ARTICLE IN PRESS

Energy Policy 36 (2008) 1764–1775

www.elsevier.com/locate/enpol

Overseas oil-development policy of resource-poor countries:

A case study from Japan
Masanari Koike, Gento Mogi, Waleed H. Albedaiwi
Department of Technology Management for Innovation, Graduate School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, Japan
Received 21 October 2007; accepted 21 January 2008
Available online 14 March 2008

Abstract

Japan, currently the world’s third largest oil consumer, depends on imports for almost all of its oil needs. Owing to this high level of
dependence, Japanese citizens as well as the economy have historically been vulnerable. In the past, certain incidents caused by the
interruption of oil imports have resulted in fatal damages to the country. In order to reduce these risks, the Japanese government has
supported overseas exploration and development activities of the domestic upstream oil industry, which has not proven as successful as
expected. This paper presents the experiences, policies, and the structure of Japan’s attempts to increase the share of domestic oil needs
met by development activities. While conducting this study, both internal and external constraints were encountered. In addition to the
lack of domestic oil reserves, factors including the institutional design of cooperation between government and private industries, the
early history of the upstream industry, the target area of overseas development, and the changing environment have created impediments
toward achieving the targets. In 2006, Japan again set a new target for doubling the ratio of self-developed oil in its total imports by 2030,
and will face challenges in clearing the above-mentioned hurdles.
r 2008 Elsevier Ltd. All rights reserved.

Keywords: Upstream oil policy of Japan; Resource-poor country; State-owned oil company

1. Objectives of the research Thus, Japan has had no choice but to depend on imported
oil for almost 100% of its domestic demand (99.6% in
This study shows how Japan has tackled overseas oil 2006).
development as a resource-poor country. During its long Understanding the vulnerability caused by its high
history, Japan has faced several barriers in its development dependence on foreign producers from past experience,
due to oil supply disruptions. It can be said with lesser Japan has long made efforts to increase its self-developed
emphasis that Japanese economy and foreign policy have oil production in overseas oil fields. The 2006 committee
always been constrained by the security issues posed by oil report on oil policy, produced by the Ministry of Economy,
supply. For instance, the outbreak of the Pacific War Trade and Industry (METI), lists four advantages of
(1941–1945) and the subsequent defeat, the first negative pursuing exploration and development activities (Advisory
growth since the end of the War after high-flying growth Committee for Natural Resources and Energy, Ministry of
(1974), and the ongoing territorial disputes with neighbor- Economy, Trade and Industry, 2006). First, they con-
ing countries relate to the issues of oil shortage, and thus tribute toward the long-term stability of the oil supply
are firmly established in the mind of the government. While because of the direct involvement in production and
Japan has maintained its domestic oil production, the operation. Second, involvement in such activities helps in
output has never been sufficient to meet the demands of the making timely prediction of changes in the market, since
world’s third biggest consumer (British Petroleum, 2007). projects are executed under the energy policies of oil-
producing countries. Third, it also makes it possible for
Corresponding author. Tel.: +81 3 5841 7046; fax: +81 3 3818 7492. investors to understand global trends of exploration and
E-mail address: tt57382@mail.ecc.u-tokyo.ac.jp (M. Koike). development and strengthen business partnerships with

0301-4215/$ - see front matter r 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2008.01.037
 ARTICLE IN PRESS
M. Koike et al. / Energy Policy 36 (2008) 1764–1775 1765

others. The last advantage mentioned in the report is the of self-developed oil in the total oil imports. Japan has
strengthening of a wide-ranging and interdependent again set a target of increasing the self-developed oil share
relationship between Japan and oil-producing countries. by referring to a numerical target. It is hoped that this
However, despite fully understanding the value of self- study will be of assistance to energy planners in the
developed oil supplies through firsthand lessons, and country.
having invested considerable effort in achieving various
objectives, Japan has botched its previous attempts. The
first national target of securing self-developed oil supplies 2. History of Japan’s overseas development
was set 40 years ago, and was downwardly revised several
times due to ‘‘changes in the external environment’’ by past 2.1. The early history of the upstream industry in Japan
administrations; however, none of the targets were
achieved (Table 1). Even in 2005, only 0.45 MMBD or Japan’s overseas oil development was initiated at the end
10.5% of total oil imports of Japan were developed by of the 1910s when declining domestic production made it
Japanese companies. difficult to meet growing domestic demand. The growth in
It is actually disadvantageous for a resource-poor demand was caused not only by economic development but
country to cultivate a strong upstream industry and to also by military use, especially the Imperial Japanese Navy.
demonstrate its technologies, which are critical to the After reaching an agreement with the Soviet Union on an
success of overseas projects. Unlike the US oil industry, oil concession for North Sakhalin, Japan founded the
which originated from the rich domestic oil reserves, North Sakhalin Oil Corporation in 1926. The company
countries with few feasible reserves face difficulties in subsequently exported around 18 million barrels of oil to
developing and maintaining a competitive upstream oil the home country until its dissolution in 1944 (Teikoku Oil,
industry. However, resource-poor countries have not 1992a).
always experienced such difficulties in overseas oil devel- In addition to the development of North Sakhalin, Japan
opment as those faced by Japan. France and Italy, with forged ahead in South East Asia to increase its oil supplies,
limited domestic oil reserves, have sustained a much higher in response to the breakdown of negotiations with the US
ratio of self-developed oil (98% and 55%, respectively, in and Netherlands over crude oil supply from the Dutch East
2004) in their total import quantity only through their Indies. Teikoku (Imperial) Resource Development, which
national oil companies, Total, and ENI (METI, 2006a, b). had a 98% share of the domestic oil production, played the
The applicable external environment may be different from key role in this process. Teikoku was founded in 1940 as a
these countries; however, the first step for Japan is to learn private corporate venture, and later (in 1941), became
from the past by examining what unique constraints Teikoku Oil Corporation, which was co-funded by private
prevented the country from achieving its national targets companies and the state government.
in securing overseas oil reserves. Even though the oil supply from the colonies in South
This study investigates Japan’s past struggles from both East Asia was at one time sufficient to meet domestic
industrial and policy perspectives in a chronological order, demand, this was very brief, and supply declined rapidly as
with an objective of highlighting the internal and external the war situation aggravated and the transportation fleets
constraints on overseas oil-development activities. These were devastated by strikes (Teikoku Oil, 1992b). Subse-
constraints are examined in the light of quantitative quently, Japan was forced to change its policy for filling the
references. In addition, with regard to these objectives, gaps by increasing domestic production and advancing its
the study focuses on the roles of the government and artificial petroleum program, neither of which accom-
industry in overseas projects. Finally, the paper introduces plished the targets due to limited domestic resources and
Japan’s current attempts toward increasing the proportion massive air strikes against the production plants.

