Petroleum Association of Japan September 2011 CONTENTS

1. Preface...... 2 2. Profile of Petroleum Association of Japan...... 3 3. Domestic Oil Supply and Demand Trend...... 7 4. Energy Policy in Japan...... 13 5. Securing Stable Supply...... 20 6. Regulatory Reform and Petroleum Industry...27 7. Petroleum Product Distribution and Marketing...... 32 8. Toward a Fundamental Reexamination of Petroleum-related Taxes...... 35 9. Reinforcement of Corporate Structure...... 39 10. Thorough Safety Measures...... 41 11. Preparation for Major Oil Spill Incidents...... 43 12. Environmental Measures in the Oil Refining Sector...... 45 13. Quality Improvement in Automotive Fuels....48 14. The Global Warming Issue and Oil...... 51 15. Utilization of Biomass Fuel...... 57 16. Efficient Use of Oil...... 60 17. Efforts toward Developing New Energies...... 63 Appendix:...... 65 N Location of Refineries and Crude Distillation Capacity in Japan N Overview of the Japanese Petroleum Industry N Main Product Specifications in Japan N PAJ’s Oil Statistics Website for Details

1 1 Preface Prices of West Texas Intermediate (WTI) in 2010 had promoting non-fossil fuels. started with the level of some 80 US dollars per barrel Regarding the global warming issue, the petroleum (US$/Bbl), and once had declined to the level of 60 industry, as an advanced environmental industry, has US$/Bbl in mid May. In comparison to 2008 and 2009, actively made efforts such as drawing up the indus- crude oil prices in 2010 showed a relatively stable try’s Commitment to a Low Carbon Society, further trend, as those generally stayed within a range enhancing energy saving at refineries, expanding bio- between 70 and 80 US dollar levels. However, crude mass fuel supply, and promoting the dissemination of oil prices climbed in late October, without returning to diesel engine vehicles. the 70 US dollar level, and WTI hit a level beyond 90 Internationally, COP 16 was held in Cancun, Mexico US$/Bbl in mid December, reflecting the supply and in December 2010 to discuss the framework of the demand factors such as the impact of cold weather in post-Kyoto Protocol after 2013. At the conference, par- winter, mainly in Europe, and oil demand increases ticipants avoided simply extending the Kyoto Protocol among oil producing countries, as well as financial and they agreed on the direction of deliberation based factors such as inflow of surplus funds into the crude on the Copenhagen Accord. Setting up the framework oil futures markets due to the easing of the money for the next term was carried over to COP17 at the end supply in all advanced countries. of 2011. Under such circumstances, an increase in the On April 20 an explosion and oil spill occurred at a Petroleum and Coal Tax was decided on as a tax for deepwater oil rig, "Deepwater Horizon" (1,500 meters global warming countermeasures by the Cabinet in below sea level) operated by BP (British Petroleum) in Japan. (A bill for the tax reform package is suspended the Gulf of Mexico in the United States. This was the as of August 2011 due to political turmoil.) largest-ever offshore oil spill disaster, as about 4.93 Thus, against the backdrop of the global economic million barrels of crude oil were estimated to have situation and global environmental issues, as well as flowed into the gulf. It is a concern from now that new domestic policy development, 2010 was another tur- exploration and development of deepwater oilfields bulent year for the petroleum industry. will lose steam in the medium and long term due to The Great Higashi Nihon Earthquake of March 11, tighter regulations for deepwater oil development and 2011 caused extensive damage to petroleum facilities. rising costs in such oil development. Especially, three oil refineries in Sendai, Kashima and Regarding the situation surrounding the domestic oil Chiba suffered serious damage, and all fuel storage industry, the Basic Energy Plan, which needs to be facilities along the Pacific Ocean coast in the Tohoku revised every three years, was reviewed in May and Region suspended their operations. In addition, many amended in August 2010. In this review, oil is posi- service stations in the disaster-stricken areas were tioned as a core energy source even in 2020 and 2030 unable to do business and more than 150 tank tracks and the review also specified the necessity for secur- were lost. For these reasons, there were temporary ing a stable oil supply such as by maintaining its sup- supply shortages in the affected areas and the Tokyo ply chain. On the other hand, from the viewpoint of metropolitan area. efficient use of fossil fuels, the Law Concerning With the increasing awareness of the convenience Sophisticated Methods of Energy Supply Structures and importance of oil due to the great earthquake, the stipulates that a certain level of heavy oils cracking petroleum industry expects that the position of oil in capacity be held until 2013 in relation to refineries’ the energy policy shall be strengthened. crude distillation unit capacity. This takes into account This brochure has been created to provide consum- the heavier crude oils procurement structure expected ers as well as stakeholders with a better understand- in the future as well as the lighter domestic fuels ing of the current situation and the future efforts of demand structure. It also required oil companies to the petroleum industry in Japan. We hope this bro- expand the supply of bio-ethanol to 500,000 kiloliters chure will help to give you a sound understanding of in crude oil equivalent by 2017, from the viewpoint of oil and the petroleum industry in Japan.

