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Petroleum Association of JapanSeptember 2011

PetroleumIndustry

in Japan2012

Petroleum Association of JapanSeptember 2012

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Preface 1

Preface

1 2

out of nine refineries in the Tohoku and Kanto regionsstopped their operations. Three of those were forcedto suspend refining operations for a long period of time. Besides, almost all oil storage terminals alongthe Eastern Japan Pacific Ocean also suspended theirshipping operations. Service stations and tank trucksmaking deliveries in the quake-hit areas also sufferedenormous damage. Consequently, confusion wasseen over a wide area. For example, the situationarose in which smooth supply of petroleum productswas hampered in the affected areas as well as theTokyo metropolitan area due mainly to damage to

infrastructure such as oil shipping terminals, roadsand ports. This was despite the petroleum industrysutmost efforts to store and supply oil at a sufficientvolume on a nationwide basis. However, as a result of the industrys unified efforts, working across all com-panies borders, the supply system was restored tothe pre-quake level in roughly three weeks. The petro-leum industry believes it could fulfill its role as the pri-mary energy supplier.

Furthermore, from the moment of disruption of system energy such as electricity and city gas, oilshowed its strength as the distributed energy thathas emergency response capabilities in terms of easydelivery and storage as a fuel for heating at the evacu-ation centers, for emergency power systems and foremergency and evacuation vehicles. Since oil is thelast-resort energy, it is necessary to re-evaluate oilas it can excel during emergency response andshould be clearly positioned as the core energy in thegovernments energy policy.

Internationally, on the other hand, the Shale Revo-lution drew attention in 2011. Mainly in the UnitedStates, the development and active production of

shale gas and shale oil is moving ahead at a fasterpace. The problem of dwindling oil resources can nowbe considered deferred for more than 50 years.Japans energy policy is formed on the basis that oilwill be depleted in 40 to 50 years. Accordingly,enhancement of alternative energy sources has beenfocused on under the Oil Use Reduction Policy. How-ever, it can be said that such a premise has beenshown to be wrong, since the risk of depleting oil

resources, including non-conventional oil resources,is diminishing in the medium and long term.

Therefore, when reexamining the future energy pol-icy, the petroleum industry is going to make a strong

appeal for the importance of promoting the effectiveuse of oil, which is superior for emergency responseand supply stability focusing on the following points: Do not let domestic oil demand decrease, in light

of the lessons of the the importance of oil fromthe Great East Japan Earthquake

Ensure a stable level of oil demand by maintainingand strengthening the oil supply chain duringtimes of normal circumstances

Prices of West Texas Inte rmediate (WT I) in 2011 hadstarted with the level of around 90 US dollars per bar-rel (US$/Bbl), and jumped to over 110 US$/Bbl in earlyApril due to the growing tension in Libya. Meanwhile,because of various factors such as the reduced con-cern of the Arab Spring spilling over into the Gulf oilproducing countries, the financial crisis in Europe,and the economic slowdown in advanced countries,oil prices temporarily dropped below 80 US$/Bbl inearly October. After that, with the tense situationregarding Iran and its nuclear development problemas well as corresponding financial sanctions against

the country, oil prices roughly stayed in the rangebetween 85 and 105 US$/Bbl at the year s end.

Japans average crude oil import price (CIF) in 2011was 108.7 US$/Bbl, up about 30 US$ versus 2010.Though the exchange rate stayed at a strong yen ()level, on a yen basis, the CIF was 54,645 /kiloliter(KL), 5,280/KL higher than the previous year.

In addition, there is a wide range of issues to beconsidered, such as countermeasures for globalwarming and settlement of double taxation, i.e., theconsumption tax on the gasoline tax.

This brochure has been created to provide consum-ers as well as stakeholders with a better understand-ing of the current situation and the future efforts of thepetroleum industry in Japan. We hope this brochurewill help to give you a sound understanding of oil andthe petroleum industry in Japan.

On March 11, 2011, the Great East Japan Earthquake,with a domestic record magnitude of 9.0 occurred,and the tsunami afterward brought catastrophic dam-age to such areas as Iwate, Miyagi and Fukushima.Furthermore, a severe nuclear accident, categorized

as Level 7 (IAEA standard), which equaled the nuclearaccident at Chernobyl, occurred at Tokyo ElectricPower Companys Fukushima No. 1 Nuclear PowerPlant.

It caused considerable damage to oil facilities. Six

CONTENTS 1. Preface.......................................................................................................................1

2. Profile of Petroleum Association of Japan .............................................................3

3. Domestic Oil Supply and Demand Trend ...............................................................7

4. Energy Policy in Japan ..........................................................................................13

5. Oil Stockpiling and New Emergency Countermeasures ....................................20

6. Japans Petroleum Resource Development .........................................................25

7. Regu latory Reform and Petroleum Industry ............ ............. .............. ............. ....27

8. Petroleum Product Distribution and Marketing ..................................................32

9. Toward a Fundamen tal Reexaminat ion of Petroleum-related Taxes ................. 36

10. Reinforcement of Corporate Structure ............ ............. .............. ............. ............. 41

11. Thoroug h Safety Measures ............ .............. ............. ............. .............. ............. ....43

12. Preparation for Major Oil Spill Incidents .............................................................45

13. Environmental Measures in the Oil Refining Sector ..........................................47

14. Quality Improvement in Automotive Fuels ..........................................................50

15. The Global Warming Issue and Oil .......................................................................53

16. Utilization of Biomass Fuel ...................................................................................59

17. Efficient Use of Oil ............. ............. .............. ............. ............. .............. ............. ....62

18. Efforts toward Developing New Energies ............................................................65 Great East Japan Earthquake and the Petroleum Industry................................67

Appendix: ......................................................................................................................69

{ Location of Refineries and Crude Distillation Capacity in Japan

{ Overview of the Japanese Petroleum Industry

{ Main Product Specifications in Japan

{ PAJs Oil Statistics Website for Details

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Profile of Petroleum Association of Japan 2 Profile of Petroleum Association of Japan

3 4

The Petroleum Association of Japan (PAJ), incorpo-rated in November 1955, is composed of 14 oil refin-ers and primary oil distributors (Motouri) in Japan.

PAJ deals with all matters concerning the refiningand marketing of p etroleum products. The main activ-ities are:1. Publishing information on important issues for the

petroleum industry2. Advocating the industrys opinions and submitting

proposals to the government, business associa-tions, the media and the general public

3. Researching and coordinating activities related to

important petroleum issues and providing infor-mation on such issues

4. Undertaking governmental subsidy programs suchas the Major Oil Spill Respon se Program, includ-ing international conferences

5. Enhancing communication and understandingamong member companies

1 . Basic Policy for Fiscal Year (FY) 2012 Business Activities

Since the Great East Japan Earthquake, the Japa-nese Government has reexamined the nations energy

policy, i.e., reexamination of the Basic Energy Plan,new countermeasures for global warming and formu-lation of innovative energy and environmental strate-gies, aiming at completing the task in summer 2012.Oil, as a system en ergy, played an important role asa last-resort energy supply during the time the supplyof electricity and city gas had been disrupted orstopped. Taking this into account, PAJ made its pro-posal on energy policy four times to the government.However, sufficient acknowledgment of the impor-tance of oil has not been made at the governmentdeliberations.

In 2012, taking those policy developments intoaccount, PAJ has focused on addressing reexamina-tion of energy policy and developing concrete mea-sures for ensuring stable oil demand, n amely,reevaluation of the government policy for an energyshift to natural gas and realization of a level playing

field in taxation. Furthermore, PAJ has also lent itsexpertise on issues such as how the oil industryshould deal with responses to a disaster, the consoli-dation of oil refining functions, the promotion of bio-mass fuel, and the right execution of subsidiaryprojects for oil spill responses, as well as work on var-ious issues in a number of fields to improve the busi-ness environment and the industrys competitiveness.

2 . Projects and Main Activity Plans in FY2012

1. Addressing issues concerning the petroleum poli-cy in the future(1) Make proposals for energy policies focusing on

how the petroleum industry should be in thefuture.

(2) Develop countermeasures for biomass fuel.(3) Tackle the global warming issue.

2. Urging comprehensive reexamination of petro-leum-related taxes and ensuring equity in taxationamong energy sources

3. Strengthening both the domestic and internationalcompetitiveness of the petroleum refining industryin Japan(1) Take action toward international issues related

to the refining industry and efforts to reinforce

further competitiveness.(2) Resolve problems by analyzing the corporate

management and financial condition of thepetroleum industry.

4. Promoting various uses of petroleum products(1) Promote activities to encourage broad use of

PAJs High Energy Efficiency Oil Utilization Sys-tems.

(2) Develop countermeasures for issues related toautomotive fuels.

(3) Conduct research study on qualities of petro-leum products which meet environmentalrequirements.

5. Promoting disaster prevention and environmental

pollution control measures(1) Formulate a response system to such risks as

major earthquakes, outbreaks of new-typeinfluenza, etc.

(2) Reinforce disaster prevention measu res,increase efforts to mitigate excessive safety anddisaster prevention regulations, and enhancevoluntary safety management systems.

(3) Maintain and improve the PAJ Major Oil SpillResponse Program.

(4) Deal with environmental problems concerningtoxic chemical substances, etc.

6. Addressing oil supply and distribution issues(1) Participate in developing policies and programs

for oil stockpiling and emergency responses.(2) Enhance services to provide information on oil-

related databases and survey reports ondomestic and foreign petroleum markets.

(3) Make positive efforts towards formation of a

fair and transparent petroleum product market.(4) Rationalize petroleum product distribution, real-

ize regulatory reform, and promote environ-mental measures.

7. Promoting activities for a strong foundation for thepetroleum industry(1) Conduct PR activities for better public under-

standing of the positioning of oil among energysources.

(2) Make right execution of the structural improve-ment projects under the government subsidies.

