
in the oil industry. Japan would like to have more control over crude oil
sources, however, and this goal is being pursued by encouraging, Japanese
companies to increase their exploratory activities.
Search for Oil
11. Tokyo's concern with its dependence on foreign suppliers for
crude oil is understandable considering that almost all of Japan's oil comes
from abroad, and nearly 85% of it is supplied by foreign companies - US
firms account for about 53%, British companies supply 12%, and about
19% is supplied by other foreign companies. Only 1I% is supplied by
Japanese-owned companies and 5% by companies owned jointly by US
and Japanese firms.
12. While oil exploration and development in Japan have been under
way since 1890, very little oil has been found. Indeed, produr.+i%n has
stagnated during the past few years at around 5.5 million barrels, primarily
because existing fields are small and funds for new exploration and
development are inadequate (see Figure 2). By the end of 1969, Japan
had about 1,500 operating wells producing an average of 10 b/d each. The
selling price was relatively high - approximately $2.60 per barrel, compared
with the $2.08 per barrel price for foreign oil - including customs duties.
To compensate refineries that buy the more expensive domestic oil, a price
differential is paid out of funds derived from the customs duties on oil
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Japan: Offshore.Oil Concessions
TAIWAN
YE I 1- 0 jl,'jS EA
West Japan QII Development
Idemitsu Kos n
Nippon Oil Deb elopment
Mitsui Mining
Mitsubishi Ma ufacturing
NAMES AND BOUNDARY REPRESENTATION
ARE NOT NECESSARILY AUTHORITATIVE
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Figure 2
SETA OF jAIPAN
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imports. The latest price hikes for foreign oil,. however, will close the gap
between the domestic and foreign prices.
13. Japan's search for oil abroad also has been going on for some
time, but only limited success has been achieved thus far (see Figure 3).
Only two Japanese firms, the Arabian Oil Company (AOC) and the North
Sumatra Oil Development Company (NOSODECO), are now producing
significant quantities of oil abroad. AOC was established in 1958 in the
Saudi Arabia - Kuwaiti Neutral Zone and by 1960 had struck its richest
field, Khafji, which can produce up to 380,000 b/d. At the present time,
some 70 producing wells are operating in the Khafji field. To meet the
dema: ~d for'low-sulfur oil, AOC developed the Hout oilfield in 1963, which
now has a capacity of some 80,000 b/d. While AOC's sales have increased,
its profits have fallen steadily during the past three years, mainly because
of the reduction in the net selling price of its oil, resulting from increased
desulfurization costs. Most of AOC's oil is the high-sulfur variety that
pollution conscious Japan is becoming more unwilling to accept.
14. NOSODECO was established in 1960 and has been receiving part
of the crude oil produced in North Sumatra in return for technical assistance
and materials supplied to the Indonesian government oil enterprise,
Pertamina. While the initial oil discoveries there were made by the
Indonesians, Japanese assistance has been involved in drilling several new
wells and in reworking many older ones. NOSODECO's share of oil produced
in 1969. came to some 4 million barrels, all of which was shipped to Japan.
Unlike AOC, NOSODECO's profits have been rising steadily over the past
few years and in 1970 reached more than $1.5 million, mainly because
of the saleability of the low-sulfur oil it produces.