Table 1
Targets and result of Japan’s overseas oil development

When target was set Target of own-developed oil Target data Result

1965 30% of total import of 881 1985 10.7%, 133 million barrels/year
million barrels/year
1967 30% of total import 1985 10.7%
1978 1.5 MMBD 1990 0.45 MMBD
1983 1.2 MMBD 1995 0.69 MMBD
1993 1.2 MMBD At the beginning of the 21st 0.58 MMBD
century
2000 Cancellation of numeric target – –
2006 40% of total import 2030 ?

MMBD, million barrels per day.

Sources: Hoshino (1968), Petroleum Association of Japan (1985), JNOC (1995), Japan Petroleum Development Association (2005), METI (2006a, b).
 ARTICLE IN PRESS
1766 M. Koike et al. / Energy Policy 36 (2008) 1764–1775

At the end of the War, with the dissolution of North Advisory Group, an advisory board for GHQ’s occupation
Sakhalin Oil, Teikoku was able to survive but lost almost policy-making.
all of its overseas assets and facilities. In addition to losing As a consequence, the Japanese oil industry was clearly
the properties in South East Asia, the company was forced divided into two streams. The upstream industry consisted
to abandon all properties in Taiwan, which was responsible of one company exclusively involved in oil production in
for 2% of its total oil production and 68% of its natural domestic fields, and the downstream industry consisted of
gas production (Teikoku Oil, 1992a). several companies and depended on foreign partners for its
On September 22, 1945, the first American policy toward oil supply.
Japan after the surrender was announced by General
Headquarters (GHQ) of the Allied Forces. It was proposed 2.2. Overseas projects with national support
that Japan was only allowed to develop domestic fields and
maintain refineries close to the fields. GHQ originally set In 1965, the amendment of the oil-development law
demilitarization as the main objective of occupation policy allowed Japan Petroleum Exploration (JAPEX) to explore
and rejected Japan’s request to import oil for maintaining foreign reserves. Japan’s oil dependency expressed as a
its oil refineries and entire economic development. In percentage of total energy use increased rapidly from
addition, GHQ ordered Japan to cease the operation of 22.6% in 1956 to 58.2% in 1965. Most of Japan’s growing
refineries along the Pacific coast on the basis that this might oil demand was met by imports from the Middle East,
yield surplus petroleum products, which could be diverted which accounted for 90.4% of total imports (Hoshino,
to military use. Consequently, Japanese refineries along the 1968). In order to reduce the dependencies on imports and
Pacific coast were forced to cease their operations for 3 the Middle East for oil resources, Japan Petroleum
years. Furthermore, oil import was banned, and the Development Corporation (which changed its name to
downstream oil companies had to depend on a small Japan National Oil Corporation (JNOC) in 1978 by adding
amount of domestic production for their survival. the operation of oil stockpiles to its activities) was
In 1949, GHQ changed its position and allowed Japan to established as the national supporting organization for
restart the import of crude oil and to begin using the Pacific private companies.
refineries again. This change reflected the US global At that time, Japan secured only 14.2% of total oil
strategy, in which Japan was accorded greater importance imports through its own companies, Arabia Oil Company
after the relationship with the Soviet Union had deterio- (AOC) and North Sumatra Oil Development Cooperation
rated. At the beginning of the Cold War, the main Co. Ltd. (NOSODECO) (Fig. 1). AOC discovered the
objectives of the US policy toward Japan shifted from Khafji oilfield in 1960 and Hout oilfield in 1963, in the
demilitarization to economic reconstruction and indepen- offshore Neutral Zone between Saudi Arabia and Kuwait.
dence of the country. This policy reversal came as blessed
rain after a drought in the domestic industry. Questioning
the production capacity of the domestic upstream industry,
Japan’s downstream oil industry had long wanted to
recommence the import of crude oil from abroad. Once the
Japanese
embargo was lifted, the Japanese downstream companies
14.2%
formed alliances with American oil companies to secure
long-term oil supply. As seen in Table 2, all of these
ArabiaOil
American companies were members of the Petroleum 14%
CALTEX
15%
Others NOSODECO
2% 0.4%
Soviet Union
Table 2 3%
France TOTAL ESSO
3% Majors
Post-war alliance between Japanese downstream oil companies and US oil 14%
Others Other US 634MMbbl 60.5%
companies 6%
20.3% 100%
Japanese oil US partner UTC
6% MOBIL
company
9%
TIDE WATER
1949 February Toa Energy Standard-Vacuum Oil Company 5% GULF
SIPC
1949 March Nippon Oil Caltex Oil Japan Limited BP 8%
14%
1949 March Mitsubishi Oil Tidewater Associated Oil 1%
Company
1949 June Showa Oil Shell Company of Japan
Limited
1949 July Koa Oil Caltex Oil Japan Limited
1949 August Maruzen Oil Union Oil Company of
California
Fig. 1. Japan’s crude oil import in 1966 by suppliers. Source: Hoshino
Source: Japan Petroleum Development Association (2005). (1968).
 ARTICLE IN PRESS
M. Koike et al. / Energy Policy 36 (2008) 1764–1775 1767