(3) Support research and development operationsby the Petroleum Industry Technology andResearch Institute, Inc. (PITRI).

(4) Support business of the Japanese NationalCommittee of the World Petroleum Council.

(5) Deal with labor policy issues concerning thepetroleum industry.

(6) Enhance communication among PAJ membercompanies and collaboration with concernedbusiness organizations.

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Profile of Petroleum Association of Japan

5 6

PAJ Member Companies (14)

Idemitsu Kosan Co., Ltd. EMG Marketing G.K. TonenGeneral Sekiyu K.K. Toa Oil Co., Ltd. Kashima Oil Co., Ltd. Taiyo Oil Co., Ltd.

Fuji Oil Co., Ltd. Cosmo Oil Co., Ltd. Kyokuto Petroleum Industries, Ltd. Mitsui Oil Co., Ltd. Showa Yokkaichi Sekiyu C o., Ltd. Showa Shell Sekiyu K.K. JX Nippon Oil & Energy Corporation Seibu Oil Co., Ltd.

Former Member & Friend of PAJ (1)

Kygnus Sekiyu K.K.

ExecutivesPresidentYasushi KimuraRepresentative Director, Chairman of the Board,JX Nippon Oil & Energy Corporation

Vice-PresidentJun AraiPresident, Representative Director, Showa Shell Sekiyu K.K.

Vice-PresidentKazuhisa NakanoPresident, Representative Director, Idemitsu Kosan Co., Ltd.

Vice-PresidentJun MutohPresident, Representative Director, TonenGeneral Sekiyu K.K.

Vice-PresidentKeizo MorikawaPresident, Representative Director Chief Executive Officer,Cosmo Oil Co., Ltd.

Senior Managing DirectorHideo MatsuiManaging DirectorJunichi HatanoManaging DirectorNobuo Hata

I Management and Committees

Commercial/Industrial Fuels

Lubricating Oils

Refining Technology

Quality Control

Hydrogen and Fuel Cell

Automotive Fuels

Environment &Public Safety Committee

Global Environmental Issue

Finance

Petroleum-related Taxation

Inland Transportation

Coastal Transportation

Ocean Transportation

Public Relations

Stockpiling

IAB (Industry Advisory Board)

Environmental

Facilities Management

Safety

Petroleum Distribution Laws

= Sub-committees

SS Technological Issue

Aviation

Technical Committee

Taxation &Finance Committee

Transportation Committee

Public Relations Committee

Crisis ManagementCrisis Management Committee

Oil Stockpiling Committee

Petroleum Energy System

Policy PlanningCommittee

General Assembly

Board of Directors Board of StandingDirectors

Auditor

Committee ofManaging Directors

Oil Statistics Committee

Japanese National Committee for ISO TC28*

JIG Japan

General Service Committee

Countermeasure Committee

Refining

Marketing

Technical Group

PAJ Oil Spill Cooperative (POSCO)

Associated Organizations

ISO: International Standardization OrganizationTC: Technical Committee

JIG: Joint Inspection Group Limited

Distribution Committee

Policy Planning

Labor Policy

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Domestic Oil Supply and Demand Trend 3 Domestic Oil Supply and Demand Trend

7 8

Structural Decline in Oil Demand

Total petroleum fuel demand for fiscal year (FY)2010 was about 196 million kiloliters (KL), up by 0.5%from the previous year. Though the total fuel demandhad exceeded 200 million KL since FY1988, it fellbelow the 200 million KL mark, continuing itsdecrease from the previous year. On the other hand,the total fuel demand for th e first half of FY2010showed a 2.5% increase versus the same term of theprevious year mainly due to economic recovery, and

increases in demand for gasoline, Fuel Oil B and FuelOil C caused by the record high temperatures duringsummer.

Though total fuel demand had fallen below the 200million KL level during the early 1980s after the sec-ond oil crisis due to a drastic decrease in demand forFuel Oil C and naphtha for industrial fuel and feed-stock, respectively, other fuels demand increased fair-ly consisten tly after the Second World War. Thisupward trend terminated in 2000. Total fuel demandreached a peak of 246.0 million KL in 1999, and astructural downward trend has continued since 2000.Peak demand volumes by fuel were: 61.5 million KLfor gasoline in FY2004 and 30.6 million KL for kero-sene in FY2002. As for industrial fuels (Fuel Oil B andFuel Oil C), the peak volume was 111 million KL inFY1973.

Major factors for such structural decline in oildemand in Japan are as follows: a gatheringmomentum of the oil use reduction policy, b changesin social structure, and c global warming counter-measures.

a Gathering Momentum of the Oil Use Reduction Policy

After suffering the two oil crises, Japan has promot-ed the so-called Oil Use Reduction policy as a coreenergy policy for lowering oil dependence in Japan.In particular, such policy measures as enhancingnuclear energy, banning new construction of oil-firedpower plants, and providing LNG with preferentialpolicy treatment has been taken for reducing the con-sumption of Fuel Oil B and Fuel Oil C for power gen-

eration and industrial use. Consequently, a fuel shiftfrom oil to coal or LNG has been progressing in theindustrial, household and commercial sectors.

b Changes in Social Structure With the changes in the structure of society due to

continuous population decline caused by a fallingbirthrate and an aging population in Japan, the petro-leum industry confronts a decline in fuel consump-tion. For example, a diminishing number of customers lowers the use of gasoline and kerosene,and a stagnant volume of transported goods togetherwith advancement of rationalization and efficiency inthe transportation industry reduces the consumptionof diesel fuel and Fuel Oil A. Regarding the decreasein gasoline demand for automobiles, it is said that thephenomenon of young adults not using cars, mainlyin urban areas, has been increasing.

c Global Warming Countermeasures Since the reduction of CO 2 emissions became a glob-

al issue, reducing consumption of oil as a fossil fuelhas been promoted. In response, oil consumption hasbeen lowered by efficiency improvement of energyconsumption such as shifting to energies that emit lessCO2 and improving vehicles fuel consumption.

Total fuel oil demand for the first half (Apr~Sep) of FY2011 was 88.6 million KL, 4% down from the previ-ous year. On a fuel-by-fuel basis, all fuels except FuelOil B and Fuel Oil C showed a decrease. Especially, jetfuel and kerosene decreased significantly by 22% and17% respectively from the previous year. The rise indemand for Fuel Oil B and C was brought about bytheir increased use for electric power generation due tothe Great East Japan Earthquake. The fuel demand forelectric power will fluctuate depending on the futureoperating status of nuclear power plants.

It is projected that structural factors for a downwardtrend in Japans petroleum product demand, excludingFuel Oil B and Fuel Oil C, will not be changed, exclud-ing temporary impacts such as rapid changes in crudeoil prices. However, in light of the lessons learned fromthe Great East Japan Earthquake, in order for the petro-leum industry to perform a last-resort function for

energy supply, it is essential to secure a stable scale of oil demand as well as to maintain and strengthen theoverall petroleum supply chain.

Petroleum Supply System in Japan

For FY2010, the domestic yield of crude oil was amere 850 thousand KL, equivalent to 0.4%, or 1.5 days,of the 208.3 million KL of Japans crude processing vol-ume. Japan, therefore, imports almost all crude oil andpetroleum products for meeting domestic petroleumproduct consumption demand.

There are two methods for covering domestic petro-leum product demand: One method is to importpetroleum products and the other is to import crudeoil and refine it to produce petroleum products locally.The latter method, i.e., crude oil importation anddomestic refining, has been adopted in Japan.

The method for refining crude oil within the countryis called the Dome stic Petroleu m Refining Sys tem.This method has various advantages such as beingable to reduce procurement costs by importing a mas-

sive amount of crude oil with large-scale tankers, toflexibly change production volume of each petroleumproduct in line with the domestic demand structure, toadjust product qualities which meet domestic environ-mental standards, etc., and to provide superior abilityto cope with an emergency. Therefore, DomesticPetroleum Refining System has been adopted as acore pillar of Japans petroleum supply system.

For the past 30 years, domestic petroleum demandhas been more or less consistently declining and, at thesame time, demand for so-called white fuels such as

gasoline, naphtha and kerosene has been increasing.Oil companies, therefore, have made efforts to followtrends in supply and demand by constructing heavy oilcracking unit s for increasi ng output of white fue ls.Any excess or deficiency beyond refining facility capac-ity has been supplemented by import or export of petroleum products.

With the advancement of internationalization, oilcompanies in recent years have tried to use productimport and export more flexibly from a strategic view-point.

0 50,000 100,000 150,000 200,000 250,000

(FY)

Unit: 1,000klI Petroleum Product (Fuel) Domestic Demand Trends

Source: Ministry of Economy, Trade and Industry (METI)

209,219

218,012

26,29723,56621,56479,199 21,083

2,967

37,680 26,701 31,423 44,7834 6, 62 3 2 7,0 66

3,739

243,21841,745 29,924 47,686 58,3723 1, 36 4 2 9, 51 6

4,611

34,543

196,05532,866 19,619 43,728 57,21423,743 14,680

4,204

2011

196,01932,891 20,349 46,699 58,15917,343 15,425

5,153

2010

2000

1990

1980

212,63932,03121,66315,99792,903 18,992

2,059

28,9951975

Total Fuels234,138

Naphtha36,240

Kerosene21,930

DieselFuel

16,759

Fuel Oil B,C111,007

Fuel Oil A19,306

Jet Fuel 1,673Gasoline

27,2231973

236,10937,116 28,265 49,388 61,42127,009 27,780

5,129

2005

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Domestic Oil Supply and Demand Trend

9 10

Crude Oil Import

The crude import volume by region in FY2010showed that Middle Eastern oil-producing countriesaccounted for 86.6%. Oil dependency on the MiddleEast had once dropped to 68% in FY1987 after the oilcrises; however, the dependency rose again in the1990s, because non-Middle Eastern oil producingcountries such as China and Mexico graduallyreduced their export of crude oils in accordance witheconomic growth in their countries.

