JAPANESE ENERGY SECURITY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000600320001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 26
• Document Creation Date: December 22, 2016
• Document Release Date: August 6, 2010
• Sequence Number: 1
• Publication Date: March 28, 1983
• Content Type: MEMO

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25X1
Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
25X1
1?93
MEMORANDUM FOR: Dr. Norman A. Bailey
Senior Director, National
Security Planning
National Security Council
Deputy Director for Economic-Resource
Analysis
Oftice of Global Issues
SUBJECT Japanese Energy Security
1. In light of your interest in Japan's energy outlook, I
am forwarding an advance copy of a forthcoming intelligence
assessment on Japanese energy security.
2. If you have any questions or if we can be of further
assistance. please feel free to contact
Attachment:
Japanese Energy Securit : Prospects and Implications
GI M 83-10083, March 1983
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25X1
25X1
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
3 hS.`. 18,
MEMORANDUM FOR: E. Allan Wendt
Deputy Assistant Secretary for
International Energy Policy
Department of State
Deputy Director for Economic-Resource
Analysis
Offic,: of Global Issues
SUBJECT Japanese Energy Security
1. In light of your interest in Japan's energy outlook, I
am forwarding an advance copy of a forthr-nminct intelligence
assessment on Japanese energy security.
2. If you have any questions or if we can be of further
assistance, please feel free to contact
Attachment:
Japanese Energy Security:
GI M 83-10083, [March 19983
Prospects and Implications
25X1
25X1
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Central Intelligence Agency
2 o 1983
DIRECTORATE OF INTELLIGENCE
MEMORANDUM FOR: Ambassador Richard Fairbanks
Office of the Special Middle
East Peacc Negotiator
Department of State
epu y Director for Economic-Resource
Analysis
Office of Global Issues
SUBJECT Japanese Energy Security
1. In light of your interest in Japan's energy outlook, I
am forwarding an advance copy of a forthcoming intelligence
assessment on Japanese energy security.
2. If you have any questions or if we can be of further
assistance, please feel free to contact
Attachment:
Japanese Energy Security: Prospects and Implications
GI M 83-10083, March 1983
25X1
25X1
25X1
25X1
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SUBJECT: Japanese Energy Security: Prospects and Implications
Distribution:
Orig - addressee
1 - SA/DDCI
1 - ExDir
1 - DDI
1 - NIO/Econ
1 - DD/E
1 - Ch/PES
OGI/PS
1 - Ch/SRD
2 - EIB
OGI/SRD/EIB (28 Mar 83) 25X1
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Central Intelligence Agency
Washington, D. C.20505
DIRECTORATE OF INTELLIGENCE
24 March 1983
Japanese Energy Security: Prospects and Implications
Summary
Japan will remain extremely vulnerable to oil supply disruptions over the
next two decades. Imported oil will account for about half Japan's energy
needs through the year 2000 and the bulk of Japan's oil supplies probably will
continue to come from politically unstable Persian Gulf sources. At the same
time, Japan will continue to rely heavily on imports for coal and natural gas
supplies because domestic production of all hydrocarbons is extremely
limited.
Although lowered prospects. for economic growth have reduced sharply
Japanese energy needs over the next two decades, slow development of non-oil
energy sources will leave Japan heavily dependent upon imported oil. Recent
Japanese private-sector forecasts place the use of natural gas, coal, nuclear
power and new energies at only 3.8 million b/doe in 1990--1.7 million b/doe
below official government projections. Several factors will limit the growth
of oil alternatives:
o Increased use of liquefied natural gas (LNG) will be impeded by its
high price relative to fuel oil and the inflexibility of "take or
pay" clauses in producer contracts.
o Coal use will be constrained by environmental regulations, high
capital costs, limited space for coal storage and preparation
facilities, and ash disposal problems.
o Nuclear power will require huge capital outlays and face public
opposition and siting difficulties.
o New energy sources, such as coal synfuels, will be hindered by
technological developments and cost factors.
o Funds for developing all non-oil energy sources will likely be
limited by government efforts to balance the budget.
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Taking these factors into account, we believe there is little potential
for Japan to significantly expand use of non-oil energy sources beyond
estimated levels. As a result, Japan will need to concentrate greater efforts
towards minimizing the country's vulnerability to a cutoff in Middle East oil
supplies including:
o Stepped-up efforts to diversify oil supplies away from Persian Gulf
sources.
o Boosting government-owned oil stocks.
o Strengthen the oil refining sector to ensure greater supply
f lexibility.
o Easing or reversing the trend to increased reliance on direct deal
purchases from producing countries.