NOSODECO cooperated with Permina (now ‘‘Pertami- so common then, or even now. The state-run companies of
na’’) to redevelop the Rantau oilfield in Indonesia’s north oil-producing countries such as PEMEX (Mexico), PET-
Sumatra Island. The Japanese government decided to push ROBRAS (Brazil), PERMINA (Indonesia), or NIDC
overseas activities such as these projects by private (Iran) were directly involved and covered both upstream
companies, targeting 881 million barrels to be imported and downstream operations as were some state-run
by domestic companies. The target was approximately one- companies from oil-importing countries such as CFP
third of the total domestic oil consumption in 1985. (France), ENI (Italy), CPC (Taiwan), and KNOC (Korea).
JNOC’s support to private companies was mainly These aspects of governmental support rapidly increased
provided in the form of equity, loans, and guarantee of the volume of overseas projects. During the first 20 years,
liabilities. JNOC invested or loaned to private companies after the establishment of the Japan Petroleum Develop-
up to 70% of total expense for the exploration stage of ment Corporation, 119 projects were accepted by JNOC
their overseas projects. If the project progressed to the next for support. Unfortunately, most of them ended up with a
development stage, JNOC also provided a guarantee of large amount of debt. In addition to the financial
obligation for up to 60% of total loans from financial consequences, Japan’s mixed effort, involving both the
institutions for project companies. However, if the government and the private sector, failed to achieve any of
exploration failed or the fields discovered were found not the original targets of increasing the ratio of self-developed
to be feasible, the repayment obligation was waived and the oil in terms of total imports and diversification of the
project companies were simply liquidated. The Japanese source countries for oil imports from the Middle East
government originally planned that JNOC should play a (Table 3).
supportive role for the domestic downstream oil industry
to arrange for the smooth delivery of oil supplies developed 3. Reconsideration of government–industry cooperation
overseas by domestic companies for use in the domestic
market. Domestic oil delivery was dominated by interna- The past activities of the Japanese government and oil
tional oil companies due to their long-term contracts with industry with respect to overseas oil development provide
the Japanese downstream industry, and the smooth some clues to the cause and effect of the present situation.
introduction of self-developed oil supplies was predicted Three intricately combined components can be put
to be very difficult. However, this plan was taken away by forward, based on chronological research, and we have
the domestic downstream industry through the Petroleum tried to verify these by referring to quantitative data or
Association of Japan, which was concerned about possible specific policies. First, the ineffective institutional design of
government-imposed pressure to accept the non-commer- government support was responsible for causing confusion
cial self-developed oil for national security reasons. As a related to responsibilities and moral hazards in the
result, the involvement of the Japanese government in projects, which resulted in extremely vulnerable project
overseas oil development provided exclusive indirect management. Second, the scope of Japan’s overseas oil
support to the upstream industry. The structure of this development was restricted by its position in the interna-
government support by 100% state-run companies was not tional political scenario and the government’s policy of

Table 3
JNOC’s financial contribution and import dependence (million yen)

1970 1980 1990 2000 2003

JNOC’s financial contribution

Equity
Cumulative total 28,073 241,420 596,669 999,521 1,195,123
Cumulative loss – 37,444 126,811 451,064 810,662
Cumulative exchange loss – 65 116 117 117
Loan
Cumulative total 4629 268,587 857,239 1,105,138 1,133,052
Cumulative loss – – 69,952 380,689 439,421
Cumulative exchange loss – 565 4258 17,749 17,892
Guarantee
Cumulative total 11,228 328,489 891,002 1,157,365 1,372,457
Cumulative payment under guarantee – – 11,454 50,165 63,146
Import dependence (%) 99.5 99.8 99.7 99.7 99.7
From Middle East 84.6 71.4 71.5 87.1 88.5

Japanese-developed oil in total import (%) 9.8 8.9 11.0 13.2 10.8

Sources: JNOC, Japan Petroleum Development Association, and METI.