Regarding crude oil imports by country, four coun-tries, namely Saudi Arabia (29.2% of total import vol-ume), the United Arab Emirates (20.9%), Qatar (11.6%)and Iran (9.8%), accounted for about three-quarters of

Japans total crude import volume.It is extremely important for Japan to maintain and

enhance positive relationships with those MiddleEastern countries. However, some of those countriesare not always problem-free in terms of their domes-tic political situations or their relations with the inter-national community. It would have to be said that thisis a fragile aspect of Japans petroleum supply struc-ture.

Petroleum Product Import and Export

For Japan, which adopts the Domestic PetroleumRefining Sys tem, petroleu m product import pla ys asupplemental role. Regarding naphtha, however,about 60% of its domestic demand is served byimported products, because petrochemical compa-nies in Japan independently import naphtha as a pet-rochemical feedstock. In addition, as domesticallyrefined fuels that are supplied to ocean liners in Japanare classified as exports, such export volume accountsfor a large portion in the supply volume of Fuel Oil Band Fuel Oil C. Likewise, the volume of jet fuel that issupplied to international aircraft is regarded as anexport, and nearly double its domestic demand is

recorded as an export.In recent years, the export volume of diesel fuel is

increasing year by year, though the future trend isuncertain.

0

1,000

2,000

3,000

4,000

5,000

6,000

60

70

50

80

90

100

Unit: 1,000 bbl/day (%)

I Changes in Crude Processing Capacity and Capacity Utilization Ratio

Source: PAJ

U t i l i z a

t i o n

R a

t i o

( % )

C r u

d e

P r o c e s s

i n g

C a p a c i

t y

5,274

79.2

4,856

82.7

4,895

78.9

4,846

74.5

4,627

77.7

4,559

74.2

4,796

82.9

4,767

87.2

5,221

79.4

4,552

77.3

4,973

62.3

5,940

66.0

5,940

70.7

5,410

85.2

20 07 2 008 2 009 2011(FY)2010200620052000199519901985198019751973

n Petroleum Product Domestic Demand by Usage (FY2010) Unit: 1,000kl

Usage

ProductGasol in e N ap htha Jet Fu el Kerosene D iesel Fuel Heavy Fuel Crud e Oil Lube Oil Total

Automobile 58,130 32,005 670 90,805

Aviation 4 5,154 5,158

Transportation & Marine 3,962 128 4,091

Agriculture & Fisheries 1,786 593 3,129 5,508

Mining & Manufacturing 63 4,192 52 13,833 964 19,103

Electric Power 214 6,169 4,689 11,071

Household & Commercial 14,353 5,645 19,998

Chemical Feedstock 46,663 679 47,342

Total 58,197 46,663 5,154 20,331 32,863 32,737 5,368 1,762 203,076

Source: PAJ

n Petroleum Supply and Demand (FY2011) Unit: 1,000kl

ItemFY

2009 2010 2011 %vs.Prev. Year

Crude Oil Import 211,656 214,357 209,173 97.6Processed 209,846 208,572 196,720 94.3

Product(Fuel Oil)

Opening Inventory 11,805 10,533 10,483 99.5

Production 196,375 195,157 185,440 95.0

Import 29,799 33,100 37,378 112.9

Total Supply 226,174 228,257 222,818 97.6

Domestic 194,988 196,019 196,055 100.0

Export 29,932 30,285 25,352 83.7

Total Demand 224,920 226,303 221,407 97.8

Closing Inventory 10,577 10,483 10,103 96.4

Source: METI

2000

1990

1980

1975

1973

OPEC 86.2 non-OPEC 13.8

249,199

238,480

254,604

UAE

14.7

Saudi Arabia

33.0

Iran 2.3Indonesia

15.0

Oman

3.5

Others

5.7

Kuwait 3.5China

3.8

Qatar

3.5

Iraq

5.5

NeutralZone5.4

Others 3.3 Mexico 0.8

UAE21.4

Saudi Arabia19.5

Iran10.7

Qatar6.0

Indonesia12.6

Oman6.4

Mexico3.7

China 6 .5 Other s 5 .4

OPEC 78.0

OPEC 87.5

non-OPEC 22.0

non-OPEC 12.5

Others 0.5Iraq 2.0

Vietnam 1.1

Kuwait 1.9

Others 0.2Australia 1.4

UAE25.6

Saudi Arabia21.6

Iran11.5

Kuwait7.4

China2.2

Oman4.5

Others3.3

Iraq 1.4 Indonesia 4.8Qatar

9.6


262,785UAE10.3Saudi Arabia

27.2Iran22.3

Indonesia11.2

NeutralZone4.9

Oman2.9

Others 1.1Iraq 2.3

China3.6

Kuwait8.3

Others 2.7 Brunei 3.3


UAE10.8

Saudi Arabia19.9

Iran31.0

Indonesia14.7

Oman1.9

Others 0.8China 0.6

Brunei3.5

Kuwait8.2

Neutral Zone5.3

NeutralZone3.5

NeutralZone5.4

Qatar10.22011


209,173Russia

4.1UAE22.5

Saudi Arabia31.1

Iran7.8

Kuwait7.0

Indonesia 3.5Oman 2.3

Others6.5

Others 0.8Neutral Zone 2.0 Iraq 2.2

Qatar11.62010


214,357Russia

7.1UAE20.9

Saudi Arabia29.2

Iran9.8

Kuwait7.0

Indonesia 2.4Oman 2.7

Others3.8

Others 0.4Neutral Zone 1.9 Iraq 3.3

Nigeria 1.9Others 1.1

Iraq 0.3

288,609

(FY)

I Crude Oil Imports by SourceUnit: 1,000kl,%

Source: METI

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Domestic Oil Supply and Demand Trend

11 12

Unit: 1,000kl,%

I Major Petroleum Products by Importing & Exporting Country

Source: METI

Republic of Korea90.3

Singapore8.0

USA0.0Taiwan 1.7 Sweden 0.0

I Petroleum Product Import & Export Composition (FY2011)

Import

Export

Gasoline Kerosene Diesel Fuel Heavy Fuel

Import2,910

Import1,490

Import875

Import7,235

Export1,254

Export600

Export7,619

Export7,135

US Forces 4.5 Guam 2.4

Australia7.1

Australia 1.2

New Zealand8.8

USA 8.1

USA1.2

Hong Kong 7.1

Singapore62.3


China2.6

Malaysia0.0

Singapore20.7

USForces1.6US Forces0.0 India 1.2



Australia34.2

Singapore30.3

Chile 2.4Mxico 2.0

HongKong13.0

Hong Kong0.4

Philippines1.7Others

4.5



China 2.9

Indonesia21.7

Indonesia 1.7

Republicof Korea

19.7

Thailand 0.3

Malaysia7.2

Russia 2.2China 0.8

Papua New Guinea 0.6Singapore 1.6

Bonded Oil(Bunker)

55.9China18.4

Singapore14.4

Malaysia 1.6Hong Kong 3.0

Malaysia50.6

Republicof Korea6.7

Naphtha 66.5

Jet Fuel 34.3 Diesel Fuel 30.1 Heavy Fuel 28.1

Kerosene 4.0

Heavy Fuel19.4

Gasoline7.8

Diesel Fuel 2.3Gasoline 4.9

Import37,378

Export25,352

Naphtha 0.2 Kerosene 2.4

Unit: 1,000kl,%

I Major Petroleum Products by Importing & Exporting Country

Source: METI


Singapore8.9

USA0.0Sweden0.0

I Petroleum Product Import & Export Composition (FY2010)

Import

Export

Gasoline Kerosene Diesel Fuel Heavy Fuel

Import1,098

Import1,053

Import444

Import3,215

Export2,198

Export198

Export11,046

Export7,908

New Zealand4.8

Others7.8

Indonesia3.0

USA3.5

Hong Kong5.6

Singapore75.3

Singapore2.3


China6.1

Philippines 3.1

China5.6

Malaysia0.0

USA 0.0Malaysia 0.0Germany 0.0

Singapore24.3

Belgium20.1

Taiwan3.4

Republicof Korea46.6


Australia15.1

Singapore29.1

Chile10.9 HongKong

13.6

United Kingdom 5.4China 6.2

Others8.2

Republicof Korea

3.0

New Zealand2.5

Indonesia40.7

Republicof Korea

14.5

USA 2.8

China 0.4Australia 0.4

Russia 2.1Singapore

3.0

Bonded Oil(Bunker)

57.4

China14.2

Singapore20.2

Malaysia1.0

Hong Kong2.2

Republicof Korea5.0

Naphtha 82.3

Jet Fuel 29.5

Kerosene 0.6

Diesel Fuel 36.5 Heavy Fuel 26.1

Kerosene 3.2

Heavy Fuel9.7

Gasoline3.3

Diesel Fuel 1.4Gasoline 7.3

Import33,100

Export30,285

Jet Fuel 0.1

Malaysia36.1

Netherlands2.8

0

50

100

150

200

250

300

60

70

80

90

100

I Crude Oil Import Trends and Dependence on OPEC and Middle East

Source: METI

1 s t

O i l C r i s i s

2 n d

O i l C r i s i s

G u

l f C r i s

i s

I r a q

W a r

Dependence on Middle East

Dependence on OPEC

Crude Oil Import Volume

(million kl)

(%)

08 0 9 1110070605040302012000999897969594939291908988878685848382818079787776751973(FY)

77.578.2

71.4

68.8

78.6

87.1

84.0

71.5

289

263

249

197

238

266

255

21492.9

89.2

86.2

71.6

78.0

79.9

87.686.6

83.6

209

85.189.1

249

90.0

Japanese OilDevelopment CompaniesIndependent Oil Companies

Source: METI

I Crude Oil Imports by Supplier Unit: 1,000kl,%National Oil Companies of Oil-producing Countries

(FY)288,609Oil Majors 74.1 8.5 9.2 8.3

262,7857.770.0 14.3 8.0

249,19944.5 44.4 7.83.3

197,26110.526.1 59.73.7

238,48061.3 9.027.8 1.9

265,52564.2 10.423.9 1.5

254,60422.2 67.3 8.32.2

249,01018.8 75.0 4.41.8

209,17318.4 73.7 4.33.62011

214,35717.8 74.4 4.73.12010

2005

2000

1995

1990

1985

1980

1975

1973

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Energy Policy in Japan 4 Energy Policy in Japan

13 14

Enactment of the Basic Act on Energy Policy

Japans energy policies have changed in responseto the diverse requirements of the times. As morethan 30 years have passed since the first oil crisis in1973, it is now necessary not only to secure a stableoil supply but also to promote fair competition, liber-alization, and efficiency improvement through dereg-ulation and other measures as well as to considerglobal environmental issues.

