1

Japanese Energy Supply Strategy in the context of

Growing Regional Demand

Shigeya KatoSenior Managing DirectorShowa Shell Sekiyu K.K.

2Contents

1. Transition of Japanese Oil Industry

2. Japanese Primary Energy Transition

3. Issues at Stake

3

1. Transition of Japanese Oil Industry

4Japanese Oil Supply/Demand Balance

Main Product= Mogas, Jet, Kero, GO(Motor/Industrial), Fuel Oil. – Excl. Naphtha

1st

Oil Shock2nd

Oil Shock

Available Capacityon Stream-day basis

Domestic Demand

Mainpro Production

Crude Intake

1,400

900450

Idle Capacity by Shutdown

Era of “High Growth”Mil.bbl/d

Era of “Deregulation”Era of “Redundancy”6

5

4

3

2

1

0

1962

1970

1978

1982

1986

1990

1994

1998

1966

1974

2002

5Demand is Whitening

2009

F

1980

F

1985

F

1990

F

1995

F

2004

F

2000

F

2005

F

Mil bbl/d

0

1

2

3

4

5

Fuel Oil

Naphtha

Industrial Gas Oil

AGO

Kero/Jet

Mogas

Forecast

Japanese Oil Demand Transitionby product

Total 3.12Mb/DWhite 2.34 (75%)FO 0.78 (25%)

Total 3.85Mb/DWhite 3.49 (91%)FO 0.36 (9%)

Data :METI

6

-10

-

10

20

30

40

50

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

US$/bbl Japanese Wholesale Market Price (RIM) Crack Spread from JCC+Tax

12Months Moving average

Gasoline(Ron90)

LSWR

HSFO(S3.0)

Middle DistillatesMiddle Distillates

Product Price (1) Domestic MarketJa

n-87

Jan-

88

Jan-

89

Jan-

91

Jan-

86

Jan-

90

7

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Gasoline(Ron90)

Middle DistillatesMiddle Distillates

LSWR

HSFO(S3.0)

RIM Compared with Import Parity12Months Moving average

RIM – Import US$/bbl

Import Data : Premium&Freight is estimated by SSSKK

Product Price (2) Import

20

15

10

5

-

-5

-10

-15

Jan-

91

Jan-

92

Jan-

93

Jan-

94

8Outline of Japanese Oil Industry Transition1. Refinery Capacity

-> Adjusted to product demand

2. Product Market-> Margin reduced to international level

-> Industry structure has changedfrom Distorted Local Market Orientedto Ubiquitous Market Oriented

9

2. Japanese Primary Energy Transition

10

Oil

Coal

Gas

New EnergiesNuclear

Hydro

77% 72 51 4342

15

20

18 18

1818

1014

15

METI’s Outlookfor 2010

ReferenceCase

EnergyConservation

Case

Mil.KL (coe)

1st Oil Shock2nd Oil Shock

417444

597

Primary Energy in Japan700

600

500

400

300

200

100

0

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

11

3. Issues at Stake

12What are Issues at Stake?1) Social responsibility = Environment

2) Price stability

3) Supply security

4) Investment

5) Return

131) Social Responsibility = Environment

a. Low sulfur product

b. CO2 reduction

c. Land remedy

141) Environment a. Low Sulfur Product

0

100

200

300

400

500

2002 2004 2006 2008 2010

USA

Europe

Japan

China

Korea

ppmMogas

0

100

200

300

400

500

2002 2004 2006 2008 2010

USA

Europe

Japan

China

Korea

ppmAutomotive Gasoil

Regulation by GovernmentVoluntary Rule by Industry

151) Environment b. CO2 Reduction

33,0

00

35,3

20

36,8

70

38,6

10

40,0

50

40,4

70

41,6

20

43,8

10

43,2

20

43,7

80

43,6

40

43,8

30

43,4

00

43,8

50

CO2 kT

-

5

10

15

20

25

CO2 / Refinery Total Throuphput Ton / KKLs

　CO2 Emission　

CO2 Ton / Refinery Total Throuphput

CO2 Reduction Effect

CO2 Reduction

50,000

40,000

30,000

20,000

10,000

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Source: PAJ

161) Environment c. Land Remedy

Number of Service Stations Number of Depots

60,421

56,444

50,067

292

202

Number of Service Stations

Number of Depots

60,000 300

55,000 275

25050,000

22545,000

20040,000

17535,000

15030,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

172) Price StabilityUtilization of refining capacity in conjunction withwidering gap between product demand and refining capacity in the Pan-Pacific

a. Standardization of product specs-> Make arbitrage work

b. Cooperation between producing and consuming countries to cope with heaving slate of crude oil