 ARTICLE IN PRESS
1768 M. Koike et al. / Energy Policy 36 (2008) 1764–1775

preferentially exploring undiscovered fields, which resulted dozen private companies. As an example of risk sharing,
in sticking to poor-potential area with regard to the Japan China Oil Development was established in 1980 for
distribution of the oil reserves. Finally, Japan’s govern- the purpose of an oil-development project in the Bo-hai
ment–industry collaboration ceased due to drastic changes Sea, China. It received 64.5% of the investment funds from
in the international exchange market, import oil price, and JNOC and the rest from 47 other companies. Usually, as a
the corollary public mood placing a greater emphasis on major shareholder of the projects, JNOC was originally
economic efficiency rather than supply security. These will intended to play a passive and supportive role for
be investigated in order in the subsequent parts of this promoting independence of private companies. Yet, private
section. companies, enjoying a large amount of risk-free investment
and loans from JNOC, eschewed taking not only explora-
3.1. Cooperative structure tion risks but also management responsibilities of the
projects. This type of risk-sharing structure inherently
In terms of the cooperative structure between the involved the nature of obscuring responsibility for the
Japanese government and private companies, there were projects, thus creating a moral hazard.
mixed outcomes toward the target of increasing overseas In addition to the involvement of a number of private
projects. Based on its merits, the involvement of JNOC companies in each project, the shareholder compositions of
attracted private money for exploration projects, which project companies worsened these structural problems.
had been too risky for private investment. The reason for Table 4 shows that upstream oil projects were financially
this was not only because exploration and development are sustained by non-petroleum industries and the structure
not always successful, but also because the projects do not prevented the building-up of experience and cultivation of
bring any profit at least for several years until the start of technology in Japan’s upstream oil industry. As a result, in
production. After the establishment of JNOC, the total many cases, Japanese consortia relied on foreign partners
amount of private money invested in exploration projects for project operation and were entitled to only a propor-
rapidly increased from 5122 million yen in 1967 to 226,853 tion of any oil discovered (Surrey, 1974). In contracts for
million yen in 1982 (JNOC, 1987). oil and gas exploration and development involving multiple
On the other hand, this system of risk sharing between participants, the company that executes and manages the
JNOC and private investors was detrimental to the original actual oil work is called an operator. It is essential to
interior features. The system was called a ‘‘one-project, expand the operator project to acquire experience in the
one-company structure’’ in which a project company was operation site for improving the E&P technology, since
established for each project. In addition, the project upstream oil technology, which involves integration of
companies were usually founded with the majority shares numerical elemental technologies, requires special experi-
from JNOC and the rest from several, or sometimes, a few ence in the operation site. This is because resource

Table 4
Investment in oil exploration projects by sector

1970 1980 1990

Cumulative amt. in In % Cumulative amt. in In % Cumulative amt. in In %

mill. Yen mill. yen mill. yen

Electricity 3705 6.4 13,022 2.3 19,072 1.5

Gas 505 0.9 1390 0.2 2179 0.2
Steel 3223 5.6 14,397 2.6 18,179 1.4
Petroleum refining, sale 9802 17.1 75,496 13.4 188,982 14.8
Trading 9068 15.8 55,742 9.9 71,016 5.5
Banking 823 1.4 24,838 4.4 29,626 2.3
Nonlife insurance 724 1.3 4894 0.9 5593 0.4
Life insurance 68 0.1 2128 0.4 2428 0.2
Shipbuilding 1790 3.1 20,447 3.6 22,564 1.8
Chemical, fiber 1371 2.4 19,019 3.4 20,438 1.6
Shipping 686 1.2 3561 0.6 3674 0.3
Nonferrous, mining 2658 4.6 4271 0.8 11,813 0.9
Petroleum development 3010 5.2 72,594 12.9 275,479 21.5
Others 1338 2.3 20,060 3.6 21,257 1.7
Total private sectors 38,771 67.5 331,859 58.9 692,300 54.1
JNOC 18,679 32.5 232,027 41.1 587,275 45.9

Grand total 57,450 100.0 563,886 100.0 1,279,575 100.0

Sources: JNOC (1987), Japan Petroleum Development Association (2005).

 ARTICLE IN PRESS
M. Koike et al. / Energy Policy 36 (2008) 1764–1775 1769

possession influences the superiority of technological companies, and received retirement bonuses on each move.
development. Also inversely, ‘‘operator qualification’’ can A former administrative vice minister of MITI served as
be acquired by evaluating past activity records, technology, the president of more than ten project companies.
operational ability, and safety management. Lacking the Although all these companies became bankrupt later, he
experiences, technologies, and capital sizes of the project was never accused of mismanagement (Horiuchi, 1998).
companies, Japanese companies were involved as non- These examples were the tip of the iceberg, and the
operators in 359 projects of the 401 E&P projects during organizational form of JNOC left or even increased the
1967–1997, which were supported by JNOC. In addition, moral hazard of project management rather than monitor-
among the 359 projects, Japanese companies gave up the ing the extravagant expenditure of tax money. The
opportunity of becoming an operator in 57 projects, even accounts of the Japanese central government consist of
while holding the largest share of the projects. Yet, there general and special accounts, and the JNOC was funded by
were only four projects in which Japanese companies could the latter. Special accounts are intended for carrying out
become operators when they collaborated with foreign specific projects, managing specific funds, and other
companies for the largest shareholder of the projects purposes (MOF, 2006). On this topic, many issues have
(JNOC, 1997). Japan could not or would not demonstrate been raised, including the fact that the establishment of
its competitiveness with regard to experience and technol- many special accounts made monitoring difficult, or that a
ogy, which are crucial for project management. The ‘‘one- lot of make-work projects were carried out to meet the
project, one-company’’ structure resulted in increasing built-in account budget (MOF, 2007). Masajyuro Shioka-
dependence on foreign partners of the projects, contrary to wa, a former minister of finance, also expressed concern
the original target of securing independence for the that a substantial amount of tax money was being
domestic industry. ineffectively spent in special accounts while savings
Questions still remain as to why questionable structures accumulated in the general account (at the Financial
could survive even with disappointing performance. One of Committee of the House of Representatives, February 25,
the main reasons came from the fact that the system of 2003). In the 2007 appropriation, the net budget of the
‘‘one-project, one-company’’ was developed as a product of special account was 175 trillion yen, while that of general
the mutual interest of the private and government sectors accounts was 34 trillion yen. Since the special accounts
with their high incentives to secure the system. On the were under the administration of ministries and each of
private side, the project companies benefited not only from them held earmarked revenue sources, the wasteful
lowering the risk of investment but also from separating expenditure was left unchecked. This is also because a
the project accounts from the parent companies’ financial number of retired officials descended into recipient
statements. The oil companies were reluctant to consoli- companies founded by special accounts and maintained
date project accounts because they were usually in the red close relationships with supervisory authorities. The case of
at least for several years until the production began, JNOC was no exception. JNOC was under MITI’s
irrespective of whether it succeeded. In addition, in many administration and maintained a close relationship through
cases, even after the start of production, project companies the involvement of former MITI officials (Matsumura,
remained in the red since the parent companies purchased 2003). In addition, the management of JNOC was
the produced oil from project companies at the interna- guaranteed by an abundant revenue from gasoline tax
tional market price while imposing large deficits on and tariffs on petroleum products. Moreover, as a special
subsidiaries (Horiuchi, 1999a, b). An old Japanese account- public corporation, JNOC enjoyed the privilege of
ing system supported their interests by investing little faith government guarantee for fund-raising and exemption
in the consolidated accounting, which then rendered the from tax liabilities such as corporate income tax or fixed
relationship between parent and affiliated companies asset tax (Fig. 2).
unclear. It was not until the year ended March 31, 2001
that all companies were required to consolidate all 3.2. Limited accessible region
significant investees, which were controlled through sub-
stantial ownership of majority voting rights or existence of By the beginning of the 1960s, when Japan ventured into
certain conditions. In addition, separation of the project the overseas fields again for the first time since the end of
accounts from the parent ones was beneficial for private World War II, the concessions in the major oil-producing
companies, since companies could then limit liabilities and countries, not to mention US and European territories,
prevent creditors from laying claim to their properties were already dominated by international oil majors.
retroactively. According to an investigation by the MITI (reorganized
On the government side, the departments secured as METI in 2001) on who owned the concessions area of
administrative control for industries and pleasant new 17.8 million km2 of the world oil concession area surveyed
posts for the retired officials. By the end of 1997, 15 project in 1968–1970, 75% of the world oil concession area was
companies were chaired by retired or former Ministry of held by US or British companies, 18% by French CFP and
International Trade and Industry (MITI) officials. These ERAP, and 3.3% by Italian ENI. Japan held only 1.9%
ex-government officials often migrated to other project (MITI, 1971). The Japanese concession area consisted of
 ARTICLE IN PRESS
1770 M. Koike et al. / Energy Policy 36 (2008) 1764–1775