Taking into account changes in the recent energysituation, the Basic Act on Energy Policy, enacted inJune 2002, aims at advancing various measures in acomprehensive manner to indicate the broad futuredirection of energy policy in Japan. This law illustratesthe following three basic principles of energy policy(the 3E): securing stable ener gy supply, environ-mental consi deration, and efficient supply us ingmarket mechanisms upon due consideration of thefirst two principles. It stipulates the roles and respon-sibilities of the central government, local govern-ments, and others. The law also provides that takinginto account the next decade or so, the Basic EnergyPlan should stably map out the basic direction of vari-ous measures on energy supply and demand in linewith these 3E principles.

Oil Remains an Important Energy even in the 21st Century

The petroleum industry has consistently advocatedthe following opinions for the simultaneous achieve-ment of the energy policys three basic principles (3E):1. Achieve the optimum energy mix suitable for

Japan by evaluating the characteristics of eachenergy source fairly and objectively.

2. Promote effective and efficient use of oil, whichconstitutes the largest share of the primary energysupply.

3. Emphasize the feasibility of launching new ener-gies such as nuclear power and biomass.

4. Provide an equal footing regarding competitiveconditions on taxation, stockpiling obligations, etc.among all energy sources in order to achieve theoptimum energy mix.

As a result of industry advocacy efforts, the termsOil Use Reduction Policy and Departure from theMiddle East, conventional objectives of Japans basicenergy policy, were eliminated from the Basic EnergyPlan established in October 2003. The plan re-empha-sized the significance of oil by stating oil will remainan important energy source in the future from theviewpoints of economic efficiency and convenience.

Upon compilation of the Basic Energy Plan, a reporttitled Energy Supply and Demand Outlook toward2030 was drawn up in October 2004. The followingpoints were clearly stated in this report:

1. Oil will remain the central player in primary energysupply in 2030.

2. The introduction of IGCC (Integrated GasificationCombined Cycle) fueled by residuals should bepromoted to enhance efficient utilization of oilresources.

3. The whole concept of oil substitution policy, aswell as the definition of new energi es, will bereexamined.

Toward the Advancement of Energy Supply Structure

After the G8 Hokkaido Toyako Summit in 2008, argu-ments for realizing a low-carbon society have beenspreading in the nation. Movements regarding globalenvironmental issues in foreign countries have alsobecome active. Those movements are pressing theenergy industry for drastic changes. It is requested todevelop future energy policies considering the simul-taneous settlement of the global warming issue inaddition to ensuring energy security to cope with therecent violent fluctuations of crude oil prices.

Under these circumstances METI started delibera-tions, from October 2008, on the reexamination of itsalternative energy policy and the increased use of

nonfossil energies. Unstable conditions have contin-ued such as a steep rise in prices of all fossil fuelsincluding oil in 2008, but a drop in the prices due toworldwide financial instability after autumn. In thesedeliberations, therefore, the vulnerability of Japansenergy supply structure has been pointed out; forexample, its dependency on offshore fossil fuels forover 80% of its supply. In addition, the following pro-posals were emphasized: (1) the importance of takingmedium- and long-term measures such as globalwarming countermeasures and formation of a low-carbon society and (2) the necessity for reexamining

energy policies, taking into account the Basic Act onEnergy Policy (a unified settlement of 3E).

The petroleum industry has been arguing in favor of the following opinions through the deliberations of the council meetings:1. Oil should be regarded as a core energy, not as a

buffer energy, since oil will remain the major ener-gy (40% of primary energy supply) even in 2030.

2. The Alternative Energy Law should be abolishedand new legislation should be established to allowsophisticated use of all energies through innova-tive technologies for securing stable supply as wellas efficient and clean use of oil resources.

3. An equal footing of competitive conditions such astaxation and subsidies among energy sourcesshould be provided to achieve the optimum mix of energies.

In consequence, as the basic policy for Japan torealize a low-carbon society, the points below wereindicated in the report compiled in January 2009:1. To reexamine the alternative energy policies for

which the purpose is merely restraining oil usage2. To conduct an objective assessment of each ener-

gys characteristics based on the basic principles of the Basic Act on Energy Policy and to enhance thecorresponding development of a sophisticatedenergy supply structure

3. To give consideration to the impartiality of com-petitive conditions among energy sources

The petroleum industry considers these points to beextremely significant.

With the completion of the report, the concept of oil substitution in the policy measures of the Alter-native Energy Law, which aims only at reducing reli-ance on oil, was reexamined and this concept was

eliminated in the revised law. Thereafter, a new law,the Law Concerning Sophisticated Methods of EnergySupply Structures, which incentivizes energy suppli-ers to take such measures as listed below, was enact-ed in July 2009:1. To promote innovative energy technologies and

non-conventional resource development2. To expand the use of nonfoss il energies (nuclear,

hydraulic, geothermal, new energies, etc.)3. To enhance the sophisticated and effective use of

fossil resources (crude oil, natural gas, coal, etc.)This new law is intended to urge energy suppliers

(electric power, city gas and oil) to expand the use of nonfossil energy resources as well as to promoteeffective use of fossil resources. Specifically, the noti-fication of the criteria for judgment concerning thepromotion of the effective use of fossil energies wasgiven in July 2010.

Aiming to raise the installation ratio of Japansheavy oils cracking units (currently about 10%) toabout 13% by FY2013, each oil refiner is obliged toattain the facility improvement in three stagesdepending on the current installation ratio. This will

lead to new or additional installation of heavy oilscracking units, or the reduction of crude distillationunits to raise the installation ratio. In addition to these,each refiner is going to work on technology develop-ment such as improvements in facility operations.

Restructuring of Japans Energy Policies ~Energy Policies after the Great East Japan Earthquake~

In recent years, the global energy conditions suchas the steep rise in crude oil prices have becomeincreasingly severe. The international energy marketis facing significant structural changes such as therapid growth of energy demand in Asian countries

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Energy Policy in Japan

15 16

and the rising tide of resource nationalism.In addition, energy prices have fluctuated widely as

the situation was made worse by various factors suchas natural disasters including damage from an earth-quake and a hurricane, reexamination of energy secu-rity in light of the Fukushima nuclear power plantaccident, inflows of speculative money, terrorist activ-ities and uncertainties in the Middle East like the issueof Irans nuclear development. Amid mounting inter-national concern over energy security, many countriesare gearing up for the restructuring of their nationalenergy strategies.

In the context of these circumstances, while thegovernment pursues energy policies stipulated in thesecond revision of the Basic Energy Plan in June 2010,Japan faces unprecedented situations brought aboutby the Great East Japan Earthquake and FukushimaNo. 1 Nuclear Power Plant accident which occurred onMarch 11, 2011.

Under these circumstances, the government adopt-ed The Guideline on Policy Promotion~For the Revi-talization of Japan~ which shows Japans revitalizationpolicy, at the cabinet meeting on May 17, 2011 to pro-vide reconstruction support for the eastern Japanregion, in addition to dealing with various pre-quakeissues facing Japan, and to start its efforts for revitaliz-ing Japan.

This guideline specifies that correcting the distortedand fragile energy system, implementing innovativestrategies for energy and environment on a short-,medium- and long-term basis in order to comply withrequests for overcoming limited power supply andstrengthening safety measures, and enhancing safe,stable and efficient energy supply in line with environ-mental concerns shall be deliberated at the Council

on the Realization of the New Growth Strategy.In response, the following three points were con-

firmed again and at the councils meeting on June 7:a Japan is in a situation to reexamine with a clean

slate the existing Basic Energy Plan that aimed for50% dependency on nuclear power generation inprimary energy supply by 2030, since Japan facessuch a unprecedented situation in light of th e

Great East Japan Earthquake and Fukushima No. 1Nuclear Power Plant accident.

b Over the years, Japan has changed its energy mixdrastically from water to coal, from coal to oil, and

from oil to nuclear. Countries around the worldalso structure their own energy strategies to meettheir needs. It is always an important issue for allnations to select energies for achieving economicgrowth and the stability of their citizens lives.

c Japan needs to speed up its new consensus build-ing by reexamining its energy and environmentalstrategy from scratch, irrespective of the givenpremises.

It was also decided to establish the Energy andEnvironment Council, headed by the Minister of Statefor National Policy, to rethink the nations energy andenvironment strategies without exceptions across allgovernment agencies and ministries.

The Energy and Environment Council, of which thefirst meeting was held on June 22, 2011, issued theInterim Compilation of Discussion Points for Formu-lation of Innovative Strategy for Energy and the Envi-ronment" on July 27, and decided the broad directionby illustrating the scenarios of lowering the depen-dence on nuclear power and shifting to a distributed

energy system. Based on this direction and the basicpolicy, various deliberations were conducted at thefollowing organizations: The Green Growth Strategy at the Energy and

Environment Council Validation of the power generation cost of each

energy source including nuclear power at Commit-tee to Review Costs, etc. of Power Generation

Development of the optimum energy mix for thenew Basic Energy Plan at the Advisory Committeeon Energy and Natural Resources

Countermeasures against global warming at theCentral Environment Council

Issues on nuclear energy policy at the AtomicEnergy Commission

Taking into account the argument points and thedeliberation results at those meetings, the Energy and

Environment Council decided the Basic Principles~Towards a Proposal Defining Options for a Strategyfor Energy and the Environment~ on December 21.Following this policy, redesign of the energy and envi-ronment strategy was specified in the Strategy forRebirth of Japan adopted at the cabinet meeting onDecember 24.

