Oil To Command Biggest Market Share In Japan's Medium/Long Term Energy Outlook

Kazuya Fujime
Managing Director
Institute of Energy Economics, Japan

The Japanese government's long-term energy supply/demand outlook, released in June 1994, projected that, excluding LPG, Japan's oil supply (crude oil plus refined products) would drop from 295 million kl. (5.086 million b/d) in fiscal 1992 to 285 million kl. (4.914 million b/d) by 2000 (down 3.4% from fiscal 1992) and further to 277 million kl. (4.776 million b/d) by 2010 (down 6.1% from fiscal 1992).

That scenario would have occurred as a result of policies to promote energy conservation and greater use of nuclear, natural gas, coal, and other oil-alternative energy sources.

In this case, excluding LPG, oil's share of Japan's primary energy supply would shrink from 54.4% in fiscal 1992 to 48.9% in fiscal 2000 and 43.6% in fiscal 2010.

LPG imports were projected to increase from 15.3 million tons in fiscal 1992 to 17.4 million tons in fiscal 2000 (up 13.7% from fiscal 1992) and to 20 million tons in fiscal 2010 (up 30.7% from fiscal 1992).

With LPG included, total oil supply was projected to shrink from 315 million kl. (5.431 million b/d) in fiscal 1992 to 308 million kl. (5.431 million b/d) in fiscal 2000 (down 2.2% from fiscal 1922) and to 303 million kl. (5.224 million b/d) in fiscal 2010 (down 3.8% from 1992).

In this case, oil's share of primary energy supply would fall from 58.2% in fiscal 1992 to 52.9% in fiscal 2000 and to 47.7% in fiscal 2010.

However, fiscal 1995 results showed that, excluding LPG, oil supply increased by 5.2% from the fiscal 1992 level.

Although partly attributable to the unusually warm summers of 1995 and 1996-which saw not only the seasonal increase in gasoline and diesel consumption but also increased demand for C grade heavy fuel oil used for power generation-the rise reflected constantly growing demand for transport fuels.

So it appears that taking a view of declines in the medium and long term, as the government outlook did, can hardly be justified by actual records.

In addition, refinery crude oil throughput also increased in this period, rising 5.2% from 230.4 million kl. (3.972 million b/d) in fiscal 1992 to 242.4 million kl. (4.179 million b/d) in fiscal 1995.

Moreover, crude oil imports rose to 265.5 million kl. (4.578 million b/d) in fiscal 1995, up 3.8% from 255.7 million kl. (4.409 million b/d) in fiscal l992. Domestic crude oil production marked a decline from 982,000 kl. (16,900 b/d) in fiscal 1992 to 857,000 kl. (14,800 b/d). Domestic crude oil production accounts for a scant 0.3% of Japan's total oil supply, with the rest wholly dependent on imports.

Oil supply/demand plan

It shouldn't come as a surprise that the government outlook is far removed from reality.

In its recently released oil supply/demand plan for fiscal 1995-2000, the government assumed domestic fuel oil demand would grow an average 0.5%/year in the 5 years to fiscal 2000.

During fiscal 1990-95, domestic fuel oil demand grew an average 2.4%/year. The last 5 years marked an economic decline, when the bubble economy of fiscal 1987-91 collapsed and an average GDP growth slumped to 1.3%/year in real terms.

Elasticity of fuel oil demand to real GDP stood high at a ratio of 1.85. Aside from such contributors as unusually warm weather, the strong yen, and downward price pressures from falling crude oil prices, the high elasticity can be attributed largely to soaring demand for transportation fuels-notably gasoline up 2.9%/year, diesel up 3.9%/year, and jet fuel up 5.0%/year-as well as naphtha demand growing a high 7%/year, which reflected ethylene and other petrochemical product exports to Asia to meet soaring demand there.

The oil supply/demand plan is based on the assumption that GDP would grow an average 2.7%/year in real terms during fiscal 1995-2000. It means elasticity of fuel oil demand to real GDP is put at 0.185, only a tenth of the 1.85 recorded in the last 5 years.Will the second half of the 1990s undergo an economically unexplainable change from the first half? To the contrary, the plan assumes no oil shocks will occur in the second half of the decade.