Gasoline tax
Tariff on petroleum products

Equity

Private The Export-Import Bank of Japan JNOC

companies Private banks

Repayment Loan Loan Dividend

Dividend
Equity Repayment
Equity
Guarantee Guarantee

E&P project companies

Fig. 2. Structure of JNOC’s financial support for E&P project.

AOC and NOSODECO. The area of AOC’s concession in in 1960 to 3.2% in 2000 (calculated by Oil & Gas
the Middle East including Khafji Field was small Journal and World Oil). Figs. 3 and 4 show the contrast
(3400 km2) but exceptionally profitable either before or between the US and Japanese companies with regard
after in the history of Japan’s oil industry, producing to the areas they focused on during their oil exploration
almost all of Japan’s self-developed oil production at that activities.
time. AOC won the Khafji contract by breaking the Why did the Japanese stick to unexplored areas? Would
international standard of 50–50 basis profit sharing with it have been equally valuable for them to get into the
oil-producing countries. The ratios of profit sharing for existing fields by acquiring shares without running the
AOC’s Khafji contract are 44–56 between AOC and Saudi exploration risks? The geological spread of E&P activities
Arabia and 43–57 between AOC and Kuwait (Suzuki, by Japanese companies reflects the government’s rather
1981a, b). It was a desperate measure of an undeveloped slavish target since 1967 of increasing self-developed oil,
Japanese oil company and AOC was exposed to harsh both as reducing dependence on the international oil
international criticism. companies and as diversifying supply resource of oil
Later, resource control intensified in the Middle East, imports. Based on the government policy, JNOC’s
starting with oil reserve nationalization by Iran in 1951. contributions to domestic companies were defined only
The field condemnation of Iraq occurred in 1960, followed for the projects conducted in unexplored areas. However, it
by the formation of OPEC by the major oil-producing is doubtful whether the policy was based on Japan’s
countries in the same year. Thus, global exploration and position in the global oil market, which limited her access
production (E&P) companies were forced to shift their to overseas oil exploration. Hattori (2002), an executive
target fields from the oil-rich regions and areas in which director of JAPEX, specified spending most of the
operations were straightforward from a geological view- investment into the relatively risky exploration projects
point to untapped regions and environmentally severe rather than acquisitions as one of the reasons as to why
areas. The undeveloped Japanese E&P industry lagged far JAPEX was not able to build overseas properties. Surrey
behind in the face of intensifying global competition. (1974) also expressed considerable skepticism on the
In addition to the external environment at that time, effectiveness of the policy ‘‘given the large risks involved
there were some other political or economic constraints on in exploring relatively unknown areas, and the fact that the
Japan, which narrowed the scope to advance into the international oil companies controlled many of the most
global E&P competition. In terms of transportation cost, favorable areas.’’ It was not until June 2001 that the JNOC
import from Africa and Latin America was not feasible law was amended to allow a further support also for
because of the long distance to Japan and the limited acquisition of existing oil fields. Consequently, the regional
passage capacity of Panama Canal preventing the scale composition of Japan’s overseas oil development was not
merit. In addition, during the Cold War, along with other as much as expected since 1967 but kept relying on a few
members of the Free World, Japan had little access to old fields in the Middle East such as the Khafji Field, which
Communist but resource-rich countries such as the Soviet was discovered in 1960 (Fig. 5).
Union and Central Asian countries. As a result, relatively
open but not so favorable areas in the Asia-Pacific region 3.3. Changing mood
remained accessible to Japanese oil companies. The Asia-
Pacific region remained low and even gradually declined in The ineffective project management exposed its vulner-
the share of the world’s total oil discovery (sum of ability when the exchange rate of the US dollar to the yen
cumulative production and proven reserves) from 3.5% changed drastically after the mid-1980s. The companies
 ARTICLE IN PRESS
M. Koike et al. / Energy Policy 36 (2008) 1764–1775 1771

US Onshore US Offshore Canada

OECD Europe FSU & E. Europe Africa
Middle East Other Eastern Hemisphere Other Western Hemisphere
70,000

60,000

50,000
($ million)

40,000

30,000

20,000

10,000
77

80

85

90

95

00

05
19

19

19

19

19

20

20
Fig. 3. E&P expenditure of major US petroleum-producing companies by region in the years 1977–2005. Data source: Energy Information Administration
(2007).