2 2 Profile of Petroleum Association of Japan The Petroleum Association of Japan (PAJ), incorpo- arguments concerning the Basic Act on Global Warm- rated in November 1955, is composed of 14 oil refining Countermeasures and the Commitment to a Low ers and primary oil distributors (Motouri) in Japan. Carbon Society, and continuously improving the busi- PAJ deals with all matters concerning the refining ness environment and competitiveness are the key and marketing of petroleum products. The main activ- issues. Also, each oil company is urged to make ities are: efforts to maintain a sound supply chain through 1. Publishing information on important issues for the solving such key issues as noted above. petroleum industry Taking such circumstances into account, PAJ offers 2. Advocating the industry’s opinions and submitting its opinions about the future direction of petroleum proposals to the government, business associa- policies, etc. and contributes to the development of tions, the media and the general public the petroleum industry as its basic policy through the 3. Researching and coordinating activities related to following business activity plans: important petroleum issues and providing infor- 1. Maintaining a huge oil supply chain, covering mation on such issues every segment from crude oil imports and refining 4. Undertaking governmental subsidy programs to distribution and marketing such as the “Major Oil Spill Response Program”, 2. Promoting effective and sophisticated use of oil including international conferences 3. Dealing with global and domestic environmental 5. Enhancing communication and understanding issues as well as safety issues among member companies 4. Gaining public and consumer understanding of and trust in the petroleum industry, as well as improving the industry’s image 1. Basic Policy for Fiscal Year (FY) 2011 Business Activities 2. Projects and Main Activities in Along with such changes in the business environ- FY2011 ment as the decline in domestic petroleum product demand and fluctuations in crude oil prices, the petro- 1. Addressing issues concerning the petroleum poli- leum industry in Japan has been working positively cy in the future as an advanced environmental industry to take global (1) Proposals for energy policies focusing on how warming countermeasures, while making efforts to the petroleum industry should be in the future improve its revenue base. At the same time, even (2) Action toward the global warming issue though domestic oil demand shows a downward (3) Action toward the introduction of bio-ETBE trend, oil will continue to constitute the largest share (ethyl-tertiary-butyl-ether) of the primary energy supply. As the last resort for energy for sustaining the nation’s economy, the 2. Urging comprehensive reexamination of petro- industry is continuously requested to play an impor- leum-related taxes and ensuring equity in taxation tant role in carrying out the social responsibility of among energy sources meeting the 3E principles of Japan’s energy policy, namely, energy security, environmental consider- 3. Strengthening both the domestic and international ation, and efficient supply while using market mecha- competitiveness of the petroleum refining industry nisms. in Japan In FY2011, PAJ positively advocates clarifying (1) Response to international issues related to the petroleum policies under the future energy policies. petroleum industry and efforts to reinforce fur- Taking action against a tax for global warming coun- ther competitiveness termeasures, preparing opinions for the concrete (2) Analysis of corporate performance and the

3 Profile of Petroleum Association of Japan

financial condition of the petroleum industry in petroleum industry Japan (1) Effective PR activities for better public and consumer understanding of oil and the petroleum 4. Promoting various uses of petroleum products industry (1) Development of countermeasures for issues (2) Support for research operations by the Petro- related to automotive fuels leum Industry Technology and Research Insti- (2) Enhancement of promotional activities to tute, Inc. (PITRI) encourage broad use of PAJ’s High Energy Effi- (3) Support of activities of the Japanese National ciency Oil Utilization Systems that demonstrate Committee of the World Petroleum Council superior performance from an environmental (4) Action toward labor policy issues concerning viewpoint the petroleum industry (3) Research and development of automotive fuels, (5) Enhancement of communication among PAJ lubricating oils, etc. member companies and collaboration with concerned business organizations 5. Promoting disaster prevention and environmental protection activities (1) Reinforcement of disaster prevention measures, increased efforts to mitigate excessive safety and disaster prevention regulations, and enhancement of voluntary safety management systems (2) Maintenance and improvement of the PAJ Major Oil Spill Response Program (3) Formulation of a response system to such risks as major earthquakes, outbreaks of new-type influenza, etc. (4) Active participation in development of policies and programs on environmental issues such as toxic chemical substances

6. Addressing oil supply and distribution issues (1) Efforts towards formation of a fair and transparent petroleum product market (2) Improvement of services to provide information on oil-related databases and survey reports on domestic and foreign petroleum markets (3) Active participation in development of policies and programs for oil stockpiling and emergency responses (4) Enhancement of the rationalization of petroleum product distribution, as well as realization and implementation of environmental countermeasures

7. Promoting activities for a strong foundation for the

4 = Sub-committees

■ Executives I Management and Committees President Akihiko Tembo Petroleum Distribution Laws Chairman, Representative Director, Idemitsu Kosan Co., Ltd. General Assembly Auditor Distribution Committee Vice-President SS Technological Issue Yaichi Kimura President, Representative Director Chief Executive Officer, Aviation Cosmo Oil Co., Ltd. Board of Directors Board of Standing Vice-President Directors Petroleum Energy System Jun Arai Environmental President, Representative Director, Showa Shell Sekiyu K.K. Vice-President Facilities Management Yasushi Kimura Committee of Policy Planning Environment & President and Representative Director, JX Nippon Oil & Energy Corporation Managing Directors Committee Public Safety Committee Safety Senior Managing Director Hideo Matsui

Managing Director Automotive Fuels Junichi Hatano

Managing Director Commercial/Industrial Fuels Nobuo Hata Policy Planning Global Environmental Issue Lubricating Oils

PAJ Member Companies (14) Labor Policy Refining Technology

• Idemitsu Kosan Co., Ltd. Technical Committee Quality Control • TonenGeneral Sekiyu K.K. • Toa Oil Co., Ltd. Hydrogen and Fuel Cell • Kashima Oil Co., Ltd. Associated Organizations Finance • Taiyo Oil Co., Ltd. Taxation & PAJ Oil Spill Cooperative (POSCO) • Fuji Oil Co., Ltd. Finance Committee Petroleum-related Taxation • Cosmo Oil Co., Ltd. General Service Committee • Kyokuto Petroleum Industries, Ltd. • Mitsui Oil Co., Ltd. Inland Transportation Countermeasure Committee • Showa Yokkaichi Sekiyu Co., Ltd. Transportation Committee Coastal Transportation • Showa Shell Sekiyu K.K. Technical Group • JX Nippon Oil & Energy Corporation Ocean Transportation • ExxonMobil Y.K. Oil Statistics Committee • Seibu Oil Co., Ltd. Refining Public Relations Committee Public Relations Former Member & Friend of PAJ (1) Marketing Stockpiling • Kygnus Sekiyu K.K. Japanese National Committee for ISO TC28* Oil Stockpiling Committee ISO: International Standardization Organization IAB (Industry Advisory Board) TC: Technical Committee

JIG Japan Crisis Management Committee Crisis Management JIG: Joint Inspection Group Limited