US options for enhancing Japanese energy security are limited. The
export of Alaskan oil to Japan--which could reduce dependence on middle East
oil by over 10 percent and lessen Arab leverage on Japan--is presently viewed
with little enthusiasm in Japan. According to Japanese statements, Tokyo has
been concerned that such oil shipments could be diverted to US domestic use in
the event of a global supply disruption. Natural gas from the North Slope
could obviate the need for Soviet gas and reduce dependence on Indonesian
supplies, but Tokyo has already contracted for all the gas it will need until
1990. Beyond 1990, additional gas requirements will likely be insufficient to
support economic construction of the proposed Alaskan gas pipeline. As for
coal, prospects for increased sales look bleak. Indeed, Japanese coal
requirements in 1990 will probably fall short of government projections by
over 600,000 b/doe, and purchases of US coal could well decline from present
levels because of the high cost of US coal and stiff competition from other
suppliers.
This memorandum was prepared by Energy Issues Branch, office of 25X1
Global Issues. The information contatne erein is updated to 24 March
1983. Comments may be directed to Chief, Energy Issues Branch, on
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Japanese Energy Security: Prospects and Implications
Energy in Japan
Paralleling dramatic economic growth, Japanese energy consumption rose
sharply during the 1960s and early 1970s--jumping from 1.9 million barrels per
day oil equivalent (b/doe) in 1960 to nearly 7.1 million b/doe in 1973. Cheap
imported oil met most of Japan's burgeoning energy needs, and by 1973
dependence on imported oil stood at 77 percent of total energy use. Rapid
growth in energy and oil demand ended abruptly following the 1973 oil
crisis. Through 1982, total energy consumption has increased by less than
300,000 b/doe and oil use had declined by over 900,000 b/doe.
Sluggish growth in energy demand and the falloff in oil use can be traced
to slower economic growth and sharply higher oil prices. Annual economic
growth rose an average of 3.4 percent between 1973 and 1982--approximately
one-third the rate of the 1960-72 period. On the price front, imported crude
oil prices increased more than 10 fold since 1973 (Table 1)--spurring major
improvements in energy efficiency. The energy/GNP ratio has fallen over 23
percent since 1973 and is the lowest of any major industrialized country. The
ratio of oil to GNP has fallen even faster (Table 2). Contributing to these
declines has been a structural shift in the economy away from heavy, energy
intensive industries, such as steel, to processing and assembling industries
with low energy inputs, such as electronics.
o increased use of natural gas, coal and nuclear power in electricity
generation has slashed annual oil requirements by nearly 350,000
b/doe since 1973.
o conversion to coal in the cement industry following the 1979 oil
price hikes has cut annual oil use by over 130,000 b/d.
o in the steel industry, substitution of coal for oil in blast
furnaces has reduced annual oil consumption by about 110,000 b/d
since 19 73 .
Still, Japan faces a serious energy security problem. Poor in domestic
resources, Japan--the Free World's second largest economy--depends upon
imported energy for over 80 percent of its energy needs. Imported oil is the
dominant fuel in all sectors of the economy and accounts for over 60 percent
of the country's total energy consumption. Nearly two-thirds of Japan's oil
requirements, moreover, come from the politically unstable Persian Gulf
region.
GI M 83-10083 25X1
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Japanese Energy Policy: Looking to the 1990sa
Cornerstones of current Japanese energy policy are: securing a stable
oil supply, reducing dependence upon imported oil through the development and
introduction of alternative energy sources, and continuing energy conservation
efforts.
Oil Supply. Despite these efforts the Japanese economy remains highly
vulnerable to supply disruptions as far as we can determine. Tokyo recognizes
that this vulnerability will not change much in the future. With security of
supply in mind the Japanese government has worked hard to keep smooth
relations with oil exporting countries. The government itself has worked out
government-to-government oil deals (for instance with Mexico); energy and
related investment projects in OPEC countries (such as large petrochemical
plants in Saudi Arabia); and sponsored oil exploration projects in Communist
countries (China and the Soviet Union) and in OECD countries (Canada). Sho rt-
te rm components of oil supply security are private and government oil
stockpiles. Under law, privately owned stockpiles must equal 90 days
supply. The government-owned oil stockpiling program eventually envisions
maintaining 315 million barrels of crude oil--a 66 percent increase over the
previous plan. At the end of September 1982, both government and private
stocks stood at 436 million barrels--roughly 120 days supply--but government
stocks, at only 66 million barrels, were far short of planned levels.