Certainly growing naphtha demand in the first half of the 1990s largely owed to booming Asian markets. The growth of Japan's exports will slow down once newly built ethylene plants are put on stream elsewhere in Asia or those markets reach self-sufficiency or even export status in petrochemical production.

Transportation fuel demand

But the same is not true of the growth in Japanese demand for transportation fuels.

A constant growth in transportation fuel demand is likely not only because the number of passenger cars registered keeps growing but also because the market share of recreational vehicles, with their poorer fuel economy, is expected to rise from 20% at present to 30% level.

Why does the government maintain an outlook for small fuel demand growth? It lies in a wish to tighten product supply/demand now that the Provisional Law on Importation of Specified Petroleum Products (Plispp) was removed this past April, allowing nonoil companies to import certain key refined products.

The aim is to prevent a price collapse not only in gasoline but also diesel and kerosine, among others. With the removal of Plispp, deregulation of the oil industry reached where it should reach. While deregulation is designed to help narrow the gap between domestic and foreign prices by improving efficiency of the oil industry, administrative authorities still respect stable oil supply as the keynote of their oil policy.

What they are really eager for is to avoid any deregulation that can endanger the foundation of the oil industry.

This sentiment is shared by officials within the oil industry. They are also eager to avoid any situations where the conventional policy of refining-within-a-consuming-area can be jeopardized.

A likely direction of Japan's oil policy from now on is that product supply/demand will be tightened to the very limit, where a balance can barely be made without invoking an incompatibility between the official goal of narrowing domestic-foreign price gaps and the much longed-for maintenance of the oil industry's foundation.

Product imports

Japan's refined product imports dropped 4.9%/year from 4.865 million kl. (839,000 b/d), or 20% of total domestic product demand, in fiscal 1990 to 3.7867 million kl. (653,000 b/d), or 15% of the total, in fiscal 1995.

The oil supply plan assumed imports would increase 5.8%/year to 5.018 million kl. (865,000 b/d), or 20% of the total in fiscal 2000.

But the oil supply/demand plan is nevertheless still just a plan, and ups or downs simply depend on markets at home and abroad.

Although product imports were freed to include nonoil companies, the plan put the product import ratio at 20% of domestic demand, unchanged from the maximum ratio in the Plispp days (April 1986-March 1996).

It means, even after Plispp removal, domestic refineries are still expected to supply 80% of domestic demand, and the so-called refining-in-consuming-area system is kept alive without even a slight change.

Crude oil throughput at domestic refineries, up 3.4%/year from 3.5183 million b/d in fiscal 1990 to 4.1478 million b/d in fiscal 1995, is projected to increase only 1.1%/year to 4.3765 million b/d by fiscal 2000.

Crude oil imports increased almost as much as domestic demand, up 2.2%/year from 4.1117 million b/d in fiscal 1990 to 4.578 million b/d in fiscal 1995.

Also assuming a nearly identical 0.5%/year growth as is projected for overall domestic demand, the government plan put imports at 4.6906 million b/d in fiscal 2000.

Crude oil imported solely for refining rose 3.3%/year from 3.5994 million b/d in fiscal 1990 to 4.2256 million b/d in fiscal 1995. This category is projected to grow faster than the rate of overall domestic demand growth, about 0.7%/year to 4.383 million b/d in fiscal 2000.

That is because product exports based on the so-called processing deals grew-and will grow-faster than domestic demand.

On the other hand, crude oil imported for nonrefining use (burned directly) fell 7.3%/year from 512,200 b/d in fiscal 1990 to 352,500 b/d in 1995. This category of use is projected to drop further by 3.7%/year to 292,300 b/d in fiscal 2000.

The decline suggests that oil use in coal-fired thermal power generation has been and will continue to be slashed according to official policy.

Particularly it shows that, in contrast to increasing liquefied natural gas use, petroleum fuel use in the form of crude burning, etc., is doomed to fall at coal-fired thermal power plants subject to stringent environmental standards for their location near metropolitan areas.

The government set forth, in its long-term energy supply/demand outlook released in June 1994, that oil's share of total generated output of kilowatt-hours dropped from 29.7% in fiscal 1990 to 27.8% in fiscal 1992 and 21.6% in fiscal 1994 and will decline further to 16% by fiscal 2000 and 10% by fiscal 2010.