5 Profile of Petroleum Association of Japan

= Sub-committees

I Management and Committees

Petroleum Distribution Laws General Assembly Auditor Distribution Committee SS Technological Issue

Aviation Board of Directors Board of Standing Directors Petroleum Energy System Environmental

Facilities Management Committee of Policy Planning Environment & Managing Directors Committee Public Safety Committee Safety

Automotive Fuels

Commercial/Industrial Fuels

Policy Planning Global Environmental Issue Lubricating Oils

Labor Policy Refining Technology

Technical Committee Quality Control

Hydrogen and Fuel Cell

Associated Organizations Finance Taxation & PAJ Oil Spill Cooperative (POSCO) Finance Committee Petroleum-related Taxation General Service Committee

Inland Transportation Countermeasure Committee Transportation Committee Coastal Transportation Technical Group Ocean Transportation Oil Statistics Committee

Refining Public Relations Committee Public Relations

Marketing Stockpiling Japanese National Committee for ISO TC28* Oil Stockpiling Committee ISO: International Standardization Organization IAB (Industry Advisory Board) TC: Technical Committee

JIG Japan Crisis Management Committee Crisis Management JIG: Joint Inspection Group Limited

6 3 Domestic Oil Supply and Demand Trend Structural Decline in Oil Demand b Changes in Social Structure With the changes in the structure of society due to Total petroleum fuel demand for fiscal year (FY) continuous population decline caused by a falling 2009 was about 195 million kiloliters (KL), down by birthrate and an aging population in Japan, the petro- 3% from the previous year. The total fuel demand fell leum industry confronts a decline in fuel consump- below the milestone 200 million KL level for the first tion. For example, a diminishing number of time since it hit that level in FY1988. customers lowers the use of gasoline and kerosene, Especially in the first half of FY2009, though there and a stagnant volume of transported goods together were some signs of recovery from the world econom- with advancement of rationalization and efficiency in ic stagnation triggered by the Lehman Shock, domes- the transportation industry reduces the consumption tic production activities and consumer spending were of diesel fuel and Fuel Oil A. Regarding the decrease still weak. Consequently, the total fuel demand in gasoline demand for automobiles, it is said that the showed a 7% decline versus the same term of the pre- phenomenon of young adults not using cars, mainly vious year. in urban areas, has been increasing. Though total fuel demand had fallen below the 200 million KL level after the Second World War and the c Global Warming Countermeasures second oil crisis in the 1980s, gasoline, kerosene and Since the reduction of CO2 emissions became a diesel fuel demand increased fairly consistently. This global issue, reducing oil consumption, since it is a upward trend terminated in 2000. Total fuel demand fossil fuel, has been promoted. In response, oil con- reached a peak of 246 million KL in 1999, and a struc- sumption has been lowered by efficiency improve- tural downward trend has continued since 2000. Peak ment of energy consumption such as shifting to demand volumes by fuel were: 61.5 million KL for energies that emit less CO2 and improving vehicles’ gasoline in FY2004 and 30.6 million KL for kerosene in fuel consumption. FY2002. As for industrial fuels (Fuel Oil B and Fuel Oil Total fuel oil demand for the first half (Apr~Sep) of C), the peak volume was 111 million KL in FY1973. FY2010 was 91.7 million KL, 2% up from the previous Major factors for such structural decline in petro- year. On a product-by-product basis, naphtha and leum demand in Japan are as follows: a lowering oil Fuel Oil A showed a decrease, while gasoline, diesel consumption policy gathering momentum, b chang- fuel, Fuel Oil B and Fuel Oil C showed increases of es in social structure, and c global warming counter- about 3%. Jet fuel and kerosene also increased by 6% measures. and 11%, respectively from the previous year. The rise in demand for jet fuel, kerosene, Fuel Oil B and C is a Lowering Oil Consumption Policy considered as a backdrop of the low demand levels in Gathering Momentum the previous year. The growth of gasoline and diesel After suffering the two oil crises, Japan has promot- fuel is attributable to a temporary demand increase ed the so-called “the policy of lowering oil consump- due to the impact of a record-breaking hot summer in tion” as a core energy policy for lowering oil 2010. dependence in Japan. In particular, such policy mea- It is projected that structural factors for a downward sures as enhancing nuclear energy, banning new con- trend in Japan’s petroleum product demand will not struction of heavy-fuel-fired power plants, and be changed, excluding temporary impacts such as providing LNG with preferential policy treatment have rapid changes in crude oil prices and trouble in power been strongly taken for reducing the consumption of generation plant facilities. Under such circumstances, Fuel Oil B and Fuel Oil C for power generation and improving efficiency of the overall petroleum supply industrial use. Consequently, a fuel shift from oil to chain, while maintaining it at an adequate scale, is the coal or LNG has been progressing in the industrial, urgent issue for the petroleum industry. household and commercial sectors.

7 Domestic Oil Supply and Demand Trend

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

(FY) Jet Fuel 1,673 Diesel Fuel Oil B,C Fuel Oil A Kerosene Naphtha Gasoline Total Fuels Fuel 1973 111,007 19,306 21,930 36,240 27,223 16,759 234,138 2,059 1975 92,903 18,992 15,997 21,663 32,031 28,995 212,639

2,967 1980 79,199 21,083 21,564 23,566 26,297 34,543 209,219

3,739 1990 46,623 27,066 37,680 26,701 31,423 44,783 218,012

4,611 2000 31,364 29,516 41,745 29,924 47,686 58,372 243,218

5,129 2005 27,009 27,780 37,116 28,265 49,388 61,421 236,109

5,283 2009 16,434 16,043 32,388 20,056 47,320 57,464 194,988

5,154 2010 17,330 15,404 32,864 20,332 46,668 58,197 195,948

0 50,000 100,000 150,000 200,000 250,000 Source: Ministry of Economy, Trade and Industry (METI)