Asia Pacific Middle East Africa North America Europe Latin America CIS
350,000

300,000

250,000
(Million Yen)

200,000

150,000

100,000

50,000
67

70

75

80

85

90

95

00
19

19

19

19

19

19

19

20

Fig. 4. Japanese companies’ total investment for field exploration and development by region in the years 1967–2000. Data sources: JNOC (1987, 1997,
2005).

invested for project operation and obtained revenue from stabilizing at 18 dollars per barrel in the fall of 1986
oil production in US dollars, without considering the (Griffin and Neilson, 1994). This was followed by the days
exchange risks. Thus, the rapid appreciation of the yen of plentiful and cheap oil for 13 years, interrupted only by
caused by the Plaza Accord of 1985 diminished the value of a brief price spike at the time of the Gulf War, 1991. These
cash returns and production revenue on a Japanese yen solid transformations, both in the exchange rate and in the
basis. The US dollar, which stood at around 240 yen just global oil prices, dealt the accounts of project companies a
before the Plaza Accord, was being traded below 90 yen in double hit by compounding huge deficits for the compa-
April 1995. Most of the JNOC’s exchange loss from the nies’ accounts (Fig. 6).
loan was also recorded in this period (Table 1). Unfortu- The drastic movement in the global oil market also
nately, the decline of world crude oil price started in 1985 helped in changing the people’s view of oil as a market
and made things worse. Saudi Arabia’s increase in oil commodity, rather than a strategic resource. The ample
production, despite the sluggish international demand, led production and high liquidity of oil in the developed
to the price collapse of 1985–1986, with prices plummeting international oil market in those days led to oil being
from 28 dollars per barrel to 8 dollars per barrel before treated as a general commodity like wheat, which was
 ARTICLE IN PRESS
1772 M. Koike et al. / Energy Policy 36 (2008) 1764–1775

Middle East Asia Pacific Africa Europe North America Latin America CIS

50,000

40,000

30,000
(1000 kl)

20,000

10,000

0
67

70

75

80

85

90

95

00

04
19

19

19

19

19

19

19

20

20
Fig. 5. Japan’s self-developed oil import by region. Data sources: JNOC (1987, 1997, 2005).

700 25
Liquidated project companies
Oil Import Price (CIF nominal)
600 Oil Import Price (CIF 1997)
20
500

(No. of companies)
(100 yen / kl)

15
400

300
10

200
5
100

0 0
19 3
74

19 5
19 6
19 7
19 8
19 9
19 0
19 1
82

19 3
19 4
19 5
86

19 7
88

19 9
19 0
19 1
19 2
19 3
19 4
95

19 6
97
7

7
7
7
7
7
8
8

8
8
8

8
9
9
9
9
9

9
19

19

19

19

19

19

Fig. 6. Liquidation of project companies with respect to changes in crude oil import price in Japanese yen. Data sources: Research and Statistics
Department, Bank of Japan, JNOC (1987, 1997, 2005), Ministry of Finance.

relatively easy to procure from the market. This means that 4. Recent challenges
public and policy leaders in Japan might not have
considered the priority of oil security as a serious matter. The period after 1998 can be seen as the time in which
Moreover, a serious and longstanding post-bubble stagna- the role of the national government was publicly recon-
tion in the 1990s left the public opinion keen to the sidered. In November 1998, a former minister of METI,
extravagant use of tax money, thus prioritizing economic Mitsuo Horiuchi, accused JNOC of the ineffective manage-
efficiency. In particular, debate over ineffective fiscal ment of tax money by publishing an article in a Japanese
investment and loans to public corporations along with magazine. Being an experienced politician, Horiuchi ran
the vested-interest structures attracted public attention, his own company and was familiar with business account-
leading to the reform or restructure of cloning systems. ing. He substantiated his views about the mismanagement
JNOC and the policy of promoting Japanese-developed oil of both the JNOC and its subsidiaries by reviewing a
supply also became subjects under reconsideration and a number of their financial statements, and opposing
number of project companies were liquidated in the same government officials’ explanations that the JNOC re-
period. This might be the first time that Japan faced the mained in surplus. Bowing to public anger, JNOC was
dilemma of a resource-poor country caught between supply dismantled in 2002 as part of the structural reform carried
security and economic efficiency (Table 5). out by the administration of the prime minister at that
 ARTICLE IN PRESS
M. Koike et al. / Energy Policy 36 (2008) 1764–1775 1773

Table 5
JNOC’s cumulative financial support and the dividend and repayment as of end of March 2004 (million yen)

Status Number of Equity (A) Loan (B) (A)+(B) Dividend Principal

companies repayment

Exploration 15 47,773 34,312 82,085 0 1828

Preparing for production 5 22,879 23,984 46,863 0 8147
Producing 39 662,351 548,399 1,210,750 204,218 468,499
Preparing for liquidation 11 24,664 17,228 41,892 0 1042
Liquidating 3 3713 5330 9043 0 1270
Liquidation completed 216 398,609 458,177 856,786 0 58,686
Support termination 12 29,534 45,528 75,062 6317 9515
Consolidated 4 5570 0 5570 245 0
Total 305 1,195,093 1,132,958 2,328,051 210,780 548,987