Oil Alternatives. Through increased use of liquefied natural gas (LNG),
coal, nuclear power, and unconventional energy sources, Japan plans to lower
its dependence on imported oil to 49 percent of total energy use in 1990 and
only 38 percent in the year 2000. Indeed, non-oil energy sources are
projected to meet nearly all of Japan's future energy needs, with oil
requirements through the end of the century forecast at about the 1980
level. To ensure stable supplies of LNG and coal, Japan is seeking to
diversify its sources of supply; Japan has already signed long-term contracts
for LNG supplies from six countries and has equity interest in coal
development projects in several countries.
Energy Conservation. With only limited ability to expand domestic energy
production, energy conservation occupies an important role in Japan's energy
program. The government currently offers low-interest loans, special
depreciation allowances, and tax deductions for energy saving equipment. By
1990, Tokyo estimates that conservation efforts will reduce the armunt of
energy required to produce a unit of GNP by nearly 16 percent compared with
1980, thus saving an estimated 1.9 million b/doe in 1990 alone.
Changing Outlook
Sharply lowered prospects for economic growth, together with structural
changes in the economy, have transformed the outlook for Japanese energy
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demand. In the past year alone, Japanese government and private-sector
forecasts of 1990 energy needs have been trimmed by about 10 to 20 percent
The recent record on conservation together with a slower economic
growth performance in the years ahead account for these more moderate demand
projections. Another reason they point to is the.maturing of the Japanese
economy and its transformation into a high-technology service economy will
further restrain energy demand. According to the Japanese Economic Council,
the share of gross domestic product accounted for by the service sector
rise fran 33 percent in 1980 to nearly 50 percent by the year 2000.
Demand Projections. The most recent Japanese government forecast points
to 1990 energy needs of 10.7 million b/doe. We believe this government
projection will prove too high because it assumes a 5 percent annual economic
growth rate. Indeed, according to the International Energy Agency, the
Japanese Economic Advisory Council is revising its mid-term economic forecasts
which Japanese observers suggest is likely to show 3.5-4 percent per annum
economic growth. Recent Japanese private-sector projections already contain
more realistic growth assumptions; these 1990 projections, consequently, are
much lower than the available government forecast
o The Petroleum Association of Japan and the Bank of Tokyo project
1990 requirements at around 9 million b/doe.
o The Institute of Energy Economics has become bearish on energy
demand; in December it dropped its base 1990 forecast to 8.3 million
b/doe.
Based on the most recent Japanese private-sector forecasts and assuming
an annual economic growth rate of about 3 percent, we believe Japanese energy
requirements will reach 8 to 8.5 million b/doe in 1990 compared with about 7.3
million b/doe last year. By the year 2000, energy demand is likely to
approximate 8.8-9.3 million b/doe--assuming a roughly 3 percent annual GNP
growth rate during the 1990s and continued improvements in energy conservation
Although real economic growth may prove higher than what we have
assumed for the 1990s, it-would not necessarily result in corresponding gains
in energy consumption since much of Japan's future economic expansion will
occur in high-tech and service industries rather than in energy intensive
industries.
Demand Close Up
Oil. Despite prospects for slow growth in energy consumption, Japan will
remain heavily dependent upon oil over the next two decades. Based on our
assessment of the development of non-oil energy sources, we believe oil
consumption will approximate 4.5 million b/doe in 1990 and around 4.3 million
b/doe in the year 2000. As a result, imported oil will account for nearly 55
percent of Japan's energy requirements in 1990 and about for just under 50
percent by the end of the century.
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Natural Gas. Demand for natural gas is likely to grow more rapidly than
the demand for any other major fuel during the 1980s; Japanese efforts to
reduce oil use and the clean burning properties of gas have made natural gas a
desired fuel. Gas requirements, however, will be substantially less than the
Japanese were expecting when they initiated many of their gas supply projects
in the mid-1970s. We believe Japan's gas needs will rise from current levels
of about 500,000 b/doe to approximately 950,000 b/doe in 1990. This forecast,
while in line with Japanese private-sector forecasts, is roughly 250,000 b/doe
below the official Japanese government projection.
gas requirements beyond 1990 are likely increase y only ou
100,000 to 200,000 b/doe--far below government growth projections.