Petroleum Supply System in Japan product in line with the domestic demand structure, to adjust product qualities which meet domestic environ- For FY2009, the domestic yield of crude oil was a mental standards, etc., and to provide superior ability mere 920 thousand KL, equivalent to 0.4%, or 1.5 days, to cope with an emergency. Therefore, “Domestic of the 295.7 million KL of Japan’s crude processing vol- Petroleum Refining System” has been adopted as a ume. Japan, therefore, imports almost all crude oil and core pillar of Japan’s petroleum supply system. petroleum products for meeting domestic petroleum For the past 30 years, domestic petroleum demand product consumption demand. has been more or less consistently declining and, at the There are two methods for covering domestic petro- same time, demand for so-called “white fuels” such as leum product demand: One method is to “import gasoline, naphtha and kerosene has been increasing. petroleum products” and the other is to “import crude Oil companies, therefore, have made efforts to follow oil and refine it to produce petroleum products locally”. trends in supply and demand by constructing heavy oil The latter method, i.e., crude oil importation and cracking units for increasing output of “white fuels”. domestic refining, has been adopted in Japan. Any excess or deficiency beyond refining facility capac- The method for refining crude oil within the country ity has been supplemented by import or export of is called the “Domestic Petroleum Refining System”. petroleum products. This method has various advantages such as being With the advancement of internationalization, oil able to reduce procurement costs by importing a mas- companies in recent years have tried to use product sive amount of crude oil with large-scale tankers, to import and export more flexibly from a strategic view- flexibly change production volume of each petroleum point.

8 I Changes in Crude Processing Capacity and Capacity Utilization Ratio Unit: 1,000 bbl/day (%) 5,940 5,940 6,000 100 5,410 5,221 5,274 4,973 4,895 5,000 4,767 4,796 4,856 4,846 4,552 4,615 90 85.2 87.2 4,000 82.9 82.7 77.3 80 79.4 79.2 78.9 77.8 3,000 74.5 70 70.7 2,000 66.0 Crude Processing Capacity 62.3 60

1,000 Utilization Ratio(%)

0 50 1973 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010(FY) Source: PAJ

n Petroleum Product Domestic Demand by Usage (FY2009) Unit: 1,000kl Product Gasoline Naphtha Jet Fuel Kerosene Diesel Fuel Heavy Fuel Crude Oil LP Gas Lube Oil Total Usage Automobile 57,499 31,080 2,527 650 91,756 Aviation 4 5,319 5,324 Transportation & Marine 256 3,662 137 4,055 Agriculture & Fisheries 1,896 629 3,321 5,845 Mining & Manufacturing 65 4,349 45 12,041 6,647 894 24,042 City Gas 1,489 1,489 Electric Power 248 7,211 3,644 567 11,670 Household & Commercial 13,801 6,198 13,005 33,005 Chemical Feedstock 47,310 642 5,942 53,894 Total 57,569 47,310 5,319 20,045 32,257 32,433 4,286 30,178 1,681 231,079 Source: PAJ n Petroleum Supply and Demand (FY2010) Unit: 1,000kl FY 2008 2009 2010 %vs.Prev. Year Item Import 234,406 211,656 214,357 101.3 Crude Oil Processed 223,975 209,846 208,633 99.4 Opening Inventory 11,544 11,805 10,577 89.6 Production 208,803 196,375 194,969 99.3 Import 29,315 29,799 33,067 111.0 Product Total Supply 238,119 226,174 228,036 100.8 (Fuel Oil) Domestic 201,060 194,988 195,948 100.5 Export 34,153 29,932 30,282 101.2 Total Demand 235,213 224,920 226,230 100.6 Closing Inventory 11,805 10,577 10,339 97.7 Source: METI

9 Domestic Oil Supply and Demand Trend

Crude Oil Import is a fragile aspect of Japan’s petroleum supply structure. The crude import volume by region in FY2009 showed that Middle Eastern oil producing countries Petroleum Product Import and Export accounted for 89.5%. Oil dependency on the Middle East had once dropped to 68% in FY1987 after the oil As previously indicated, petroleum product import crises; however, the dependency rose again in the plays a supplemental role in Japan because it has 1990s, because non-Middle Eastern oil producing adopted the “Domestic Petroleum Refining System”. countries such as China and Mexico gradually Regarding naphtha, however, about 54% of its reduced their export of crude oils in accordance with domestic demand is served by imported products, economic growth in their countries. because petrochemical companies in Japan indepen- Regarding crude oil imports by country, four coun- dently import naphtha as a petrochemical feedstock. tries, namely Saudi Arabia (29.5% of total import vol- Both Fuel Oil B and Fuel Oil C have considerable ume), the United Arab Emirates (21.3%), Qatar volumes shipped to ocean liners, which are fueled (12.1%) and Iran (10.9%), accounted for about three- with imported products as well as domestically quarters of Japan’s total crude import volume. refined product exports. Jet fuel also makes up a It is extremely important for Japan to maintain and large portion of fuel supplies to international aircraft, enhance positive relationships with those Middle which is nearly double its domestic demand. Eastern countries. However, some of those countries In recent years, the export volume of diesel fuel is are not always problem-free in terms of their domes- increasing year by year, though the future trend is tic political situations or their relations with the inter- uncertain. national community. It would have to be said that this