Showing options for the energy and environmentstrategies and enhancing national debate, the draftsof the Green Growth Strategy, the new Basic EnergyPlan, the new General Framework of Nuclear EnergyPolicy and new global warming countermeasures willbe prepared through continuous deliberations in2012. The Innovative Strategy for Energy and Envi-ronment is scheduled to be decided during summer2012.

Reexamination of Japans Petroleum Policies

In the deliberation of energy policies, petroleumpolicies were also reexamined.

In particular, for securing a stable supply of oil asthe superior energy source due to its disasterresponse capabilities, such topics were tackled aheadof other energy policy measures as the reinforcement

of oils disaster response capabilities was studied atthe Round-table Session of Experts on the Policies of Resources and Fuels. At the round-table session, itwas reported that in the Great East Japan Earthquake,many requests from various quarters were made foroil as a distributed energy in the situation where thesystem energies supply (electricity and city gas) wassuspended. It was determined that oil, which couldmeet such supply requests, played the role of the lastresort of energy for protecting peoples lives. It wasalso decided, as a reinforced measure for a thorough-going oil supply chain in a time of disaster, to formu-late a joint disaster preparedness system among oiland LPG companies by strengthening disasterresponse capabilities at oil terminals and service sta-tions as well as developing a system for data gather-

ing and information service on oil and LPG reserves,etc. With PAJs advocacy efforts, the following opin-ions were incorporated into the deliberation: Clarification of role sharing between public and

private sectors, and enhancement of their collabo-ration

Preparation for a system for information gathering Enhancement of disaster response capability at oil

terminals Necessity for stable oil demand to maintain a

sound supply chain in addition to the expansion of government oil product stockpiling

However, at the 7th session of the Basic Issues Com-mittee on Energy and Natural Resources, the follow-ing four points were indicated as the direction of reform for Japans optimum energy mix and energypolicy:a Thoroughly strengthen policy measures for energy

saving and electricity saving, considering consum-ers behavior and changes in social infrastructure.

b Accelerate the development and usage of renew-able energies to the maximum extent possible.

c Effectively utilize fossil fuels including an energyshift to natural gas, while taking full considerationof the environmental burden (clean use of fossilfuels).

d Lower the dependency on nuclear power genera-tion as much as possible.

Although oil accounts for the major portion of Japans primary energy supply, the petroleum indus-trys advocacy points as described below are hardlyincorporated into its report: Heighten the position of oil as a core energy, by

reevaluating its superiority in disaster responsecapabilities in light of its ease of use in multipleroles.

Ensure a stable scale of oil demand to maintain theoil supply chain.

Furthermore, an energy shift to natural gas wasincluded in the report; despite the fact that the futureenergy strategy had not been firmed up at that stage.From now on it is essential to carry out more carefuldeliberations on each energy source from scratch,

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Energy Policy in Japan

17 18

without preconditions.The Innovative Strategy for Energy and Environ-

ment will be formulated around summer 2012, afterundergoing a process of national debate. PAJ contin-ues to advocate the necessity of oil and its superiorityas an energy supply due to its disaster response capa-bilities which can most benefit affected people.

Energy Supply and Demand Performance (FY2010 Flash Report)

Final energy consumption for FY2010 showed a4.0% increase from the previous year, due to the eco-nomic recovery, an extremely hot summer and a verycold winter. In comparison with the previous year bysector are: 6.8% up for the industrial sector, 2.8% upfor the household and civil sector, and 0.9% up for the

transportation sector.As a result, the total final energy consumption

showed an increase versus the previous year after sixyears of decline since FY2004.

On the other hand, the total domestic primary ener-gy supply was 22,065 petajoules (PJ), or 569.3 millionKL in crude oil equivalent, up by 5.6% versus the pre-vious year; of which oil was 8,853 PJ, or 228.4 millionKL in crude oil equivalent. The oil ratio decreased by2.0% to 40.1% from the previous years 42.1%.

The supply ratios in the total primary energy supplyare: nuclear p ower decreased from 11.5% to 11.3%,while coal increased from 21.0% to 22.6% and natural

gas increased from 19.0% to 19.1%. Major primaryenergy sources other than oil showed growth fromthe previous year. However, even the ratio of coal, the

second largest primary energy source following oil, isjust half that of oil. Stable oil supply, therefore, is

absolutely essential for ensuring energy security inJapan even in the future.

Law Concerning Promotion of Use of Nonfossil Energy Sources

and Effective Use of Fossil Energy Raw Materials by Energy Suppliers(Law Concerning Sophisticated Methods of Energy Supply Structures)

Necessity for Enhancing Energy Suppliers Efforts; Oblige Them to:

To promote utilization of nonfossil energies and effective utilization of fossil energy sourcesby Energy Suppliers (Electricity, Oil and City Gas)

Expand the use of nonfossil power sources, ramping up nonfossil powe r sources suchas solar energy and nuclear power more than 50% by 2020 (Electric Companies)

Purchase electricity by solar power generation at fair prices (Electric Companies) Use biomass fuels and biogas (Oil Companies and City Gas Companies) Use crude oil and natural gas effectively (Oil Companies and City Gas Companies)

Necessity for Promoting Technology Development; Development in:

(Examples) Hydrogen production, storage and fuel cells toward building a hydrogen society Nonconventional resources (methane hydrate and oil sands) High efficiency cracking facilities for residual oils Inte grated Gasification Combined Cycle (IGCC) Utilization of cellulosic biomass like woody waste

Basic Policy(Formulated by METI Minister)

Criteria for Judgment(Oblige specific energy suppliers to

comply with and )

Plan Creation/Submission(Applicable companies:

Energy suppliers over a certain size)

Advice and Order**Status of efforts is quite insufficient

in light of the criteria for judgment

Partial Revision of Laws such asthe Act on the Promotion of Development and Introduction of Alternative Energy

To change the objective for promoting development and introduction fromAlternative Energy to Oil to Nonfossil Energies (new energies, nuclear power, etc.)

through reexamination of the alternative energy policy

Examples of Specific Measures

Set up and publicly announce guidelines for businesses to introduce use of nonfossil energies in their factories and offices(Examples) Promotion of large-scale solar energy (mega solar) facility construction through cooperation with local public organizations Further enhancement for launching new energies such as solar energy generation at public fa cilities like ports, railroads and airports

Long-term Final Energy Consumption Outlook Unit: million kl crude oil equivalent

(FY) 1990 2005 20102020 2030

Business-as-usual Case

AdditionalMeasures Case

PoliticalInitiative Case




Final Energy Consumption 359 100% 413 100% 386 100% 421 100% 401 100% 375 100% 424 100% 391 100% 346 100%

Industry 181 50% 182 44% 170 44% 180 43% 180 45% 177 47% 179 42% 179 46% 174 50%

Household & Commercial 95 27% 134 32% 128 33% 149 35% 134 34% 121 32% 154 36% 130 33% 103 30%

Household 43 12% 56 14% 56 14% 61 14% 56 14% 52 14% 66 16% 56 14% 47 14%

Commercial, etc. 52 15% 77 19% 73 19% 88 21% 78 20% 68 18% 87 21% 74 19% 56 16%

Transportation 83 23% 97 24% 88 23% 92 22% 86 22% 78 21% 91 22% 82 21% 69 20%

Long-term Primary Energy Supply Outlook Unit: million kl crude oil equivalent

(FY) 1990 2005 2010*2020 2030







Primary Energy DomesticSupply

508 587 570 627 596 553 637 590 515

E n e r g y

C a

t e g o r y

Oil 265 52% 255 43% 212 37% 227 36% 215 36% 190 34% 220 35% 204 35% 168 33%

LP Gas 19 4% 18 3% 16 3% 18 3% 18 3% 18 3% 18 3% 18 3% 17 3%

Coal 85 17% 123 21% 129 23% 128 20% 120 20% 107 19% 131 21% 119 20% 92 18%

Natural Gas 54 11% 88 15% 109 19% 114 18% 103 17% 89 16% 112 18% 94 16% 71 14%

Nuclear Power 49 10% 69 12% 64 11% 99 16% 99 17% 99 18% 107 17% 107 18% 107 21%

Hydropower 22 4% 17 3% 18 3% 19 3% 19 3% 19 3% 19 3% 19 3% 20 4%

Geothermal 0 0% 1 0% 1 0% 1 0% 1 0% 1 0% 1 0% 1 0% 2 0%

New Energy 13 3% 17 3% 20 4% 22 3% 22 4% 30 5% 29 5% 29 5% 38 7%

* actual figure Source: METI : The Long-term Energy Supply and Demand Outlook, in August 2009

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Oil Stockpiling and New Emergency Countermeasures

21 22

of oil stockpiling obligations as well as strengtheningthe foundations for emergency responses, the followingprovisions were amended in the new act:1. Notification requirements for business commence-

ment of oil refiners, distributors and retailers; clari-fication of registration requirements for oilimporters

2. Clarification of the provisions concerning a releaseorder of the government oil stockpiles by the min-ister of the Ministry of Economy, Trade and Indus-try (METI)

3. Advice to increase the crude oil processing vol-umes above planned volumes

The Subcommittee on Petroleum Stockpiling andEmergency Preparedness under the Petroleum Coun-

cil of the Advisory Committee for Natural Resourcesand Energy, started in March 2005, deliberated theredefinition of the roles of both government and pri-vate sectors stockpiling obligations, and the appropri-ate levels of each sectors reserves. The subcommitteeissued its report, which recommended mitigating theprivate sector stockpiling obligation from 70 days to alevel of 60-65 days and increasing the governmentsector stockpiling with appropriate timing in order notto lower the nations energy security level. In responseto these developments, the Petroleum Councils Petro-leum Policy Subcommittee was set up in December2005. The Petroleum Policy Subcommittee recom-mended the following measures in May 2006 fromthe necessity for forming a responsive oil stockpiling

I Overview of Past Emergency Periods

288.61 Million kl(FY1973)

Events of the Period

andGovernmentResponses

StockpilingDays

Crude OilImport Vol.

