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INTERVIEW: Japan eyes 'strategic space' for flexible oil reserves management

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INTERVIEW: Japan eyes 'strategic space' for flexible oil reserves management

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Tokyo — Japan intends to boost its flexibility with its national petroleum reserves by introducing "strategic space", which will allow the country to efficiently procure crude oil that is in line with the refining sector's requirement for lighter grades, a top government official told S&P Global Platts.

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The move, part of the Ministry of Economy, Trade and Industry's first fuels and resources policy direction in the wake of the coronavirus pandemic, comes as the pandemic had shifted Japan's oil supply and demand balance, following a sharp decline in its demand for crude oil to be refined.

"We are looking to replace [crude] oil grades in Japan's national [petroleum] reserves for the domestic demand structure because heavy oil is increasingly not needed [in the country]," Ryo Minami, METI's director-general of oil, gas and mineral resources said in an interview with Platts on Sept. 1.

Japan, however, would not be able to snap up crude oil during favorable market conditions if storage for its national petroleum reserves are filled to the brim.

"Introducing a strategic space [in the national petroleum reserves] is one of the ideas, although it would not be so large," Minami said. "Introducing a small space [in the reserves] would allow us a flexible response."

Japan's national petroleum reserves stood at 302.98 million barrels at the end of June, which equated to 141 days of domestic oil consumption, according to the latest METI data. This is down from 304.68 million barrels a year ago, but up from 135 days of domestic consumption at the end of June 2019 because of the decline in domestic demand.

In recent months, the coronavirus pandemic plunged Japan's monthly crude oil imports to its lowest in more than half a century, while keeping demand for key refined products such as gasoline at multi-decade lows.

Japanese refiners, however, are boosting imports of gasoline and other refined products as demand for these products are recovering, following the lifting of the state of emergency measures on May 25.

Acquiring upstream assets

As part of the latest policy direction, Japan is also looking to develop "Asia-wide joint [petroleum] reserves", focusing on Vietnam and other Southeast Asian countries, Minami said.

METI is also looking to "swiftly" increase the number of oil producing countries, along with Saudi Arabia and Abu Dhabi, storing their oil in Japan for commercial purposes in exchange for prioritizing supply to Japan in the event of an emergency, Minami said.

Japan, which aims to raise its oil and gas equity lifting ratio to more than 40% by 2030, intends to provide Japanese companies financial support via the state-owned Japan Oil, Gas and Metals National Corp. to acquire upstream assets as part of the policy, Minami said.

"This is most important because we are in a situation, where various companies are selling their non-strategic assets because of low crude oil price," Minami said. "In the event of seeing strategic assets being placed for sale, Japan should acquire them with financial support from Jogmec as the private sector is in financial difficulties amid the low oil [price]."

In fiscal 2019-2020, the proportion of Japan's equity liftings in its total oil and gas imports and domestic production rose to a record high 34.7%.

Carbon recycling

Minami also said that Japan's push for "zero emissions in thermal power generation and zero-emission fuels" are among METI's fuel policy priorities for fiscal 2020-2021.

Starting in the current fiscal year, METI will launch 60-theme research and development projects for carbon recycling, with Osakikamijima in Hiroshima prefecture and Tomakomai in Hokkaido becoming research centers, Minami, who also heads METI's carbon recycling advancement office, said.

As for the zero-emission fuels, Japan is looking to burn ammonia together with coal, among other options, for thermal power generation, as local refiners have also started to develop "e-fuel," which produces carbon neutral refined products such as gasoline by using carbon dioxide and hydrogen in the refining process, he said.

Minami also revealed that Japan is currently working with Saudi Arabia to sign a memorandum of cooperation on carbon recycling and circular carbon economy on the sidelines of the G20 energy ministerial meeting in Saudi Arabia over Sept. 27-28.