Japanese refiners weigh contingency plans for Middle East crude supply

Tokyo — Japanese refiners are stepping up their efforts to diversify their crude oil supply sources amid escalating tensions in the Middle East and the refiners may have to tap petroleum reserves in the event of crude supply disruption in the region, top company executives said Tuesday.

The potential military conflict in the Middle East, following a recent US strike killing Iranian General Qassem Soleimani in Baghdad, is pressuring the refiners to accelerate their consideration for alternative crude supply sources.

"It will be a vital situation if the Strait of Hormuz cannot be transmitted," Tsutomu Sugimori, president of JXTG Holdings, told S&P Global Platts Tuesday, noting Japan's petroleum reserves of more than 200 days of domestic consumption.

"If it lasts long, it would suspend [Japan's] distribution therefore we must diversify our supply sources," Sugimori said on the sidelines of the Petroleum Association of Japan's new year reception in Tokyo. "We are already working on such efforts because we cannot do that immediately," he added.

Potential alternative crude supply sources would be North and Latin America, Russia and West Africa, Sugimori said.

The Middle East accounted for 89% of Japan's crude imports, or an average of 3.01 million b/d over January-November, according to Ministry of Economy, Trade and Industry data. Around 80% of Middle East oil supplies transits the Strait of Hormuz to Japan.

Minister of Economy, Trade and Industry Hiroshi Kajiyama said earlier Tuesday that Japan will work closely with the International Energy Agency to ensure steady oil supply in the event of any disruption in crude flows from the Middle East.

"In the event of an emergency, we will take necessary action with the IEA and other relevant countries," Kajiyama told reporters at a news conference.

RELEASING RESERVES

The refiners are leaning toward utilizing Japan's option to release its petroleum reserves because their refineries, which are configured to process sour crude oil from the Middle East, require work to broaden their crude slate drastically, the executives said.

"Releasing [petroleum] reserves" will be the refiners' top preferential option to be utilized to ensure their domestic oil products supply in case of crude supply disruptions in the region, PAJ President Takashi Tsukioka told reporters.

"Among our priority is to release the reserves held by oil producing countries under a system run by the Japanese government," Tsukioka said on the sidelines of the PAJ new year reception.

"Of course we will also release the reserves held by the private sector as part of such operation," Tsukioka said. "Releasing the national reserves would come next but not all national terminals can release them all at once as some places require preparation," he said.

Japanese refiners have also practiced how petroleum reserves can be released most effectively as part of contingency planning in the wake of oil facility attacks in Saudi Arabia in September, Tsukioka added.

At the end of October, Japan had 81.98 million kl or 515.64 million barrels of petroleum reserves, equivalent to 234 days of consumption, according to METI data. The petroleum reserves also included 1.10 million kl or 6.92 million barrels of crude stocks at the end of October, which accounted for four days of domestic consumption and three days of imports, held by Saudi Arabia and Abu Dhabi - Japan's top two crude suppliers.

NO CUT

Japanese refiners will also receive their full Middle East term crude supply nominated for loading in February for the second consecutive month after supply cuts by OPEC and non-OPEC producers took effect in January, Tsukioka told reporters Tuesday.

Sugimori confirmed that JXTG Nippon Oil & Energy, the refining arm and Japan's largest refiner, has no Middle East crude supply cuts for February loadings.

The oil production cut accord by OPEC, Russia and nine other allies expanded collective output cuts by 503,000 b/d to 1.7 million b/d for January through March.

--Takeo Kumagai, takeo.kumagai@spglobal.com

--Edited by Claudia Carpenter, claudia.carpenter@spglobal.com