Lower gas demand estimates can be traced to price factors and strict 25X1
contract conditions. The price of imported natural gas (LNG) is tied to crude
oil prices in current contracts. Consequently, the price of heavy fuel oil--a 25X1
lower quality by-product of crude oil and a major fuel in electric utilities
and industry--is cheaper than LNG. LNG contracts moreover contain
inflexible "take or pay" causes. As a result, (little 25X1
growth in gas use for electricity generation beyond 1990 and the projected
increase in industrial gas requirements is minimal. Present contractual
obligations will provide supplies for the rapid growth in gas demand during
the 1980s. 25X1
Coal. We believe coal requirements in 1990 will fall far short of
government projections. Lower than expected growth in electricity demand has
lessened the need for new power plants. Because of existing LNG commitments
and nuclear power plants under construction or site approved, we believe the
bulk of the reduction in new power plant construction will fall on coal.
over 6 GW of coal-fired capacity representing 25X1
about 160,000 doe have already been scrapped or delayed until the 1990s;
additional delays or cancellations are possible. Declining oil prices and
rising coal prices, moreover, have recently made the construction of new coal-
fired plants uneconomic compared with continued operation of existing oil-
fired facilities. In industry, the steel and cement industries have already
converted their facilities from oil to coal, and we believe future growth in
industrial coal use will be sluggish. 25X1
Taking these factors into account--along with low growth in steel
production, which currently accounts for about three-quarters of Japan's coal
use--we place Japanese coal requirements in 1990 around 1.5 million b/doe--
only about 150,000 b/doe above the 1981 level. Through increased use of coal
for electricity generation, total coal requirements in the year 2000 could
reach about 1.8-1.9 million b/doe, an amount that would still be sharply below
current government projections of 2.7 million b/doe.
Nuclear Power. Japan has the world's third largest nuclear power
program--ranking behind only the United States and France. Future growth in
nuclear power, however, is constrained by lower levels of projected
electricity demand, public opposition, and siting difficulties. Of the 30
gigawatts (GW) of capacity planned to be added during the 1980s, we believe
only 11 GW of capacity is likely to be in operation by 1990 given current
construction lead-times. As a result, we place output fran nuclear power in
1990 at around 800,000 b/doe--400,000 b/doe below government projections. By
the year 2000, our analysis indicates nuclear power output probably will reach
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about 1.1-1.2 million b/doe--at least 1.3.million b/doe below official
government projections. 25X1
New Energies.' I kunconventional energy 25X1
sources--such as solar, wind, bio-mass and synthetic fuels--are unlikely to
reduce Japan's dependence upon imported oil over the next two decades. Lower
estimates stem fran reductions in projections of future price levels which
have lessened the perceived need to develop new energy sources. Moreover,
there is still great uncertainty about the ability 25X1
to develop the needed technology on a commercial scale. Sluggish oil and
electricity consumption have also reduced government revenues fran oil and
electricity taxes--the Prima sources of funds for alternative energy
development. ma 25X1
Effect of an Oil Price Decline
Moderate oil price declines of 10 to 15 percent would have several
benefits for Japan. A sharp, sustained oil price decline, however, could
significantly worsen Japanese energy security by increasing Japanese
requirements. A recent assessment by the Japanese Economic Planning Agency,
and Japanese private-sector forecasts, for example, indicate a 10 percent
decline in oil prices would boost energy requirements by about 300,000 b/d
over a three year period. Given the 16 March OPEC pricing action--if it
holds--and assuming the real price of crude remains at that level through the
balance of the decade, energy demand in 1990 could approach 8.5 million b/doe-
-the high end of our projected range. Although the bulk additional demand
would be met by oil, increased electricity generation could spur construction
of new coal and nuclear power plants. Consequently, some existing oil-fired
capacity could thus be retired or used only for peak-load demand. Additional
government revenues from oil and electricity consumption taxes, moreover,
would provide added funds for alternative energy development.
A larger decline in oil prices to $20 to $25 per barrel, however, would
probably have a stro neqative impact on coal and gas use, particularly in
the longer term. real oil prices of around $27 25X1
per barrel in 1985 and $28 per barrel in 1990 are required to make coal a
breakeven proposition in new power plants. Should the new lower oil prices be
viewed as sustainable, construction schedules of new coal-fired power plants
could well be scrapped or delayed indefinitely. On the gas front, several LNG
projects could be postponed indefinitely as lower returns would make these
large capital investment projects uneconomic. Moreover, because of long lead
times needed to bring gas reserves to market, no new supplies would be
available should energy prices recover by the early 1990s.
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Japan: Sectoral Energy Use and Substitution Potential
Energy demand in all sectors of the Japanese economy will grow, but much
less rapidly than government planners predict because of slower growth '
prospects and structural changes in the economy. Given present government
policies and technical and economic constraints, only electric utilities are
likely to significantly reduce their dependence on oil over the next two
decades (Table 6).
Industrial
Industry is the largest energy consuming sector in Japan. Because of the
continuing shift to less energy-intensive industries, future growth in energy
demand will probably be sluggish.