Unit: 1,000kl,% I Crude Oil Imports by Source Others 0.8 Others 1.1 Nigeria 1.9 China 0.6 (FY) Iraq 0.3 Saudi Arabia UAE Iran Kuwait Indonesia Neutral Zone OmanBrunei 288,609 1973 19.9 10.8 31.0 8.2 14.7 5.3 1.9 3.5 OPEC 92.9 non-OPEC 7.1 Iraq 2.3 Others 2.7 Brunei 3.3 Others 1.1 Neutral Oman Saudi Arabia UAE Iran Kuwait Indonesia Zone 2.9 27.2 10.3 22.3 8.3 11.2 China 262,785 1975 4.9 3.6 OPEC 89.2 non-OPEC 10.8 Iran 2.3 Kuwait 3.5 Others 3.3 Mexico 0.8 Neutral Saudi Arabia UAE Qatar Indonesia Iraq Oman China Others Zone 33.0 14.7 3.5 15.0 5.5 3.5 3.8 5.7 249,199 1980 5.4 OPEC 86.2 non-OPEC 13.8 Kuwait 1.9 Iraq 2.0 Others 0.5 China 6.5 Others 5.4 Neutral Saudi Arabia UAE Qatar Iran Indonesia Oman Mexico Zone 19.5 21.4 6.0 10.7 12.6 6.4 3.7 238,480 1990 3.5 OPEC 78.0 non-OPEC 22.0 Australia 1.4 Iraq 1.4 Indonesia 4.8 Others 0.2 Vietnam 1.1 Neutral Saudi Arabia UAE Qatar Iran Kuwait OmanChina Others Zone 21.6 25.6 9.6 11.5 7.4 4.5 2.2 3.3 254,604 2000 5.4 OPEC 87.5 non-OPEC 12.5 Neutral Zone 2.0 Iraq 2.3 Others 0.5 Oman 3.4 Indonesia 2.0 Saudi Arabia UAE Qatar Iran Kuwait Russia Others 2009 29.5 21.3 12.1 10.9 7.7 4.5 3.8 211,656 OPEC 86.2 non-OPEC 13.8 Neutral Zone 1.9 Iraq 3.3 Others 0.4 Oman 2.7 Saudi Arabia UAE Qatar Iran Kuwait Russia Others Indonesia 2.4 2010 29.2 20.9 11.6 9.8 7.0 7.1 3.8 214,357 OPEC 84.0 non-OPEC 16.0 Source: METI

10 I Crude Oil Imports by Supplier Unit: 1,000kl,% National Oil Companies of Oil-producing Countries Japanese Oil Independent Oil Companies Development Companies (FY) 1973 Oil Majors 74.1 8.5 9.2 8.3 288,609

1975 70.0 7.7 14.3 8.0 262,785

1980 44.5 3.3 44.4 7.8 249,199

1985 26.1 3.7 59.7 10.5 197,261

1990 27.8 1.9 61.3 9.0 238,480

1995 23.9 1.5 64.2 10.4 265,525

2000 22.2 2.2 67.3 8.3 254,604

2005 18.8 1.8 75.0 4.4 249,010

2009 17.1 3.2 74.4 5.3 211,656

2010 17.8 3.2 74.3 4.7 214,117 Source: METI

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

(million kl) 300 289

263 Crude Oil Import Volume 266 (%) 255 249 249 100 250 238

92.9 214 197 90.0 200 90 87.6 86.6 89.2 89.1 87.1 86.2 Dependence on OPEC 150 84.0 79.9 80 78.2 78.0 77.5 78.6 100 71.4 71.5 Dependence on Middle East 70 71.6

68.8 50 1st 2nd Iraq War Iraq Oil Crisis Oil Crisis Gulf Crisis

60 0 1973 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 (FY) Source: METI

11 Domestic Oil Supply and Demand Trend

I Petroleum Product Import & Export Composition (FY2009) Unit: 1,000kl,% Jet Fuel 0.0 Import Gasoline Heavy Fuel Naphtha 86.7 29,799 2.9 7.8 Gasoline 5.2 Kerosene 1.5 Diesel Fuel 1.1 Export Kerosene Jet Fuel 27.8 Diesel Fuel 37.8 Heavy Fuel 28.0 29,932 1.2 Naphtha 0.0 I Major Petroleum Products by Importing & Exporting Country Gasoline Kerosene Diesel Fuel Heavy Fuel USA Malaysia Malaysia Thailand Russia 0.5 China 1.6 0.0 0.0 0.0 7.4 China China China 0.3 Sweden Malaysia Singapore 9.1 12.5 0.0 Singapore 9.3 19.5 10.4 Republic Import Import Import of Korea Import Import 854 459 317 10.2 2,332 Singapore Indonesia 61.9 Republic of Korea Republic of Korea Republic of Korea 10.4 78.9 80.5 87.5 Republic Others Taiwan US Forces Republic China of Korea Malaysia 1.2 New Zealand of Korea US Forces 6.8 0.7 0.1 2.8 2.3 3.1 2.9 Others 4.1 Australia China 11.7 Singapore USA 0.7 Netherlands 15.4 Hong Kong 3.3 24.2 Republic 3.3 4.6 USA Export Export Export Singapore Export Export of Korea 6.5 1,552 357 11,319 40.8 8,382 46.4 Hong Kong China 6.4 21.0 Bonded Oil Chile (Bunker) Singapore Singapore 6.8 59.4 71.6 28.6 Australia Philippines 19.1 6.1 Source: METI

I Petroleum Product Import & Export Composition (FY2010) Unit: 1,000kl,% Jet Fuel 0.1 Import Gasoline Heavy Fuel Naphtha 82.3 33,067 3.3 9.7 Gasoline 7.3 Kerosene 0.6 Kerosene 3.2 Diesel Fuel 1.4 Export 30,282 Jet Fuel 29.5 Diesel Fuel 36.5 Heavy Fuel 26.1 Naphtha 0.0 I Major Petroleum Products by Importing & Exporting Country Gasoline Kerosene Diesel Fuel Heavy Fuel USA China Malaysia USA 0.0 Singapore USA 2.8 Singapore 0.0 5.6 0.0 Malaysia 0.0 3.0 Russia 2.1 Sweden Germany 0.0 Australia 0.4 8.9 Singapore Republic 0.0 China 0.3 2.3 of Korea 14.5 Import Import Import Import Indonesia 40.7 Import 1,098 1,053 444 3,215