Crude OilDependence

on Middle East

Time

Background

Oil Share ofPrimaryEnergySupply

Rate of CrudeOil Price Hike

($/Bbl)

Crude CIF(Highest) (Yen/Liter)

GasolineRetail Price

(Yen/Liter)

Ratio of CrudeImport Amount

to JapanTotal Imports

ForeignExchange Rate

(Yen/$)

1st Oil Crisis

Oct 1973 ~ Aug 1974

- Private- Government

Crude oil supply cut due to oilexport suspension by Arabcountries at the outbreak of the 4th Middle East War

Hoarding of toilet paper, etc. Setting of wholesale & retail prices

by Administrative Guidance(Mar~Aug '75)

Setting of Standard Prices by thePetroleum Industry Law(Dec '75~May '76)

Restraint of large lot electric poweruse and voluntary ban on privatevehicles

Enforcement of two laws foremergency responses (Dec '73)

Enforcement of Petroleum ReserveLaw (Apr '76)

77.4%(FY1973)

21.5 (Aug 1974)

114 (May 1975)* 1

Arabian Light (Posted Price)3.9 Times

Oct 19733.0

Jan 197411.6

67 (as of Oct 1973)

67 Days0 Days

23%(FY1973)

77.5%(FY1973)

298(Aug 1974)


2nd Oil Crisis

Oct 1978 ~ Apr 1985

Suspension of Iranian crudeexport and interruption of tanker traffic in the Gulf due to the Iranian Revolution

Partial release of private oilstockpiles (Apr '79~Aug '80)

Setting of wholesale prices byAdministrative Guidance(Mar '79~Apr '82)

Implementation of energy savingmeasures such as target temperatures for air conditioning

Introduction of lighter summerclothing

Enforcement of Energy Saving Law(Jun '79)

Enforcement of Alternative EnergyPromotion Law (May '80)

71.5%(FY1979)

55.2 (Aug 1981)

177 (Dec 1982)* 1

Arabian Light (Spot Price)3.3 Times

Sep 197812.8

Nov 198042.8

92 (as of Dec 1978)

85 Days7 Days

43%(FY1980)

75.9%(FY1979)

246(Apr 1982)


Gulf Crisis

Aug 1990 ~ Feb 1991

Invasion of Kuwait by Iraqresulted in economicsanctions, and escalated into the Gulf War

Voluntary ban on purchasing crude oilat high prices

Restraint of fuel imports and shift to adomestic production structure

Setting of wholesale prices byAdministrative Guidance & Moving to"Monthly Settlement Method"(Sep '90~Apr '91)

Partial release of private oil stockpiles(4 days)

Implementation of energy savingmeasures such as higher airconditioning temperatures duringsummer and environmentally-friendlydriving campaign in government &private sectors

58.3%(FY1990)

27.6 (Nov 1990)

142 (Nov 1990)* 2

Dubai (Spot Price)2.2 Times

Jul 199017.1

Sep 199037.0

142 (as of Dec 1990)

88 Days54 Days

19%(FY1990)

71.5%(FY1990)

128(Nov 1990)


HurricaneKatrina

Aug 2005 ~ Dec 2005

Damage to oil-related facilitiesin the Gulf of Mexico area in the USA due to the destructivehurricane Katrina

Voluntary ban on gasoline imports Partial release of private oil

stockpiles (3 days) Urgent gasoline export to USA

50.0%(FY2003)

42.7 (Oct 2005)

131 (Oct 2005)* 2

Dubai (Spot Price)1.1 Times

Jul 200552.83

Sep 200556.54

170 (as of Sep 2005)

80 Days90 Days

20%(FY2005)

89.5%(FY2004)

113(Oct 2005)

*1 Government Statistics *2 Oil Information Center

Current Status of Oil Stockpiling in Japan (as of Dec 2011)

Private Stockpiling Government Stockpiling

Stockpile Days 87 days 116 days

Stockpiling Volume 35.7 million kl 47.7 million kl

Obligation Days 70 da ys of dome stic demand 50 mill ion kl (attai ned in Feb 1998)

Holding MethodThrough production

and distribution processesIn sealed designated storage tanks

Holding LocationPrivate sector tanks in refineries

and oil terminalsaTanks of national stockpiling basesbTanks borrowed from private sector

CompositionCrude oil : 50%

Oil products: 50%Crude oil : 99.7%

Oil products: 0.3%

Administrative Body Oil refiners and importers

a 10 national stockpiling bases(2/3 of government reserve)

b Private oil companies(1/3 of government reserve)

Effect ofStockpile Release

a Prompt supply to distribution markets asstockpiles are held at refineries and oil terminals

b Flexible release of stockpiles depending oncrude procurement status and seasonaldemand fluctuation

c Weak psychological effect on the markets,compared with the government announcementon releasing its stockpiles

a strong psychological effect on the market whenthe government announces its decision torelease its stockpiling to increase oil supply inthe market

b Reduced mobility of released stockpiling,compared with the private sector release,as reserves are stored at remote nationalstockpiling bases

Cases ofStockpile Release

a 2nd Oil Crisis (Mar 1979~Aug 1980)b Gulf Crisis in response to CERM

(Jan~Mar 1991)c Hurricane Katrina aftermath (Sep~Dec 2005)d The Great East Japan Earthquake (Mar~May

2011)e Libyan situation (Jun~Dec 2 011)

None(Only for stockpile release training exercises)

Financial MeasuresSubsidy for oil purchasing costs

and tank construction costsGovernment's budget

(Petroleum and Coal Tax)

Cost RecoveryPart of product cost

(passing the cost on to consumers is expected)Part of product cost

(passing the cost on to consumers is expected)

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Oil Stockpiling and New Emergency Countermeasures

23 24

system:1. Increasi ng of the stockpile volume (by buildup of

the government stockpile)2. Introducing oil product reserves by the govern-

mentRegarding the government product reserve, it was

decided to implement kerosene stockpiling in July2009. Kerosene reserve stockpiling at a level equiva-lent to one days consumption during the peak season(130 thousand KL) is underway in the five regions(Hokkaido, East Japan, Kanto, Chubu & Kinki, and Shi-koku & Kyushu) in Japan. However, neither reductionof the private sector stockpiling days nor buildup of the government stockpile volume was taken.

Taking into account the great difficulties experi-enced in petroleum product distribution at the time of

the Great East Japan Earthquake in March 2011, theimprovement of the governments oil product stock-piling by expanding product coverage and volumesfor the stockpiles, and more flexible provisions forstockpiling release requirements are currently underreview.

Toward New Emergency Countermeasures

In FY2007, the Subcommittee on NextGeneration Fuels and Petroleum Policiesunder the Advisory Committee for Natural

Resources and Energy made a reviewbased on active promotion of internationalcooperation for oil stockpiling with coun-tries in and surrounding Asia, where oilconsumption is rapidly increasing. It alsodiscussed Japans cooperation toward sta-bilization of the international oil market inan emergency, taking into account the pos-sible direct release of its stockpile to over-seas countries.

In line with such movements, a Japaneseoil company successfully won an interna-tional bid in 2009 for preferential sales andpurchase of its crude oil stockpile, based onan intergovernmental agreement conclud-ed with New Zealand. In June 2009, theAgency for Natural Resources and Energy(ANRE) in Japan made an agreement on

the Joint Stockpiling Project with the Supreme Petro-

leum Council (SPC) of the United Arab Emirates.Based on this agreement, stockpiling of crude oil fromAbu Dhabi National Oil Company (ADNOC) had start-ed with receiving the first cargo (about 300 thousandKL) at the Kiire Stockpiling Base in Kagoshima Prefec-ture in December 2009. In addition, under the basicagreement on a joint project between ANRE andSaudi Arabian Oil Company (Saudi Aramco) in June2010, the first crude oil tanker (about 300 thousandKL) arrived at the Okinawa Stockpiling Base in Okina-wa Prefecture after February 2011. Such crude oilreserves are used commercially by these oil produc-ing countries under normal times; however, in anemergency situation Japanese oil companies receivepreferential crude oil supply from their reserves underthese agreements. This scheme is expected to rein-force energy security and at the same time toenhance the formation of strategic relationships withoil producing countries.

On the other hand, in accordance with movingahead with global warming countermeasures, pro-

moting the introduction of renewable energies is

underway. Since such energies as solar and windpower generally have a supply instability problem, oilas the last resort of energy, which complements thesupply instability, will play an ever-greater role.

It is however assumed that Japans domestic oildemand will continue to show a structural downwardtrend. In order to keep playing roles as being the lastresort of energy and for providing flexible responsesin an energy, it is an important policy issue to reduce

the petroleum industrys burden of huge costs associ-ated with holding the private stockpiling.

In response to societys demand at the time of the

Great East Japan Earthquake in March 2011, the petro-leum industry as a whole made utmost efforts tomaintain stable oil supply, utilizing the characteristicsof a distributed energy that thrives during disasters inevery segment, from refining to marketing. Currently,the government is reexamining the current BasicEnergy Plan. The petroleum industry is advocating for-mulation of an agile an d flexible stockpiling systemwhich will be able to mitigate confusion caused by asupply shortage of petroleum products in an emer-gency, considering the lessons learned from therecent great earthquake.