Refinery utilization

Refinery utilization in Japan, after bottoming out in fiscal 1983 at 55.1% (of total refining capacity of 5.94 million b/d), gradually recovered to 77.3% by fiscal 1990 and reached 82.5% (of total refining capacity of 5.118 million b/d) in fiscal 1994.

Given the average utilization rate of 79.4% (of 5.27 million b/d refining capacity) seen in fiscal 1995, the government outlook assumes an average utilization of 80% (of 5.471 million b/d refining capacity) for fiscal 1996-2000.

It projects refineries will run at 80% of 5.5 million b/d capacity by about 2000. Afterward, the government outlook assumes falling domestic demand for petroleum products.

IEEJ's forecast

The Institute of Energy Economics, Japan disclosed in December 1994 until now its most recent energy supply/demand forecast for 1994-2015.

IEEJ is a privately run foundation and research institute. And yet its long-term energy supply/demand forecasts have drawn attention as much as the government outlooks have and enjoyed a high reputation among energy companies and energy analysts.

IEEJ forecast provided three cases-base, high growth, and low growth. This paper introduces the latest IEEJ forecast, primarily the base case.

The base case predicts Japan's GDP will rise 2.5%/year in 1994-2005 and 1.9%/year in fiscal 2005-2015 in real terms.

It predicts crude oil prices, which averaged $17/bbl cif in Japan as of fiscal 1994, will start rising from 2000 onward in reflection of a gradually tightening oil supply/demand balance on international markets to $22/bbl by fiscal 2000, and $26/bbl by 2015 in real terms.

IEEJ's forecast assumes the Japanese economy will pursue moderate structural shifts in an effort to cope with the rising yen, reaching 90 yen against the dollar by fiscal 2015.

Oil's share of primary energy supply (domestic production + imports - exports ± stock fluctuations) is expected to decline from 57.4% in fiscal 1994 to 52.9% in fiscal 2000, 51.4% in fiscal 2005, 50% in fiscal 2010, and 49% in fiscal 2015.

Even 2 decades later, however, oil still will account for nearly 50% of primary energy supply, thus remaining unchanged as the mainstay of energy sources.

This is because the lack of price incentives will encourage neither energy conservation nor introduction of new energy sources as much as is expected in the government outlook and because nuclear plans would be behind schedule due to siting difficulties.

Oil supply (production + imports - exports ± export/stock fluctuations) is forecast to grow moderately from 332 million kl. (5.724 million b/d) in fiscal 1994 to 348 million kl. (6 million b/d) by fiscal 2005 and to 369 million kl. (6.36 million b/d) by fiscal 2015.

Japan's oil demand outlook broken out by refined product is shown in Table 2 [51211 bytes]. But, judging from recent demand trends, a most likely case can lie between the high and low growth cases.

At any rate, given the massive growth of transportation fuel products, notably gasoline, diesel, and jet fuel, the market is likely to see an intensifying domination of whiter products.

Japanese refining capacity

Given these product demand outlooks, what will be Japan's likely oil refining capacity?

Japan's refining capacity reached nearly 6 million b/d at its peak in fiscal 1983. With mothballed units included, the upper limit of the capacity of existing refineries can be put at an estimated 5.5 million b/sd.

Assuming that of the 5.5 million b/sd, 85% (4.675 million b/sd) would be the highest possible utilization factor, the upper limit should be outstripped in around 2005.

In that case, whether resulting gaps are to be covered by greater product imports or construction of additional capacity becomes a key question.

Also, increasing market share for white oil products will require additional secondary capacity, but its construction will not prove easy at all due to siting and other problems.

In this regard, again, the question of whether or not product imports should be increased is likely to surface early in the next century should be subject to serious consideration.

At any rate, given an underlying trend of white oil products' increasing dominance not only nationwide but regionwide in Asia, what supply system should be employed in better meeting Japan's product demand is expected to be an issue of vital importance for the Japanese oil industry in the early part of the next century.

The Author

Kazuya Fujime is Managing Director of the Institute of Energy Economics, Japan, based in Tokyo. He joined IEEJ in April 1967, became a director in 1993 and managing director in 1995. He has specialized in oil supply/demand and price forecasting and analysis, notably long term outlooks for Japan's petroleum supply/demand and the factors that influence that outlook. Kazuya Fujime has degrees from Tokyo University's Faculty of Liberal Arts' departments of French area studies and international relations.