Malaysia Republic of Korea Republic of Korea Republic of Korea 36.1 91.1 92.0 100.0 Taiwan Netherlands Republic Indonesia New Zealand Hong Kong 3.4 2.8 of Korea 2.2 3.0 Others China Others 2.5 Republic 5.0 Malaysia USA 7.8 5.6 8.3 of Korea China 1.0 3.5 3.0 New Zealand Belgium Singapore 14.1 4.8 Export 20.1 Export Republic Export 29.1 Export Export Hong Kong 2,198 198 of Korea 11,046 7,905 46.6 5.6 Singapore Bonded Oil Chile Australia 20.2 (Bunker) Singapore Singapore 10.9 15.1 24.3 Hong Kong 57.4 75.3 13.6 China 6.2 United Kingdom 5.4 Source: METI Philippines 3.1

12 4 Energy Policy in Japan Enactment of the Basic Act on Energy Policy As a result of industry advocacy efforts, the terms Japan’s energy policies have changed in response “Post-oil” and “Departure from the Middle East”, con- to the diverse requirements of the times. As more ventional objectives of Japan’s basic energy policy, than 30 years have passed since the first oil crisis in were eliminated from the Basic Energy Plan estab- 1973, it is now necessary not only to secure a stable lished in October 2003. The plan re-emphasized the oil supply but also to promote fair competition, liber- significance of oil by stating “oil will remain an impor- alization, and competitiveness through deregulation tant energy source in the future from the viewpoints and other measures as well as to consider global of economic efficiency and convenience”. environmental issues. Upon compilation of the Basic Energy Plan, a report Taking into account changes in the recent energy titled “Energy Supply and Demand Outlook toward situation, the Basic Act on Energy Policy, enacted in 2030” was drawn up in October 2004. The following June 2002, aims at advancing various measures in a points were clearly stated in this report: comprehensive manner to indicate the broad future 1. Oil will remain the central player in primary energy direction of energy policy in Japan. This law illus- supply in 2030. trates the following three basic principles (the “3E”): 2. The introduction of IGCC (Integrated Gasification “securing stable energy supply”, “environmental Combined Cycle) fueled by residuals should be consideration”, and “efficient supply using market promoted to enhance efficient utilization of oil mechanisms upon due consideration of the first two resources. principles.” It stipulates the roles and responsibilities 3. Oil substitution policy, as well as the definition of of the central government, local governments, and “new energies”, will be reexamined. others. The law also provides that taking into account the next decade or so, the Basic Energy Plan should Restructuring of Japan’s Energy be drawn up in line with these 3E principles. Policies

Oil Remains an Important Energy even In recent years, the worldwide interest in energy in the 21st Century security has grown as a result of the rapidly increasing severity of global energy conditions such as the The petroleum industry has consistently advocated steep rise in oil prices. The international energy mar- the following opinions for the simultaneous achieve- ket is facing significant structural changes such as the ment of the energy policy’s three basic principles: rapid growth of energy demand in Asian countries 1. Achieve “the optimum energy mix” suitable for and the rising tide of resource nationalism. In addi- Japan by evaluating the characteristics of each tion, energy prices have fluctuated widely as the situ- energy source fairly and objectively. ation was made worse by various factors such as 2. Promote effective and efficient use of oil, which natural disasters including damage from a hurricane, constitutes the largest share of the primary energy inflows of speculative money, terrorist activities and supply. uncertainties in the Middle East like the issue of Iran’s 3. Emphasize the feasibility of launching new ener- nuclear development. Amid mounting international gies such as nuclear power and biomass. concern over energy security, many countries are 4. Provide an equal footing regarding competitive gearing up for the restructuring of their national ener- conditions on taxation, stockpiling obligations, etc. gy strategies. among all energy sources in order to achieve “the Under these circumstances, in May 2006, the Minis- optimum energy mix”. try of Economy, Trade and Industry (METI) set up five

13 Energy Policy in Japan

quantitative targets as the New National Energy Strat- sion of the Basic Energy Plan was made in June 2010: egies (the “New Strategies”) mainly focusing on 1. Constraints are increasing in both domestic and energy security. In response to this, the Basic Energy foreign energy environments such as through Plan was revised to emphasize strategic diplomatic intensified competition for ensuring resource inter- efforts for securing energy resources, development ests globally and utilization of various energies, promotion of 2. Pressures to shift to a low-carbon path on the nuclear-oriented policy measures, and close coopera- energy supply and demand structure to prevent tion with Asian countries (for energy conservation, oil global warming are getting stronger stockpiling, etc.). 3. The energy and environmental sectors are being Points for the highly commendable policies are: required to become a leading force in economic 1. Necessity for in-depth strategic and comprehen- growth sive upstream policies and strengthening of the oil Aiming at reviewing the future energy policies on a refining and distribution segments medium- and long-term basis, the revised Basic Ener- 2. Necessity for enhancing the diesel shift (shifting to gy Plan, which contains the descriptions of not only diesel vehicles) as one of the effective energy con- the energy supply and demand structure, but also in- servation measures in the transportation sector depth reforms of social systems and lifestyle, was 3. The petroleum industry’s commitment to launch drawn up with an eye to the next 20 years until 2030. bio-ETBE (ethyl-tertiary-butyl-ether) produced This outlook also includes the following points: using bio-ethanol in FY2010 with respect to coun- 1. Request for maintaining the stable supply of oil, termeasures for the introduction of biomass fuel because oil excels in its convenience and econom- The revised Plan also indicates the importance of ic efficiency, and it will remain as a core energy effective and efficient utilization of all kinds of ener- 2. Need for strengthening relationships as well as gies including oil, enumerating the following basic securing interests with resource-rich countries, principles for stable energy supply: enhancing competitiveness in the oil refining sec- 1. Effective and thorough utilization of energies tor and maintaining a sound domestic supply 2. Evaluation of the 3E of all kinds of energies, selec- chain tion of the optimum energy mix and reinforcement 3. Aim for supplying biomass fuels at a volume of measures for intensive use of those energies equivalent to at least 3% of gasoline demand 3. Cooperation between the government and the pri- nationwide in 2020, on the basis that biomass vate sector for strategic and comprehensive pro- fuels have a sufficient greenhouse gas (GHG) motion of the measures leading to the acceleration emission reduction effect on a Life Cycle Assess- of sophisticated use of oil ment (LCA) basis and the supply stability and economic efficiency are ensured As a result of this revised Basic Energy Plan, the 4. Aim for maximizing supply of biomass fuels in Long-term Energy Supply and Demand Outlook, 2030 by developing production technologies for issued in March 2008, indicates that oil will remain an the next-generation biomass fuels such as cellu- important energy source in the future, even though lose oil’s share in Japan’s primary energy supply will decline to a little less than 40% in 2030. On the other hand, while debate on Post-Kyoto Pro- During the deliberation of this revision, the petro- tocol was being carried out, the government leum industry indicated the importance of gaining a announced in June 2009 that the medium-term target consensus that treats all energy sources equitably. of GHG emission reduction in 2020 is to be 15% ver- Taking into account the following points under a sus 2005. In response to this, the Long-term Energy rapid rise in global energy demand, the second revi- Supply and Demand Outlook, which had been plotted