Foreign currencies were exchanged by the exchange rates as of March 31, 2004 from IMF Exchange rate archives.
1 USD ¼ 104.30 JPY, 1 GBP ¼ 191.33 JPY, 1 AUD ¼ 79.15 JPY, 1 BRL ¼ 35.71 JPY.
Source: JNOC (2005).

time, Junichiro Koizumi. The roles of the JNOC were Central Asia, Africa, Siberia, and Sakhalin. The reason for
taken over by a new organization, Japan Oil, Gas and this is not only that the access became wider since the end
Metals National Corporation (JOGMEC). JOGMEC was of the Cold War but also that countries in the Asia-Pacific
established to perform three main roles in supporting region began to secure domestic fields due to growing
private companies: financial support, research and devel- domestic demand. China and Indonesia, which used to be
opment for technology, and oil stockpiling. This time, major oil producers in the region, became net importers in
JOGMEC’s financial support covered not only projects in 1993 and 2004, respectively. In response to these changes,
unexplored areas but also acquisition of existing fields. Yet, former Japanese Prime Minister Yoshiro Mori visited
the extent of JOGMEC financial contributions is narrowed African countries in January 2001 to build a better
and scaled down to investment and guarantee in relation to relationship for the security of natural resources such as
borrowing up to 50% of the total exploration costs. In oil production in Nigeria. Following Mori’s visit, former
terms of its legal form, JOGMEC did not become a special Prime Minister Koizumi visited Kazakhstan and Uzbeki-
public corporation as JNOC but was established as an stan in August 2006 for the first time as an incumbent
incorporated administrative agency that did not enjoy the prime minister. The next Prime Minister, Shinzo Abe,
privilege of government guarantee for fund-raising or visited the Middle East in the spring of 2007, which was
exemption from tax liability. At this point, there was little more obviously a facet of resource diplomacy. Abe visited
voice asking for a stronger national commitment by taking four oil-producing countries (Saudi Arabia, United Arab
more direct risks, in the debate over reviewing the role of Emirates, Kuwait, and Qatar) with approximately 180
the government in overseas oil development. business executives, not only from the oil industry but also
While reducing public support, integration in the private from several other industries such as high-tech, manufac-
sector of the oil-development industry has been promoted. turing, construction, and finance. These public–private
Aiming at a national flagship company, Inpex and Teikoku partnerships for resource diplomacy have raised expecta-
entered into an administrative merger in April 2006. The tions concerning improvements in market access, not only
merger by Japan’s no. 1 and no. 3 oil developers is from domestic industries but also from resource-producing
currently scheduled for completion in 2008, which is countries for Japan’s economic support and personnel
designed to expand overseas access to desirable projects exchanges.
by means of large-scale corporate resources. In 2003, the Following these efforts, the Japanese government again
Advisory Committee for Energy under METI proposed set a new numerical target in the New National Energy
that Japan needed a central firm for securing a stable Strategy of 2006, since the last target was withdrawn in
overseas supply, because creating such a firm would 2000 as it promoted ineffective management. It reflects a
improve its bargaining power, strengthen the company’s major structural change in the international energy market
finances, boost fund-raising and investment capacity, and owing to various elements concerning both supply and
build up technology and human resources (Advisory demand conditions. The target for Japan’s self-developed
Committee for Energy, 2003). Inpex, the majority of whose oil is set as 40% of total oil import, which is an even higher
shares were owned by METI, and Teikoku Oil agreed to target than previously set. In order to achieve this aim, the
this proposal due to a sense of crisis in the projected Japanese government and industry realized that it is
harshly competitive global environment. essential to continue to reform the structure of government
In terms of resource diplomacy, the Japanese oil industry support and private industry involvement. They also
and government are exploring the possibilities offered by consider that Japan should develop the expertise for
 ARTICLE IN PRESS
1774 M. Koike et al. / Energy Policy 36 (2008) 1764–1775