Oil will likely remain-the dominant industrial fuel over the next two
decades due to the limited potential for fuel substitution. Increased coal
use is constrained by environmental regulations, high capital costs, limited
space for coal storage and preparation facilities, and problems regarding ash
disposal and access to coal supplies. Capital costs, for example, are
generally two to four times as much for coal than for oil or gas. The residue
ash fran burning coal creates immense disposal problems in a densely populated
country like Japan. Although LNG use avoids many of the problems associated
with coal, its high price relative to fuel oil and the inflexibility of "take
or-pay" contracts will likely impede its penetration in the industrial
sector. Industrial electricity demand should trend upwards because of the
increased production of computers, industrial robots, and machine tools. The
high price of electricity, however, largely rules out supplanting oil through
increased use of electricity.
Residential/Canmercial
According to private-sector forecasts, energy demand is projected to grow
at the fastest rate in the residential and commercial sectors. Growth of the
service economy, higher living standards, additional buildings, and the
increased use of cooling systems will all tend to boost total energy
requirements. Electricity will likely be the fastest growing source of energy
in this sector if forecasts of increased price competitiveness with other
fuels prove correct and consumers continue to prefer clean energy sources.
Natural gas and oil needs will also trend upwards. Widespread substitution of
gas for oil, however, is constrained by the high prices of gas and the lack of
a gas distribution infrastracture outside of Japan's major cities.
Transport
Energy requirements in the transport sector are also likely to rise,
Despite improvements in engine fuel
efficiency, gas and diesel fuels needs will trend upwards because of increased
numbers of cars and trucks, more travel, and the increased use of air
conditioners and automatic transmissions.
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Electricity Generation
Due to rising electricity demand, the largest increase in Japanese energy
requirements over the next two decades will occur in electric utilities.
Electricity generation, however, will fall short of government projections by
over around 20 percent according to Japanese private-sector forecasts. Oil
consumption in this sector will decline sharply; Japanese private-sector
forecasts place oil use at less than 20. percent of total utility energy needs
in 1990 compared with around 40 percent at present. The high cost of
generating electricity fran oil compared to coal and nuclear power and the
greater supply security of LNG account for the projected sharp decline in oil
use (Table 7).
Changing Product Demand
Japan's oil requirements are rapidly shifting to lighter grade petroleum
products (Table 8). Increased oil use in the residential, commercial, and
transport sectors have raised the demand for. light and medium-weight
distillates, while fuel substitution efforts in industry and electric
utilities have decreased the demand for heavy oils. By 1990,
heavy oils will account for only 28 percent of domestic oil demand
compared with 38 percent in 19 80 .
Declining oil demand combined with rising oil prices in terms of yen,
however, have caused heavy losses for many refiners. In fiscal 1981, Japanese
oil refining and marketing firms posted the worst operating results in
history, with losses of $1.4 billion. Refineries are currently operating at
only 50-55 percent of capacity. In order for the petroleum industry to
provide stable oil supplies and the increasing quantities of lighter grade oil
products that the economy will demand, a restructing of the industry is
essential. To this end, the government has called for the scaling down of
refining capacity by 1 million b/d and is promoting the development of heavy
oil cracking technologies in the industry. In addition, the Japan Development
Bank currently offers loans at favorable rates for new investment projects.
Import Dependence
Because of limited domestic oil production potential, Japan will have to
rely on imports for nearly all of its oil requirements through the year
2000. We believe the bulk of these imports will have to cane from politically
unstable Persian Gulf sources because the region contains 60 percent of the
Free World's oil reserves. As a result, Japan will remain extremely
vulnerable to oil supply disruptions over the next two decades. In recent
years, moreover, Japan has increased direct purchases of crude oil from oil-
producing countries at the expense of major,oil companies (Table 9). As a
result, the potential for producer leverage on Japan has increased while
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market buffers provided by oil company distribution systems have 'decreased.'
Although Japan will rely on imports for the bulk of its gas and coal
needs, imports of coal and LNG pose far less of a security risk than oil.
Based on current and proposed contracts, Japan is expected to be importing LNG
from six to seven different sources in 1990. Major suppliers include
Indonesia, Abu Dhabi, and Malaysia.' Moreover, if all of the LNG projects now
underway are completed as scheduled, we believe supplies to Japan will begin
to exceed demand by 1985. In addition, Japan probably could withstand a major
LNG supply disruption as long as alternative oil supplies can be obtained.
Japanese electric utilities--the principal gas consumers-maintain a
significant ability to switch to alternative fuels. Currently 62 percent of
LNG-fired capacity can switch to alternative fuels, and by 1990 the utilities
will have, the capability to cut gas consumption by nearly 40 percent of total
gas use.