182) Price Stability - Japanese Crude Slate

Japan’s Crude Slate - Lighter and SourerAPI

1.15%

White Oil Demand RatioSulfurAPI

Refinery modernisationcompleted

Diesel sulfur 500 ppmDiesel sulfur2,000 ppm

Diesel50 ppmS

78.7%

81.0%

82.4%83.3% 83.3%

84.2%84.9% 86.0% 86.3%

84.5%

Sul content (wt%)35.6

35.5 1.50%

35.4 1.45%

35.3 1.40%

35.2 1.35%

35.1 1.30%

35.0 1.25%

34.9 1.20%

34.8FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03

Remark: White Products Ratio is on CY basis. Source: PAJ, IEA

192) Price Stability

SweetSour

- Significant Change in Crude Production (2004)

kbbl/d

RussiaChad

KazakhstanEcuadorCanada

Eq. GuineaAngola

VietnamSudan

TurkmenistanIndia

CongoGabon

NorwayYemen

ArgentinaColombia

OmanUS

UK North Sea

-200 -100 0 100 200 300 400 500 600 700

Source: Shell

203) Supply Security

Enhancement of strategic reserve in light of growing dependency on Middle-East

213) Supply SecurityVol Mil. bbl

Others

Mid-East

ME Ratio67.9

88.5

Ratio %1st Oil Shock2nd Oil Shock

79.5

- Japanese Crude Dependency on Mid-East

5,000 100

954,000

90

853,000

802,000 75

701,000

65

600

1973

1976

1978

1980

1982

1986

1988

1990

1992

1994

1996

1998

2000

1984

2002

Source: METI

223) Supply Security - Security of Sea Lane

Malakka Strait

PhilippinesHolmes Strait

Source: Fujitsu research institute

40

30

20

10

0

1995 99 2003 07 11 15 19

2

1

0

■Oil/Korea□Oil/Japan■Oil/China(IEA)

Bil.MTMalakka Traffic Expectation

23

- Japanese Oil Stock Transition3) Supply Security

Mil.bbl700

Crude (Private)

Product&Feedstock (Private)

Obligation (Private)

Crude (National)

Target (Private+National : Image)

70Days

90Days

(35days)

600

500

400

300

200

100

0

1979

1981

1987

1989

1991

1993

1995

1997

2001

2003

1983

1985

1999

Source: PAJ

244) Investment

No more “Boom-and-Bust”

-> Investment for value creationnot for volumetric expansion.

254) Investment on Secondary Unit in JapanJapanese CDU Capacity Mil.b/d Upgrading Units Capacity Mil.b/d

Japanese CDU Capacity kb/d

FCC Capacity kb/d

Coker Capacity kb/d

10.4%

20.4%

1.7% 3.0%

0

1

2

3

4

5

619

85

1987

1989

1991

1993

1995

1997

1999

2001

2003

0.0

0.5

1.0

1.5

2.0

2.5

3.0

28.6%

47.4%

HD Capacity kb/d

Source: PAJ

265) Return

Fair return on investment for the sake of socially acceptable and sustainable growth.

275) Return

- foreign capital in Japanese Main Oil Companies

500

123 128

28.3%

34.8%

2001 20040%

10%

20%

30%

40%

50%

Fore

ign

Cap

ital R

atio

Others

ForeignCapital

Foreign Capital Ratio400

200

300

Bil.

Yen

100

0

Source: financial statement reports

285) Return - ROE by Industry25%

Oil/Coal

All Manufacturer

All Industry

20%

15%

10%

5%

0%

-5%

-10%

1995 1997 1999 2001 2003Source: 財務省法人企業統計

29

ConclusionAcceleratedly growing importance of cooperation among North-East countries