14 out previously, was revised in August. Though dis- should be, and issued a report in February 2008. The semination of electric vehicles is mentioned in the report expects the petroleum industry to play a key revised outlook, oil still constitutes about 40% of the role in energy security through stable and efficient primary energy supply. After that, then Prime Minister supply of petroleum products and stresses again the Hatoyama, after a change in the Japanese govern- necessity of promoting the building of a strong busi- ment administration, proposed a 25% GHG emission ness foundation in the petroleum industry to ensure reduction target versus 1990 on the premise of cre- energy security. Specifically, it points out that refiners ation of a fair and viable international framework and are required to make efforts to promote diversified mutual agreement on an ambitious target among all businesses such as enhancement of fuel export and major nations. diversification into the petrochemical business, tie- ups in refining operations and disposal of facilities, Reexamination of Japan’s Petroleum and further business tie-ups beyond the existing Policies framework of companies. From the viewpoint of sophisticated use of energy, In line with the deliberation of energy policies, it is desirable to upgrade cracking capacity for heavy petroleum policies were reexamined. In May 2006 oils that efficiently utilizes precious natural resources. METI compiled its report, highlighting the following The report therefore clearly states that it is necessary points: for both the government and the private sector jointly 1. To promote independent development of crude oil to promote policy measures for the development and resources and to facilitate natural gas develop- promotion of innovative technologies. ment through enhancing venture money supply The petroleum industry advocated the following functions, etc. three points at the hearing concerning the Basic Ener- 2. To strengthen the refining function through ratio- gy Plan at the Basic Plan Committee under the Gener- nalization for creating sophisticated refineries and al Council of the Advisory Committee for Natural promotion of business integration and coopera- Resources and Energy: tion among companies in petroleum complexes 1. Considering that stable energy supply is essential 3. To improve environmental and security aspects of in Japan as a resource-poor nation and oil will the oil distribution function remain the largest share in the primary energy supply even in 2030, the significance of oil and its In addition, the report points out that the new tech- stable supply must take priority over everything nologies for processing heavy crude oils/residuals else. and the clean and sophisticated utilization of petro- 2. It is necessary to provide policy measures for keep- leum resources are not necessarily encouraged by the ing stable oil supply such as through maintaining Law Concerning Promotion of the Development and the domestic supply chain under the situation of a Introduction of Alternative Energy (Alternative Energy structural decline in domestic demand. Law) enacted in 1980, when oil’s share of the primary 3. Launching of biomass fuels has a supply sustain- energy supply was some 80%, as well as the Law on ability problem and involves the requirement for the Promotion of the Use of New Energy (New Energy enormous costs associated with a large increase in Law) enacted in 1997. The report indicates the neces- their supply volume. Bearing such huge costs sity for further utilization of petroleum resources. would become a serious issue for the petroleum During this period, the Petroleum Council of the industry and shake the foundations of its corporate Advisory Committee for Natural Resources and Ener- management. gy reexamined what the nation’s petroleum policies and appropriate policy measures for biomass fuels

15 Energy Policy in Japan

Toward the Advancement of Energy should be provided to achieve the optimum mix of Supply Structure energies.

After the G8 Hokkaido Toyako Summit in 2008, In consequence, as the basic policy for Japan to arguments for developing a low-carbon society have realize “a low-carbon society”, the points below were been spreading in the nation. Movements regarding indicated in the report compiled in January 2009: global environmental issues in foreign countries have 1. To reexamine the alternative energy policies for also become active. Those movements are pressing which the purpose is merely restraining oil usage the energy industry for drastic changes. It is requested 2. To conduct an objective assessment of each ener- to develop future energy policies considering the gy’s characteristics based on the basic principles of simultaneous settlement of the global warming issue the Basic Act on Energy Policy and to enhance the in addition to ensuring energy security to cope with corresponding development of a sophisticated the recent violent fluctuations of crude oil prices. energy supply structure Under these circumstances METI started delibera- 3. To give consideration to the impartiality of com- tions, from October 2008, on the reexamination of its petitive conditions among energy sources alternative energy policy and the increased use of The petroleum industry considers these points to be nonfossil energies. Unstable conditions have contin- extremely significant. ued such as a steep rise in prices of all fossil fuels including oil in 2008, but a drop in the prices due to With the completion of the report, the concept of worldwide financial instability after autumn. In these “oil substitution” in the policy measures of the Alter- deliberations, therefore, the vulnerability of Japan’s native Energy Law, which aims only at reducing reli- energy supply structure has been pointed out; for ance on oil, was reexamined and this concept was example, its dependency on offshore fossil fuels for eliminated in the revised law. Thereafter, a new law, over 80% of its supply. In addition, the following pro- the Law Concerning Sophisticated Methods of Energy posals were emphasized: (1) the importance of taking Supply Structures, which incentivizes energy suppli- medium- and long-term measures such as global ers to take such measures as listed below, was enact- warming countermeasures and formation of a low- ed in July 2009: carbon society and (2) the necessity for reexamining 1. To promote innovative energy technologies and energy policies, taking into account the Basic Act on non-conventional resource development Energy Policy (a unified settlement of 3E). 2. To expand the use of nonfossil energies (nuclear, hydraulic, geothermal, new energies, etc.) The petroleum industry has been arguing in favor of 3. To enhance the sophisticated and effective use of the following opinions through the deliberations of fossil resources (crude oil, natural gas, coal, etc.) the council meetings: 1. Oil should be regarded as a core energy, not as a This new law is intended to urge energy suppliers buffer energy, since oil will remain the major ener- (electric power, city gas and oil) to expand the use of gy (40% of primary energy supply) even in 2030. nonfossil energy resources as well as to promote 2. The Alternative Energy Law should be abolished effective use of fossil resources. Specifically, the noti- and new legislation should be established to allow fication of the criteria for judgment concerning the sophisticated use of all energies through innova- promotion of the effective use of fossil energies was tive technologies for securing stable supply as well given in July 2010. as efficient and clean use of oil resources. Aiming to raise the installation ratio of Japan’s 3. An equal footing of competitive conditions such as heavy oils cracking units (currently about 10%) to taxation and subsidies among energy sources about 13% by FY2013, each oil refiner is obliged to