As for coal, the international market is currently demand constrained and
export capability will likely exceed demand through at least the 1990s,
according to market forecasts. Because of the abundance of suppliers and
surplus export capacity, coal supplies would have to be disrupted
simultaneously from several sources to cause severe problems. We believe
Australia, the United States, and Canada--which provide around 90 percent of 25X1
Japan's imported coal--will remain Japan's principal coal suppliers over the
next two decades. As far ahead as we.can see, either Australia or the United
States could ccmpensate for disruptions in supplies from other countries.
Energy Security Implications2
The uncertain political climate in the Middle East and frequency of past
oil supply disruptions. underscore the potential for future disturbances.
Petroleum systems consist of numerous production and export facilities highly
vulnerable to damage from war or sabotage, and the Persian Gulf has the
highest concentration of such facilities. A change in regime or political
policies can also pose a threat to past oil flow patterns. Although the odds
are against a major internal or external disruption in oil exports in any
particular exporting nation or region, the probability of some sort of
disruption occuring is quite high.
The impact of a cutoff in middle East oil supplies to Japan depends on
the nature and extent of the disruption. We believe the effect of an Arab oil
' Contrary to popular political belief in Japan, the allocation of oil
supplies by international oil companies following the 1973 oil crisis
allowed Japan to suffer less than other countries: Japan experienced only a 25X1
3 percent shortfall below forecast supplies, compared to an 11 percent
shortfall for the United States and 19 percent shortfall for Europe. In
1973, major oil companies supplied about 80 percent of Japan's oil.
25X1
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embargo solely against Japan would be neglibible unless accompanied by sizable
production cuts. Without production cutbacks, oil canpanies and trading firms
can meet preexisting consumption patterns by reallocating supplies within
their distribution networks. Of more concern, however, is the possible
alteration of Japanese foreign policy in an attempt to secure a resumption of
normal oil deliveries. Following the 1973 Arab oil embargo, for example,
Japan issued a statement endorsing Palestinian rights and indicating that it
might reconsider its policy toward Israel.
Japan and other oil importers would be hurt by deep, sustained production
cuts (Table 10). Because of heavy Free World dependence on Persian Gulf oil--
in particular Japanese and West European dependence--the United States would
not be immune to the shocks of a major disruption in Middle East oil supply.
Such disruptions would tend to lead to sharing of the burdens of the shortfall
through adjustments in company distribution systems if the formal IEA oil
sharing program were implemented. Moreover, competition among consuming
nation governments for the remaining oil supplies could bid up world prices.
Stock-building by Japan and other importers following the Iranian revolution,
for example, helped exacerbate tight market conditions and drive up world oil
prices.
Government Energy Security Policies
With limited domestic energy resources, Japan can only
enhance its energy security by diversifying energy imports among
fuels and sources of supply. Given numerous constraints, we
believe there is little potential for Japan to significantly
expand its use of non-oil energy sources beyond estimated
levels. Increased use of LNG, for example, would require the
reconsideration of pricing practices and "take or pay" clauses.
Although there are moves to improve contract conditions because
of the current buyer's market, do not expect
much progress in the near future. LNG projects are highly
capital intensive and, consequently, producers require a
guaranteed market and considerable returns on investment before
proceeding with construction.
We believe Japan's desire to minimize costs while enhancing
energy security probably will preclude a significant increase in
the use of other energy sources. A myriad of technical problems
complicate coal use in industry, for example; any expansion in
coal consumption rests largely with electric utilities. Because
industry studies indicate that new coal-fired plants cannot
economically replace existing oil-fired facilities government
financial assistance would be required. In addition, we believe
environmental regulations must be eased in some locations, and
.electricity rate compensation schemes could be required to ensure
public acceptance. Based on an Institute of Gas Technology
assessment, a large increase in synthetic fuels would require
huge government subsidies because of the uneconomic nature of
synfuels production and the immense capital requirements. As for
nuclear power, public opposition and siting difficulties must be
overcome.
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Given Japan's present and projected heavy reliance on
imported oil, we believe Japan probably should direct greater
efforts toward minimizing the country's vulnerability to a cutoff
in Middle East oil supplies. Such measures would include:
o stepped-up efforts to diversify oil supplies away from
Persian Gulf sources,
o boosting government-owned oil stocks,
o easing or reversing the trend to increased reliance on
producer countries for oil supplies rather than on
major oil companies, and
o strengthen the refining sector to ensure sufficient
production of lighter grade oil products.
The US Option 25X1
Some U.S. Government officials have indicated that Japanese
energy security could be improved by allowing increased exports
of U.S. domestic energy supplies to Japan, such as Alaskan oil,
Alaskan LNG, and U.S. coal.