recovery improvement or development of geologically abandon all of its overseas interests when World War II
difficult fields, in order to broaden the access to global ended and had to restart a ground-up effort. In addition,
concessions. Since November 2006, a joint committee of contrary to Italy’s case of discovering a giant gas field
JOGMEC and private upstream oil companies has along Po River in 1948, Japan was unable to discover any
reviewed the role of JOGMEC and how Japan could large petroleum reserves within its territory to revitalize its
utilize the country’s competence. According to the com- own upstream industry, which would enable it to
mittee report, most private companies expect JOGMEC to demonstrate its expertise in the global oil market.
act as a research center for fundamental technology and Japan has been dependent on imports for its oil supply
human resource development, which was difficult to and will continue to be so. In addition, as long as the
achieve in the previous structure. Two of the largest current vulnerable global oil market remains a reality,
Japanese upstream oil companies, JAPEX and INPEX where Japan can never be freed from its traumatic
Holdings, spent 3,195,000 dollars and 434,000 dollars in experiences, she will continue its attempt to secure the oil
2006 for R&D, while ExxonMobil, which produced supply through exploration and development efforts. The
petroleum liquids over ten times of these two Japanese energy planners in the country now need to reconsider the
companies, spent approximately 200 million dollars an- role of government and private companies and where and
nually for upstream R&D (Cassiani et al., 2006). This how they will secure oil supplies. Otherwise, Japan will
policy is considered on the basis of the fact that the chances again face difficulties in the harshly competitive global
of overseas development are limited by many oil-producing environment, and the situation will become even more
countries, since they shut off foreign access to their fields. It difficult with the advent of new economic powers.
is necessary to develop expertise for entering into projects
in open but economically or geologically difficult fields,
such as small ones or those with heavy oil. JAPEX’s References
development of Canada’s oil sands is one of the promising
examples. These examples also raise the necessity of Advisory Committee for Energy, 2003. Report of Basic Plan Task Force
of Advisory Committee for Energy, pp. 22–24 (in Japanese).
cooperation with domestic downstream industries for Advisory Committee for Natural Resources and Energy, Ministry of
smooth delivery of the oil supplies. In addition, this is Economy, Trade and Industry, 2006. Report of the Petroleum Policy
expected to be the next step in the further integration of Subcommittee, August 2006 (in Japanese).
Japan’s oil industries, which were long divided. British Petroleum, 2007. BP Statistical Review of World Energy 2007,
June.
Cassiani, Steve, Johnson, Jeff, Tillman, Lee, 2006. ExxonMobil Upstream
5. Concluding remarks Research Company Upstream Technology Webcast Transcript.
Energy Information Administration, 2007. The Financial Reporting
This study first tried to clarify several constraints and System Public Data. Available online at /http://www.eia.doe.gov/
their structure, which Japan encountered in trying to emeu/finance/frsdata.htmlS, as of October 1, 2007.
Griffin, James M., Neilson, William S., 1994. The 1985–1986 oil price
achieve its target of promoting overseas exploration and
collapse and afterwards: what does game theory add? Economic
development. Then, it was shown that some of them were Inquiry.
not necessarily inherent to resource-poor countries but Hattori, Masaki, 2002. Exploration strategy of JAPEX for the
were distinctive and sometimes conquerable by Japan’s 21st century. Journal of the Japanese Association for Petroleum
efforts. Using the terminology of Alfred D. Chander, Jr., Technology.
Professor of Business Management, ‘‘structure must follow Horiuchi, Mitsuo, 1998. Accuse Japan National Oil Corporation,
shameful part of MITI. Bungeishunju 76 (11), 110–121 (in Japanese).
strategy,’’ and in Japan’s case of overseas development, Horiuchi, Mitsuo, 1999a. Interview. Zaikaijin, March 1999, pp. 10–15 (in
‘‘structure did not follow strategy’’ and the ‘‘strategy’’ itself Japanese).
was rather imprecise, given the conditions faced by Japan. Horiuchi, Mitsuo, 199b. Interview. Energy Forum, May 1999, pp. 96–101
Japan’s cooperative structure between government and (in Japanese).
Hoshino, Kazuo, 1968. Establishment of Japan Petroleum Development
industries, which brought low accountability and inefficient
Corporation. Geologic News, National Institute of Advanced
project management, was not appropriate for the strategy Industrial Science and Technology, February 1968 (in Japanese).
of competing in the global oil market. More than 200 Japan National Oil Corporation, 1987. 20-year history of Japan National
projects and their disappointing consequences indicate that Oil Corporation (in Japanese).
the ‘‘one-company for one-project’’ structure was not Japan National Oil Corporation, 1997. 10-year history of Japan National
suitable for accumulating the know-how and expertise Oil Corporation (in Japanese).
Japan National Oil Corporation (Ed.), 2005. History of Japan National
necessary for successful project management. The system Oil Corporation (1997–2004) (in Japanese).
of sharing risk and cost of projects obscured the role and Japan National Oil Corporation, Japan Petroleum Development Associa-
responsibly of each partner, thus causing moral hazards, tion (Eds.), 1995. Background Data on Oil Development, Sekiyu
which devoured a huge amount of tax money. On the other Tsushin (in Japanese).
hand, when considering Japan’s disadvantageous position Japan Petroleum Development Association (Ed.), 2005. Background Data
on Oil and Gas Development, Sekiyu Tsushin (in Japanese).
in the early stage of her upstream oil industry, the strategy Masahiro, Matsumura, 2003. Inside Japan’s Energy Development Politics:
of promoting self-development in unexplored areas was What Outsiders Do Not Know. St. Andrew’s University Bulletin of the
much harder than expected. Unlike France, Japan had to Research Institute.
 ARTICLE IN PRESS
M. Koike et al. / Energy Policy 36 (2008) 1764–1775 1775

Ministry of Economy, Trade and Industry, Japan, 2006a. New National Surrey, John, 1974. Japan’s uncertain energy prospects: the problem of
Energy Strategy (Digest). import dependence. Energy Policy.
Ministry of Economy, Trade and Industry, Japan, 2006b. Report of Policy Suzuki, Shigeru, 1981a. The Japan Petroleum Development Corporation’s
Subcommittee of Petroleum Committee, Advisory Committee for Role in Developing Overseas Petroleum (I). The Kagoshima Keidai
Energy (in Japanese). Ronshu: The Studies on the Social and Cultural Sciences 22 (2), 1–23
Ministry of Finance, Japan, 2006. Current Japanese fiscal conditions and (in Japanese).
issues to be considered. Suzuki, Shigeru, 1981b. The Japan Petroleum Development Corporation’s
Ministry of Finance, Japan, 2007. Special accounts (in Japanese). Role in Developing Overseas Petroleum (II). The Kagoshima Keidai
Ministry of International Trade and Industry, Japan, 1971. Outlook of Ronshu: The Studies on the Social and Cultural Sciences 22 (3), 37–63
Resource Problems, November 25, 1971 (in Japanese). (in Japanese).
Minutes of the Financial Committee of the House of Representatives, Teikoku Oil, 1992a. 50-year history of Teikoku Oil (management version)
February 25, 2003 (in Japanese). (in Japanese).
Petroleum Association of Japan, 1985. Post-War History of the Petroleum Teikoku Oil, 1992b. 50-year history of Teikoku Oil (overseas version) (in
Industry (in Japanese). Japanese).