2008

8,614(177)

(77)

(99)

2007

8,902(174)

(79)

(95)0

2,000

4,000

6,000

8,000

10,000

201120052000199519901985198019791978(FY)

I Oil Stockpiling Obligation Trends:Volume and Days (end of Mar each year)

Source: METI

Unit: 10,000kl, (days)

Private Stockpiles

Government Stockpiles

volume: Product equivalent basisdays: Petroleum Reserve Law

(90)

5,945(90)

( 7) ( 7) ( 31 ) ( 55 ) ( 7 6)

6,048(88)

(81)

6,593(95)

(88)

6,949(128)

(97)

8,277(144)

(89)

8,816(157)

(81)

8,075(193)

(79)

(84)

8,806(156)

(72)

(114)

2012

8,343(197)

(84)

(113)

2010

8,301(199)

(84)

(115)

2009

8,670(184)

(81)

(102)

8,743(166)

(74)

(92)

I Outline of Japans Response Measuresfor an Emergency Period (as of Apr 2012)

* Japan Oil, Gas & Metals National Corporation

Oil Stockpiling Measures Oil Supply Measures

Ata normal

time

Ata time of

threat

In theevent of anemergency

EmergencyDeclaration

Petroleum Supply & Demand Adjustment Act

Allocation/Ration Systems of Major Commodities

Allocation/Ration Systems of Oil Products

Act on EmergencyMeasures for

Stabilization ofNational Life

RevisedPetroleum

Stockpiling Act

P r i v a

t e S e c t o r

S t o c k p

i l i n g

G o v e r n m e n

t S t o c k p

i l i n g

JOGMEC*

Maintain reserves

Secure stable supply by releasing oil reserves

Stop making up

oil reserves

Draw down oilreserves

Cooperative actionsby industries under

governmentdirection/supervision

Cooperative actions by the oil industryunder government direction/supervision

Establish oil supply

targets

Indicateproduction/import

plans

Order oil holdings,sales/deliveries

Indicate/ordercommodity imports

Indicate commodityholdings

Determine standardprices

Indicate commodityproduction

Ordersales/deliveries

Mediate/guideoil supplies

Restrict oil

consumption

Restrictoperations at SS

Supply Measures onMajor Commodities

Control Measures onOil Consumption

Registration of oilrefiners, importers& distributors for

informationgathering

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Japans Petroleum Resource Development 6 Japans Petroleum Resource Development

25 26

Japans Petroleum Resource Development

Petroleum resource development in Japan started in the early Meiji period (1870s)primarily in Niigata Prefecture. Currently, commercial production is ca rried out in Hok-kaido, Akita and Niigata Prefectures. Also, exploration development activities continueto be conducted, and Yufutsu Oil/Gas Well and Minami Nagaoka Oil/Gas Well can benoted as representative examples. These wells are currently unde r production. Associ-ated natural gas produced with oil is utilized as city gas or power generation fuel inmost adjacent areas and contributes to the local economies of such communities. AsJapan however is the third largest oil consuming country, demand cannot be satisfiedthrough domestic oil and gas production, because this volume is only 1.4% of the

domestic consumption of oil and natural gas. Almost all petroleum resources aredependent on imports.

Independent development of offshore oil and natural gas resources by Japanesefirms contributes not only to ensuring long-term supply stability of energy resources,but also to establishing and strengthening mutual relationships between Japan and oiland gas producing countries. Fostering business links with those national oil compa-nies and oil majors has great significance for energy security.

Today, Japanese firms are involved in approximately 130 oil and gas developmentprojects around the world in areas such as the Middle East, South-east Asia, Africa,South and North America, and the former republics of the Soviet Union, of whichabout 70 have performed well in commercial production (at the end of June 2011). Theshare of crude oil and natural gas from independent crude oil and gas developmentprojects is about 24% of the total domestic demand volume.

Japans Independent Oil and Natural Gas Development in Future

Oil and gas exploration development is a difficult business, requiring a huge amountof investment and advanced technologies. To acquire promising areas for exploration,it is essential for the government to take diplomatic initiatives for opening up accessas well as for building and enhancing cooperative relationships with oil and gas pro-ducing countries. As Japans oil development firms are latecomers to this businesssector and inferior in both capital and technologies to oil exploration companies suchas the oil majors in the USA and Europe, they have been subsidized by the govern-ment through Japan National Oil Corporation (JNOC) and, then, a newly establishedorganization called Japan Oil, Gas and Metals National Corporation (JOGMEC) whichsucceeded JNOC when it was abolished in April 2005.

In this way, the government regards crude oil and natural gas as important energysources and provides a favorable business environment for the private oil and gascompanies to conduct their business operations. In turn, the development firms investand distribute business resources to achieve their targets. It is expected that such ajoint government and private-sector system will continue to function effectively.

Idemitsu Petroleum UKIdemitsu E&P Shetland

Norske AEDCIdemitsu Snorre Oil Development

Nippon Exploration & Production UK CIECO North Sea

Marubeni Oil & Gas (U.K.)CIECO Energy (UK)

INPEX UKSummit Petroleum

Mitsui E&P PolandArabian OilThe Egyptian Petroleum DevelopmentTeikoku Oil AlgeriaTeikoku Oil Suez SOBINPEX LibyaJapex LibyaMoeko Libya

ITOCHU Oil Exploration (Azerbaijan)INPEX North Caspian SeaINPEX Southwest Caspian SeaINPEX BTC PipelineITOCHU Oil Exploration (BTC)

Summit Discovery ResourcesMid Continent Oil & GasJX NOEX USATeikoku Oil de BurgosJAPEX (U.S.)Teikoku Oil (North America)Mitsui E&P USAMitsui E&P Texas

INPEX IchthysINPEX Banda SeaJX Nippon Oil & Gas Exploration (Australia)

Japan Australia LNG (MIMI)INPEX AlphaINPEX BrowseCosmo Oil AshmoreINPEX MaselaINPEX SahulINPEX Timor SeaINPEX DLNGPLMitsui E&P AustraliaJAPAN ENERGY E&P AUSTRALIAJAPAN ENERGY E&P JPDAOsaka Gas AustraliaOsaka Gas CruxOsaka Gas GorgonOsaka Gas Ichthys Development

INPEX Offshore Southeast MahakamINPEX South MakassarJAPAN CBM JX Nippon Oil & Gas Exploration (Malaysia) JX Nippon Oil & Gas Exploration (Sarawak)Universe Gas & Oil Company INPEX Corporation INPEX TengahIndonesia Natural Gas Resources MuturiKG Wiriagar PetroleumNippon Oil Exploration (Berau)KG Berau PetroleumMI Berau Japan Papua New Guinea PetroleumSouthern Highlands PetroleumMurray PetroleumINPEX Offshore North MahakamJAPEX Buton

INPEX SERAM SEANippon Oil Exploration (Niugini)Moeco West Papua 1Moeco West Papua 3JX Nippon Oil & Gas Exploration (Onshore Sarawak)

Source: Japan Petroleum Development AssociationRemarks: projects in production

JAPAN CARABOBOINPEX North PeruTeikoku Oil (Venezuela)Teikoku Oil (Suriname) JGC Energy Development (USA)

INPEX Offshore North CamposINPEX OFFSHORE NORTHEAST BRAZIL

Mitsui E&P Australia

Ravva Oil Singapore

Mitsui E&P Mozambique Area 1

Idemitsu Oil & GasMoeco Merangin

Nippon Oil Exploration (Myanmar)Mitsui Oil Exploration

Moeco Thai Oil Development Japan Vietnam Petroleum

INPEX NatunaMoeco Vietnam Petroleum

Moeco ThailandMoeco Southwest Vietnam Petroleum

Idemitsu Cuu Long PetroleumMoeco Cambodia

Siam Moeco

Teikoku Oil (Con Son)Japex Block AMoeco Tuna E&P

Moeco (Son Hong)JX Nippon Oil & Gas Exploration

(Peninsula Malaysia)Moeco (Phu Khanh)

Nippon Oil Exploration (Cuu Long)Moeco International CIECO Exploration & Production (Australia)

Mitsui E&P Australia

Canada Oil SandsJapan Canada OilINPEX Canada

Sakhalin Oil and Gas DevelopmentSakhalin Energy Investment

Arabian OilAbu Dhabi Oil

United Petroleum DevelopmentJapan Oil Development

INPEX ABKMitsui Gas Development QatarQatar Petroleum Development

JJI S&NMitsui E&P Middle East

JAPEX Garraf

MPDC GabonTeikoku Oil (D.R.Congo)

Angola Japan OilAJOCO Exploration

AJOCO '91 ExplorationCIECO E&P (Namibia)

Mitsui E&P Ghana KetaINPEX West Congo Petroleum

Energy Mega Pratama

Major Independent Oil Development Projects by Japanese Firms (as of the end of Nov 2011)

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Regulatory Reform and Petroleum Industry 7 Regulatory Reform and Petroleum Industry

27 28

Progress in Deregulation

Amid the ongoing globalization and easing of regu-lations in the Japanese economic society, the Japa-nese petroleum industry reached almost completeliberalization at the end of 20 01 when the PetroleumIndustry Law was abolished.

In consideration of the importance of oil, regula-tions of the petroleum industry had been enforced bygiving the highest priority to the concept of securing astable supply under the Petroleum Industry Law,

which was enacted in October 1962 as a fundamentallaw. The Petroleum Reserve Law, the Gasoline RetailBusiness Law, and the Provisional Measures Law onthe Importation on Specific Refined Petroleum Prod-ucts (Fuel Import Restriction Law) were enacted sincethen to complement the Petroleum Industry Law.Consequently, a broad range of regulations as well asadministrative guidance on petroleum imports, refin-ing, manufacturing, and marketing were in effect.

