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Japan surprises with equity oil deals: Fuel for Thought

A recent win by Inpex and Itochu of stakes in two giant oil fields in the UAE and Iraq bolsters Japan’s energy security and provides the Mideast producers a secure market base in the growing demand region of Asia.

Abu Dhabi in late February granted Inpex a 10% stake in the prized Lower Zakum offshore concession, and this was followed within a month by Itochu’s acquisition of Shell’s 19.6% stake in the giant West Qurna 1 oil field in Iraq.

The two deals represent Japan gaining equity access to some of the world’s largest oil fields, which are currently producing around 400,000 b/d each.

The deals would boost Japan’s supply security as Inpex, in which the Ministry of Economy, Trade and Industry holds a 18.94% stake, has a right to lift its equity oil from the Lower Zakum field, where the Abu Dhabi National Oil Co. targets to raise output to 450,000 b/d by 2025.

The Itochu deal was even more eyecatching given that West Qurna 1 was considered out of reach of Japanese companies when it was tendered in 2009 due to its size and Iraq’s desire to have international oil majors’ presence there.

For Iraq, adding Itochu to the current stake holders - ExxonMobil, PetroChina and Indonesia’s Pertamina - represents a diversification strategy as it aims to expand its market share in East Asia.

Iraq is also considering options to store crude oil for marketing for the first time in South Korea and Japan.

Prior to its debut entry into the Iraqi upstream sector, Itochu has had a strong presence in the Asia Pacific sweet crude market, supplying numerous end-users across the region with its term and equity crude oil from various fields located in Far East Russia, Oceania and Southeast Asia.

The West Qurna 1 field uses a technical service contract, where partners are paid a per-barrel fee to reach their production target, along with reimbursement of their costs paid in oil.

Japan's UAE crude imports before and after the Gulf War

EQUITY OIL FOR SUPPLY SECURITY

Looking at Japan, where domestic oil demand is continuing to shrink and there is increased pressure to cut carbon emissions in coming years, why does it still matter for local companies to acquire equity oil?

Japan is the world’s third largest economy and a major oil consumer. It imports about 3.2 million b/d of crude, and petroleum accounts for around 40% of the country’s primary energy supply.

With the little domestic oil production of its own, overseas equity oil provides some sense of supply security.

“The significance of equity oil has not changed from the past,” said Masato Sasaki, METI’s director of oil and natural gas division.

“For instance, [Japan] relied on equity oil at the time of the Gulf War... there is a tendency of increasing imports from countries, where Japanese companies have stakes.”

In the wake of the Gulf War, Japan’s crude imports from the UAE jumped 29% year on year to 1.06 million b/d in 1991, when it was also the largest crude supplier to the country.

The UAE crude imports stayed above 1 million b/d in the following years and rose further to 1.22 million b/d in 1994, showing the largest increase among the Middle Eastern suppliers at the time.

Japanese companies, which are under equity finance or liability guarantee from the Japan Oil, Gas and Metals National Corp. for their participation in upstream development projects, are obligated to bring back all of their equity volumes to Japan in the event of emergency involving supply disruptions.

Jogmec’s financial supports accounts for roughly half of Japan’s oil and gas equity lifting volumes today but Tokyo has never executed this emergency contractual obligation.

CEMENTING TIES

For Abu Dhabi, awarding the concession to Inpex meant taking the current upstream-focused relationship with Tokyo to another level as the emirate seeks to expand its bilateral strategic partnership into other sectors.

ADNOC looks for partners to contribute technical expertise and potentially co-invest strategically in the upstream to downstream businesses.

Following the award, Inpex’s President & CEO Toshiaki Kitamura said that the company will support ADNOC’s technological innovation, investment optimization and market access, as well as look to build a solid partnership by extending its collaboration to other sectors.

Inpex sells most of its Abu Dhabi equity oil, including from the Upper Zakum field and the ADCO concession, to Japanese and other Asian companies.

Japan’s continuous imports of Abu Dhabi crude, even under testing conditions, were understood to be greatly appreciated by the emirate, according to Shin Hosaka, deputy commissioner of METI’s agency for natural resources and energy.

Japan Oil Development Co., a wholly-owned Inpex subsidiary since 2004, continued taking Upper Zakum crude, which started production in 1982, to Japan even when Middle Eastern oil prices fell below $10/b in the late 1980s.

Japan’s endeavor to balance its energy security and oil business opportunities will continue as the recent deals are still short of reaching Japan’s target of raising its oil and gas equity lifting volumes to more than 40% by 2030 from 27.4% in fiscal 2016-17 (April-March).

“Whenever [we see] good oil opportunities, we would actively pursue them,” Sasaki said. “After all, the oil will be used.”