Japan Energy Spending Cuts Add Urgency to Securing Future Supply

(Bloomberg) -- Energy companies in Japan, a country almost entirely reliant on fossil fuel imports, are slashing investments by more than one-third following the collapse in commodity prices, increasing pressure on Prime Minister Shinzo Abe’s government to supplement exploration budgets.

Spending will plunge 37 percent to about 1.2 trillion yen ($11 billion) in the year to March, the country’s Ministry of Economy, Trade and Industry forecast in a report Tuesday. The drop, just one slice of cuts globally, adds urgency to the government’s plans to sustain investment by the country’s explorers and accelerate efforts to get 40 percent of its oil and gas from domestic firms.

The world’s biggest consumer of liquefied natural gas and fourth-largest crude buyer relies on imports for 94 percent of its primary energy supply, according to the country’s Federation of Electric Power Companies. Japan may allocate 3 trillion yen over the next five years to help develop large-scale oil and gas developments with state-run Japan Oil, Gas and Metals National Corp. investing in projects, the Nikkei newspaper reported last month.

“The government must provide seed money through institutions like Jogmec” and Japan Bank for International Cooperation, said Nobuo Tanaka, former executive director of the International Energy Agency. “The government should do it as part of investment for the future to ensure energy security and reduce volatility.”

‘Suppress Investment’

Inpex Corp., Japan’s biggest oil and gas explorer, will cut spending on exploration and development projects 28 percent in the current fiscal year. JX Holdings Inc., the country’s largest refiner, will reduce upstream spending by about 40 percent over the next three years as it shifts to focus on more mid- and downstream activities.

Brent crude, the global benchmark, has fallen more than 50 percent from two years ago when many Japanese companies invested heavily in metals and energy projects. The nation’s top two trading houses, Mitsubishi Corp. and Mitsui & Co. reported their first ever annual losses and are accelerating a shift away from energy and raw materials to businesses including consumer goods manufacturing.

Debt Guarantees

“In the current price environment we are forced to suppress investment into exploration projects,” said Masahiro Murayama, managing executive officer of Inpex. “Since we are a publicly traded company, we have to carefully think about our investments due to the economic principles surrounding the drop in oil prices.”

The Group of Seven countries, which includes Japan, the U.S., and Germany, this month encouraged financial institutions to invest in energy projects to ensure stable future supplies. Investments in oil and gas production are forecast to fall 18 percent this year after dropping 24 percent in 2015, according to Fatih Birol, executive director of the International Energy Agency.

“We will support companies to the extent possible through measures including investment in projects and debt guarantees,” said Tomohiro Arai, a Tokyo-based spokesman for Jogmec, adding that he wasn’t aware of a government plan to expand its allocation to the agency as reported by the Nikkei.

JX Holdings, which has ownership stakes in oil and gas production in the U.S. Gulf of Mexico, Qatar and Papua New Guinea, is reducing capital expenditure on upstream projects to refocus on downstream businesses including power that can help the company weather the downturn in oil prices, President Yukio Uchida said May 11.

Japan is almost entirely dependent on fossil fuel imports, particularly after the March 2011 earthquake led to a meltdown at Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear plant and the eventual closure of the country’s entire atomic fleet, said Amrita Sen, chief oil analyst at Energy Aspects.

So many exploration projects have been delayed that there will be a risk of price spikes by 2018, said Sen. “From an importers point of view, it makes complete sense to do what they are doing.”

To contact the reporters on this story: Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net; Stephen Stapczynski in Tokyo at sstapczynsk1@bloomberg.net; Emi Urabe in Tokyo at eurabe@bloomberg.net To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net Aaron Clark

Copyright 2016 Bloomberg News.

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