However, as the gap between domestic and foreignprices during the deregulation process became a politi-cal issue, the shape of petroleum industry regulationswas reviewed. As a result, a series of deregulationmeasures concerning the administrative guidance andits procedures under the Petroleum Industry Law andthe Gasoline Retail Business Law were implementedduring the period between 1987 and 1992. After April1996, when the Fuel Import Restriction Law was abol-ished, the objective of Japanese petroleum policybecame the realization of an efficient oil supply usingmarket mechanisms, in addition to securing a stable oilsupply.

In June 1998 the Petroleum Council compiled a

report outlining the future direction of the petroleumpolicy with a main focus on the following points, aim-ing at implementation in 2001:

a The abolition of supply and demand adjustmentregulations such as the need for approval for busi-ness commencement and facility investments

b The abolition of regulations on pricing based onsetting standard prices

The council then deliberated the optimum form of oil stockpiling and emergency responses, and pro-

posed in its report in August 1999 to establish specificresponse measures and an increase in the volume of the government oil stockpiling. The report also point-ed out that it is extremely important from the view-

point of security measures to have a healthypetroleum industry which runs a stable business evenin a severe management climate.

Taking into account the above report and others, thePetroleum Industry Law was abolished at the end of December 2001. At the same time, the PetroleumReserve Law was partially amended and reformulatedas the new Oil Stockpiling Act, enforced in January2002, to strengthen the infrastructure for emergencyresponses. As a result, major petroleum industry reg-ulations are limited to oil stockpiling requirements bythe Oil Stockpiling Act, and to fuel quality by the Acton the Quality Control of Gasoline and Other Fuels.

In the midst of such ongoing regulatory reforms, theexcess capacity of oil refining facilities became anissue under a decline in domestic oil product demandmainly attributable to the enhancement of the oil usereduction policy, the falling population, a low birthrateand aging population, a rapid increase in crude oilprices, and growing awareness of energy conserva-tion during the economic recession after the LehmanShock. While the petroleum industry is making volun-tary efforts to reduce its refining capacity, it was decid-

ed that oil refiners need to hold at least a certain levelof the capacity of heavy oil cracking units by the LawConcerning Sophisticated Methods of Energy SupplyStructures. Consequently, each oil company isrequested to cut its refining capacity through this reg-ulatory measure by the end of Fiscal Year (FY) 2013. Insome oil companies, the partial reduction in refiningcapacities as well as refinery closures have alreadybeen decided.

Business Environment Changes after Deregulation

With deregulation and the abolition of the Fuel ImportRestriction Law as a turning point, thepetroleum indus-try has been forced to face a difficult business environ-ment under sluggish market conditions and worseningcorporate profits due to severe price competition in dis-tribution markets. For this reason, each oil company hasbeen making efforts to lower its operating costs in everyaspect of business, such as the rationalization of refin-ing and distribution functions, restructuring by large-scale workforce reductions in marketing andadministrative functions, and the reengineering of cor-porate organizations.

In the ongoing process of liberalization in each phaseof manufacturing, importing and marketing, after suchregulatory reforms as the abolition of the Fuel ImportRestriction Law and the Petroleum Industry Law, it hasbecome much more important for the petroleum indus-try to conduct business activities under market mecha-

nisms. The introduction o f a market mechanism he lpsto promote the streamlining of manufacturing and sup-ply systems through appropriate distribution of resources in a market. To that end, extensive disclosureof appropriate market information is essential for theeffective functioning of market mechanisms. Beforederegulation, however, the available information on oilsupply and demand was limited to the statistics collect-ed and publicized by the government. As these statisticswere mainly for analyzing the nations macroeconomictrends, it was insufficient for use as an up-to-date tool toallow market mechanisms to function effectively.

Under such circumstances, PAJ developed the PAJOil Statistics Weekly, which gives the weekly supplystatistics on crude oil and petroleum products, anaccurate, prompt and precise database, to providedata on oil supply situations on a weekly basis in Jan-uary 2003. Since then, data on petroleum product sup-ply by area (East Japan and West Japan), petroleumproduct export, and refining capacity utilization ratioswere added. PAJ continues to extend its information

PAJ's Oil StatisticsWeekly Website

https://stats.paj.gr.jp/

I Petroleum Industry Regulatory Reform History in Japan

Year1960

1975

1985

1990

1995

2000

2005

2010

1965

During Normal Periods During EmergenciesEnactment of Petroleum Industry LawJul '62

Enactment of Petroleum Reserve LawApr '76

Two Emergency Laws:Dec '73

Enactment of Gasoline Retail Business LawMay '77

Repeal of Fuel Import Restriction Law (Import liberalization of fuelproducts)Mar '96

Repeal of Petroleum Industry Law

Partial Revision of Act on Quality Control of Gasoline and Other Fuels(Registration and Quality Assurance Obligation of Processors)

Dec '01

Enforcement of Law Concerning Sophisticated Methods of Energy Supply StructuresAug. 09

Notification of Criteria for Judgment Concerning Promotion of Effective Use of FossilEnergies (Raise Installa tion Ratio of Heavy Oils Cracking Unit s to about 13% by FY2013)

Jul 10

Notificati on of Criteria for Judgment for Using Nonfossil Energies(Set Target Volumes for Using Bio-ethanol for Mixing with Gasoli ne by FY2 017)

Nov 10

Enactment of New Petroleum Stockpiling ActJan '02

Feb '09

Automatic Approval for Installation of Product Upgrading FacilitiesJul '87

Abolition of Guidance on Gasoline Production QuotaMar '89

Abolition of Guidance on Kerosene Inventory Build-up for WinterOct '89

Mar '90

Flexible Approval for Installations of Crude Processing FacilitiesSep '91

Abolition of Guidance on Crude Processing (Throughput)Mar '92

Abolition of Tariff-quota System (TQ) for Heavy FuelsMar '93

Abolition of SS Certificate System for Fuel Supply-source by itsBranded Primary Distributor

Lifting of the Ban on Manned Self-service SS

Dec '97

Apr '98

Enactment of Act on Quality Control of Gasoline and Other Fuelsby revising Gasoline Retail Business Law

Abolition of Guidance on SS Construction (Scrap-and-Build Rule)and on Transfer of SS Brand between Primary Distributors

Apr '96

Revision of Petroleum Reserve LawApr '96

Automatic Approval of Petroleum Product Exports(Export Liberalization of Fuel Products)

Jul '97

Enactment of Provisional Measures Law on Importation of Specific Refined Petroleum Products (Fuel Import Restriction Law)

Jan '86

1

s t P h a s e

D e r e g u

l a t i o n

2 n

d P h a s e

D e r e g u

l a t i o n

EmergencyLaw for Stabilization of NationalLife PetroleumSupply and Demand Optimization Law

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Regulatory Reform and Petroleum Industry

29 30

coverage and expects the establishment of a transpar-ent oil market by providing up-to-date oil supp ly infor-mation which can be used to allow the full functioningof market mechanisms.

Establishment of Fair and Equal Competitive Conditions among Energy Sources

More intensified competition than ever among ener-gy sources is projected with the progress of deregula-tion. In such a situation, compared with other energies,oil is unfavorably treated to a significant degree in

terms of taxation and its stockpiling obligations.From April 2003 coal was added as a taxable product

under the petroleum and coal tax scheme, and the taxrates of LNG and imported LPG were raised, taking intoaccount the reinforcement of measures to reduce CO 2 emissions originating from fossil fuels and the fairnessof tax burdens among energy so urces. Though the taxgaps between oil and other energies were narrowed,still higher tax rates versus other energies wereimposed on oil (more than double) even after April 2007when the final tax rates were applied as shown below:

- Oil : 2,040 yen/Kiloliter (KL)- Coal : 700 yen/ton- LNG : 757 yen/KL on an oil calorie equivalent basis- Import LPG: 822 yen/KL on an oil calorie equivalent

basis

Furthermore, in the FY2012 Tax Reform Package, arise in the tax rate of petroleum and coal tax, in accor-dance with the amount of CO 2 emissions, was decidedin phases from October 2012 as a tax for global warm-ing countermeasures. The new tax rates for FY2016 will

be 2,800 yen/KL for oil, 1,860 yen /KL for LNG and LPG,and 1,370 yen/KL for coal. Since the petroleum industryhad been insisting on conducting a close investigationbeforehand of the global warming countermeasures inthe existing budget, which exceeds 1 trillion yen, it isregrettable that a tax hike merely for obtaining tax reve-nue was decided. As petroleum and coal tax is levied oncrude oil, the oil companies are responsible for all taxcollections and payments under open competitionbased on market mechanisms. Thus, no cost recoverysystem including such tax collections is provided.Essentially, taxes on oil consumption are considered tobe borne by its end-consumers. The taxpaying capacityof oil companies reaches a critical limit during a down-turn in domestic demand. The petroleum industry there-fore seeks a political consideration for ensuring thecollection of the tax increases.

On top of that, new fuels like alcohol fuels (100% alco-hol) and compressed natural gas for CNG vehicles haveneither any diesel oil transaction tax nor gasoline taximposed on them. Since those fuels are for use in auto-mobiles, the impartiality of tax imposition is being seri-ously ignored.

Oil stockpiling became a very useful policy measureas a pillar for energy security after the oil crises. As forthe stockpiling obligation of imported energy resourcesother than oil, however, only LPG has a 50-day require-ment, but there is no obligation for natural gas. As it isassumed that natural gas demand will increase fromnow on, prompt actions regarding natural gas stockpil-ing are necessary from the viewpoint of maintaining astable energy supply.

On the other hand, the Law Concerning SophisticatedMethods of Energy Supply Structures was enacted inJune 2009 to enhance the efforts towards the formationof a low-carbon society. The Act on the Promotion of

Development and Introduction of Alternative Energy(the Alternative Energy Act) was also revised, so that thepast mindset of promoting alternative energies at theexpense of an excessive tax burden only on oil hasbeen changed. Realizing competitive conditions on anequal footing among energy sources is important toform a fair market where market mechanisms are

allowed to function effectively.

Movements toward Petroleum Industry

paj2012

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