15. AOC's early success in finding oil in the beginning of the 1960s
encouraged other Japanese oil companies to seek oil overseas. Few other
Japanese operations, however, have discovered commercially exploitable
deposits. Nevertheless, prospecting has continued, and by i970 Japanese
firms were exploring concessions - mostly joint ventures with uthei foreign
companies Tin Alaska, Canada, Colombia, Australia. Malaysia, Indonesia,
Thailand, Egypt, Congo (K), and the Persian Gulf. Recently, Japanese oil
men reached an agreement with India to search for offshore oil near
Bombay, and a loan has been extended to Burma to get oil exploration
under way there. Other concessions also are being sought. Teikoku Oil
Company, Mitsubishi Petroleum Exploration Company, and Teijen Limited
reportedly are seeking concessions in Libya and Nigeria. In early March
1971 a group of Japanese oil firms sent a survey team to Peru, Colombia,
and Equador to study the feasibility of joint prospecting with government
prospecting teams exploring the upper Amazon Basin. The Mitsubishi group
and Royal Dutch Shell are reportedly discussing joint exploratory operations
in Indonesian offsho:^ concessions, and JAPEX Canada may be
recons,dering developing oil shale deposits, in Canada, which was regarded
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as too costly a few years ago. Japan's most recent success was the acceptance
of its bid for oil concessions by the Iranian government. Japanese companies
will participate with Iran's National Oil Company in exploiting fields and
in downstream operations, including refineries. Japan is also interested in
Saudi Arabia and South Vietnam.
16. During the past few years there has been increasing interest in
the continental shelf around Japan. Both Japan and the United Nations
Economic Commission for Asia and the Far East (ECAFE) have made
extensive surveys of the East China Sea where the geological composition
is similar tc areas where 90% of the world's oil is produced. Surveyors
agree that the area may contain potentially large reserves. Actually drilling
did not begin until 1971, however, and it is still too early to expect
encouraging results. Conflicting claims to certain areas have arisen between
Japan, Taiwan, Korea, and, more recently, Communist China, but Japan
has avoided any direct confrontations with the other claimants, and is
confining exploratory work to uncontested areas.
17. Japanese firms involved or. the continental shelf include the Japan
Petroleum Exploration Company (JAPEX), a quasi-government firm that
is active around the Senkaku Islands in the Ryukyu chain; Teikoku Oil
which is prospecting in the East China Sea; and the Nippon Oil Development
Company, a wholly-owned subsidiary of Japan's largest refinery-distributor,
Nippon Oil, which is also prospecting in the East China Sea. Both Teikoku
and Nippon Oil are making arrangements with Gulf Oil and the Caltex
Group, respectively, for technical and financial tieups. In addition, Mitsui
Petroleum Exploration Company is preparing for joint exploration with
Continental Oil around Hokkaido, and three other firms are planning to
start drilling in the Sea of Japan. Nishi Nihon Sekiyu Waihatsu K.K., a
joint venture of the Mitsubishi group and the Royal Dutch Shell group,
has completed a seismic survey of its 38,500-square-mile parcel between
Japan and Korea. JAPEX and Idemitsu Kosan, the country's second largest
refiner-distributor, were scheduled to start drilling in May 1971 in their
16,000-square-mile concession, with technical and possibly financial
cooperation from Standard Oil of Indiana. In all these projects, profits will
be shared on the basis of capital participation, with all oil going to Japan.
18. Almost all Japan's overseas undertakings thus far have failed to
discover oil in commercially exploitable quantities. Both government and
industry leaders agree that more funds are needed for oil exploration to
succeed, but little actually has been done to make the funds available.
Indeed, investment in exploration and development, excluding that spent
on the AOC, has averaged about $10 million in each of the last 10 years,
which is less than 0.5% of the country's import bill for crude oil.
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Prospects and Conclusions
19. The remarkable growth of Japan's economy in the post-World
War II period has placed great demands on the energy sector, which have
been met largely by the dramatic expansion of the petroleum industry.
Since the early 1950s the energy supplied by petroleum has risen by some
20 times. Petroleum's share of total energy supply increased from less than
20% of the total to about 70%.
20. Japan has enjoyed a stable supply of oil at relatively low prices
throughout the 1960s. Imports from the Middle East, where most of Japan's
oil originates, have never been disrupted despite almost constant instability
in the area. Prices declined steadily during the 1960s as a result of both
declining transportation costs, achieved largely by the use of supertankers,
--id because of the general glut of oil on the world market. Japan's success
has been due to a large extent to good fortune, but its policy of
diversification of suppliers has both increased the dependability of supply
and encouraged limited competition, with some downward pressure on
prices.