Alaskan Oil. Shipments of Alaskan oil to Japan have been
discussed since the 1973 oil crisis. Annual Japanese imports of
500,000 b/doe of Alaskan oil could reduce Japan's dependence on
Persian Gulf sources by about 10 percent and lessen Arab leverage
on Japan. The export of Alaskan oil, however, is currently
forbidden by US law and faces considerable domestic opposition in
Congress and from US shipping interests. Japanese desire to
acquire Alaskan oil, moreover, appears to be waning largely
because of the present soft oil market. According to State
Department reporting, although both the Japanese government and
private industry would welcome the removal of the prohibition on
Alaskan oil exports--primarily for long-term security
considerations--Japanese liftings of Alaskan oil would be
unlikely to exceeed 100,000 b/d under present market
conditions. Japanese companies, moreover, would be interested in
Alaskan oil only if it could be supplied on a commercial basis
and competitive terms, implying their opposition to any
requirements for US tankers or a US emergency escape clause that
would halt exports in an emergency situation. Given dampened
Japanese enthusiasm in the current soft market, we believe it is
unlikely that Japan would be willing to make significant new
reciprocal concessions to obtain Alaskan oil.
Alaskan LNG. Japan has been importing about 25,000 b/doe of
Alaskan LNG annually since 1969. Currently, there is a proposal
for exporting Alaskan North Slope natural gas to Japan which
envisions an 820 mile pipeline to carry North Slope gas from
Southern Alaska for liquefaction and shipment to Japan.
would be competitive in the Japanese market in 1988---wh-e-n
12
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deliveries of 125,000 b/doe could technically begin. Japan, 25X1
however, has already contracted for all the gas it will need
until 1990 Beyond 1990, LNG requirements will likely 25X1
staanate or increase only slightly
Although the expiration of some existing contracts will 25X1
necessitate additional purchases beginning in 1993, the required
volume will be insufficient to support the proposed capacity
(370,000 b/doe) of the pipeline. 25X1
US Coal.. Japan is the largest purchaser of US coal. We
believe prospects for significantly increasing US coal sales to
Japan are bleak. US coal is currently the most expensive coal
purchased by Japan, and the Japanese are reluctant to sign long-
term contracts with.US suppliers until prices are more
competitive with exports from Australia and South Africa.
Moreover, recent private-sector forecasts place steam coal
imports in 1990 at about 30 million tons--roughly half of 1980
projections. Consequently, major coal development projects in
the western United States no longer appear necessary,
The Sakhalin Issuel
Part of Japanese efforts to increase energy security has
been directed towards diversifying energy supplies. A point of
contention between Japan and the United States has been Japanese
participation in a joint venture to tap the offshore gas
resources at Sakhalin Island. Although the venture has
experienced poor planning and significant delays, we believe
there are several reasons for the Japanese to continue the.
project:
o The Japanese have already sunk considerable investment
into the project--$170 million in exploration alone--
much of which would be lost if the project were
cancelled. By the same token, Japan stands to gain a
supply of gas at discount prices as well as lucrative
Soviet business for its growing petroleum equipment
industry if the project succeeds.
o For Japan, knowing that it is the only market for
Sakhalin natural gas, participation in the project is
an important element to maintaining good relations with
the USSR.
o Dependent on Indonesia for over half of its LNG
requirements, Japan is anxious to diversify its sources
of supply, and nearby Sakhalin Island is a natural
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choice. It is closer to Japan than Alaska, Australia,
or Malaysia and does not pose the same risk of
political instability as do Abu Dhabi and Indonesia.
For these reasons Tokyo seems determined to proceed with the
project even though Japan could obtain all the liquefied natural
gas it will need from a variety of other suppliers.
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Japan: Energy Import Prices
(US $ per million Btu)
Crude Oil
LNG
Coal
1973
.57
.55
--
1974
1.89
1.32
1.41
1975
2.07
1.65
1.45
1976
2.20
1.80
1.38
1977
2.36
2.00
1.37
1978
2.43
2.33
1.50
1979.
3.24
2.77
1.68
1980
5.70
5.03
2.15
1981
6.44
5.73
2.67
1982b
6.08
5.64
2.56
Steam coal imports were restricted prior to 1974.
" January-October.
Japan: Measures of Efficiency
Energy/GNP
Ratio
Oil/GNP
Ratio
1973
100
100
1974
102.14
97.48
1975
96.08
90.89
1976
95.72
90.74
1977
91.37
88.56
1978
88.82
84.65
1979-
87.76
80.92
1980
83.32
71.17
1981
79.07
64.73
1982.