21. It was not until early 1971 that the price of Japanese crude oil
imports was raised in conjunction with the worldwide price rises by
producing countries. During the five-year term of the new price agreement,
the total cost to Japan of the price increase will be about $4 billion, or
some 22% more than Japan's bill would have been at the former price
levels. Nonetheless, the $2.40 per barrel cost to Japan in 1975 will barely
exceed the $2.38 per barrel price Japan paid for its crude oil in 1960 and
will be considerably less than the price of Japanese domestically produced
crude oil. Moreover, Japan's total oil bill of $19 billion during the period
will be about one-third less than the United States pays for the same
quantity of US domestically produced crude oil.
22. Wholly-owned foreign oil companies, which supplied a significant
share of the capital and technology required for the industry's growth,
continue to supply nearly 85% of Japan's crude oil requirements. The
industry's continued reliance on foreign firms has been a source of concern.
Although foreign participation in the domestic refining industry tightly
controlled and presents few problems, foreign domination of Japan's crude
oil supply is disquieting to many Japanese. Prospecting abroad by Japanese
companies has been stressed, and a goal has been set for Japanese companies
to supply 30% of cr'ile oil requirements by 1985.
23. Additional funds will be made available for overseas oil
exploration, and the role of direct government participation in exploration
activities can be expected to expand. Already, several Japanese exploration
companies have been consolidated at Tokyo's urging. The chances that
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Japanese companies will discover large reserves, however, are poor, with
the possible ex^cption of the East China Sea. Most of the more promising
concessions throughout th,; w';rld have already been awarded to the major
international oil companies, but Japan may obtain concessions that other
companies have relinquished. It is also possible that some oil producing
countries may prefer to award concessions to Japanese companies rather
than to Western firms, which already Lontrol a lar;;e share of their oilfields.
This may have been part of the rationale behir-;l the recent choice of a
Japanese consortium by Iran in preference to Western firms.to exploit a
promising concession. Japanese willingness to invest in pipe lines and
refinery , facilities in Iran, however, probably tipped the scales.
24. It appears unlikely that Japan will achieve its 1985 goal, although
efforts to acquire petroleum resources are almost certain to increase.
Considering that requirements are expected to quadruple by 1985 and that
deliveries by Japanese cc--:,panies will have .to be increased by 600% in 15
years at a cost of some $5 billion, the target is indeed ambitious. Even
if the target were achieved, Japan still would have to triple its purchases
from foreign companies to meet domestic requirements.
25. Japan will continue to depend on Middle East oil for the
foreseeable future despite its search for new sources. Alternatives to the
Middle East are limited. The Soviet Union may be considered a source.
but the USSR is often hard pressed to meet it's commitments to Eastern
Europe. Communist China may be supplying a small percentage of Japan's
oil imports by 1975. P, CIA estimate* places probable Chinese exports at
200,000 b/d by 1975. If all of these exports were sold to Japan, they
would satisfy about 3% of total. Japanese demand in that year. It is unlikely
in the foreseeable future that Chinese crude oil will represent a significant
source of supply to Japan. Japan has a relatively small concession in Alaska,
but even if oil were discovered, production could not get under way before
the mid-1970s, and output would be very small compared to Japan's needs.
More Indonesian oil probably will be purchased, and by 1975 Djakarta could
supply as much as 19% of Japan's needs, compared with a 13% share in
19:170. Not only is the transport distance less than one-third the distance
from the Middle East, but also Indonesian crude oil is the low-sulfur quality
that Tokyo increasingly demands. African oil (south of the Sahara) is also
a possibility. Japan has shown interest in Nigerian and Cabindan oil and
is presently participating in a joint prospecting venture in the Congo (K).
With the possible exception of Nigeria, however, African sources probably
will not be able to supply a significant portion of the Japanese market
for many years.
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