74.99
60.24
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Japan: Changing Projections of Energy Demand in 1990
(million b/doe)
Japanese Government
(MITI)
Oil
8.4
6.5
5.3
Coal
2.3
2.2
2.1
Gas
1.2
1.2
1.2
Nuclear
1.6
1.4
1 . 2
Other
.9
1.4
.9
Total
14.4
12.7
10.7
Japanese Institute of Energy Economics
1978
1980
Oil
8.4
5.8
4.5
Coal
1.6
1.9
1.5
Gas
1.0
1.0
.9.
Nuclear
1.0
.9
.9
Other
.4
.6
.5
Total
12.4
10.2
8.3
Firm 131
Oil
7.9
5.2
5.1
Coal
1.5
2.1
2.1
Gas
1.2
1.2
1.U
Nuclear
1.5
1 .1
1.0
Other
.8
.7
.7
Total
12.9
10.3
9.9
1 Major US Oil Company.
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1V J
Jafr~n: E;nen7y fYmand
(Thousand b/d oil equivalent)
1973
1980
1.901
1990
7,016
7,552
7,434
8,000-8,500
6,307
6,508
6,205
Oil Consumption
5,421
5,000
4,742
4
450-4
550
Domestic Production
14
10
8
,
,
50
4,300-4,400
Imports, of which:
5,400
5,091
4,650
4
400-4
500
50
Persian Gulf
Oth
4,120
3,547
2,990
,
,
2,500-2
700
4,250-4,350
2
250
2
er OPE)C
T
t
l
a
950
765
799
,
850
,
-
,450
85
o
a
OPEC
Otherb
5,070
330
4,312
3,789
3,350-3,550
0
3,100-3,300
779
861
950-1,050
1,100-1,200
Natural Gas Consumption
Domesti
P
d
i
110
475
491
900-1,000
1
000-1
10
c
ro
uct
on
50
41
55
50
,
,
0
Imports, of which:
Indonesia
60
434
436
850-950
50
950-1
050
Abu Dhabi
219
224
385
,
385-535
50
50
55
Brunei
35
143
134
130
0-240
Alaska
25
22
28
Malaysia
Australia
155
155
USSR
125-155
155
Canada
0-75
75
Qatar
0-75
75
0-75
75
Coal Consumption
D
1,099
1,239
1,362
1
500-1
600
omestic Production
252
214
209
,
,
150-200
1,800-1,900
Imports, of which:
Australia
847
371
983
11119
1,300-1,450
150-200
1,600-1,750
426
502
600-700
United States
246
290
347
275-325
700-800
Canada
155
350-400
162
156
200-250
Other
75
105
114
175-225
250-300
250-300
447
433
450-550
600-700
46
391
406
700-300
1,100-1,200
a Includes OAPEC members.
Including unknown.
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Table 6
Japan: Sectoral Energy Demanda,b
(thousand b/doe and percent)
1980
1990
2000
Industry
2,736
2,725
2,830
Oil (percent)
49
44
41
Gas
2
3
3
Coal
30
32
32
Electricity-
19
21
24
Residential/Commercial
1,056
1,340
1,570
Oil (percent)
53
48
43
Gas
15
14
13
Electricity
29
33
35
Other
3
5
9
Transport
1,114
1,295
1,335
Oil (percent)
98
97
96
Other
2
3
4
Electricity Generation
2,346
2,695
3,285
Oil (percent) 44
22
11
Gas 18
25
22
Coal 5
11
18
Nuclear power 16
28
36
Hydroelectric/geothermal 17
14
13
a Fiscal year.
b Based on estimate by the Japanese Institute of Energy
Economics.
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Japan: Electricity Generation Costs
(US Cents/KWH)
Nuclear Power
4.4
Coal
5.6
Oil and LNG
7.0-7.4
Source: Japan's Atomic Energy White Paper for 1982.
Domestic Oil Demand (Pie Chart)
percent
1973a
1980a
1990a
Light
26
28
31
Middle
26
34
40
Heavy
48
38
28
a Fiscal year.
Categories include--light: gasoline, naptha;
middle: jet fuel oil, kerosine, gas oil heavy
oil A;
heavy: B and C heavy oils.
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Japan: Crude Oil Purchases
(percent)
1977
1982
Major Oil Companies
68
44
Oil-Producing Countries
19
44
Japanese Producers
8
9
Independents
5
3
Table 10
Japan: Key Economic Variables
(percent)
Average GNP Average Inflation Rate
Growth Rate Producers Consumers
1970--73 9.1
4.4.
19741-75 .5
13.7
1976--79 5.0
3.0
19 80 2-81 3.5
7.7
1 Crude oil prices increased 290 percent following the 1973 oil
embargo.
2 Crude oil prices increased 170 percent following the Iranian
revolution.
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