16 attain the facility improvement in three stages Energy Supply and Demand depending on the current installation ratio. This leads Performance (FY2009 Flash Report) to new or additional installation of heavy oils cracking units, or the reduction of crude distillation units to Final energy consumption for FY2009 showed a raise the installation ratio. In addition to these, each 2.3% drop from the previous year, due to the impact refiner is going to work on technology development of the continuous economic downturn from FY2008. such as improvements in facility operations. In comparison with the previous year by sector are: 2.2% down for the industrial sector, 2.4% down for the household and civil sector, and 2.3% down for the transportation sector. As a result, the total final energy

Law Concerning the 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)

To promote ቢ utilization of nonfossil energies and ባ effective utilization of fossil energy sources by Energy Suppliers (Electricity, Oil and City Gas)

Necessity for Enhancing Energy Suppliers’ Efforts; Oblige Them to: Basic Policy • Expand the use of nonfossil power sources, ramping up nonfossil power sources such (Formulated by METI Minister) as solar energy and nuclear power more than 50% by 2020 (Electric Companies) • Purchase electricity by solar power generation at fair prices (Electric Companies) Criteria for Judgment • Use biomass fuels and biogas (Oil Companies and City Gas Companies) (Oblige specific energy suppliers to • Use crude oil and natural gas effectively (Oil Companies and City Gas Companies) comply with ቢ and ባ)

Necessity for Promoting Technology Development; Development in: Plan Creation/Submission (Applicable companies: (Examples) Energy suppliers over a certain size) • 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 Advice and Order* • Integrated Gasification Combined Cycle (IGCC) *Status of efforts is quite insufficient • Utilization of cellulosic biomass like woody waste in light of the criteria for judgment

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

To change the objective for promoting development and introduction from “Alternative 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 facilities like ports, railroads and airports

17 Energy Policy in Japan

consumption showed a year-on-year decrease for the fifth consecutive year since 2005. On the other hand, the total domestic primary energy supply was 20,482 petajoules (PJ), or 528.4 million KL in crude oil equivalent, down by 5.0% versus the previous year; of which oil was 8,408 PJ, or 216.9 million KL in crude oil equivalent. The oil ratio decreased by 0.8% to 41.1% from the previous year’s 41.9%. Though supply quantity of each major primary energy, excluding nuclear power, decreased from the previous year, the ratio of coal to the total primary energy supply decreased from 22.8% to 21.4%, but natural gas increased from 18.6% to 19.4% and nuclear power also increased from 10.4% to 11.8%. Howev- er, even the ratio of coal, the second largest primary energy source following oil, is just half that of oil. Sta- ble oil supply, therefore, is absolutely essential for ensuring energy security in Japan even in the future.

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

2020 2030 (FY) 1990 2005 2009 Business-as- Additional Political Business-as- Additional Political usual Case Measures Case Initiative Case usual Case Measures Case Initiative Case

Final Energy Consumption 359 100% 413 100% 371 100% 421 100% 401 100% 375 100% 424 100% 391 100% 346 100%

Industry 181 50% 181 44% 159 43% 180 43% 180 45% 177 47% 179 42% 179 46% 174 50%

Household & Commercial 95 27% 134 32% 125 34% 149 35% 134 34% 121 32% 154 36% 130 33% 103 30%

• Household 43 12% 56 14% 53 14% 61 14% 56 14% 52 14% 66 16% 56 14% 47 14%

• Commercial, etc. 52 15% 78 19% 72 19% 88 21% 78 20% 68 18% 87 21% 74 19% 56 16%

Transportation 83 23% 98 24% 88 24% 92 22% 86 22% 78 21% 91 22% 82 21% 69 20%

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

2020 2030 (FY) 1990 2005 2009* Business-as- Additional Political Business-as- Additional Political usual Case Measures Case Initiative Case usual Case Measures Case Initiative Case Primary Energy Domestic 508 587 539 627 596 553 637 590 515 Supply

Oil 265 52% 255 43% 211 39% 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% 113 21% 128 20% 120 20% 107 19% 131 21% 119 20% 92 18%

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

Nuclear Power 49 10% 69 12% 62 12% 99 16% 99 17% 99 18% 107 17% 107 18% 107 21%

Energy Category Energy Hydropower 22 4% 17 3% 17 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% 16 3% 16 3% 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

18 Energy Policy in Japan

I Primary Energy Supply Trends Unit: million kl crude oil equivalent, % Nuclear Power 0.6 Natural Gas 1.5 (FY) New Energy 0.9 1973 Oil incl. LPG 77.4 Coal 15.5 416 Hydropower, Geothermal 4.1 2.5 1.5 0.9 1975 73.4 16.4 5.3 396

1.0 1980 66.1 16.9 6.1 4.7 5.3 429 1.2 1985 56.3 19.4 9.4 8.9 4.8 438 2.5

1990 57.1 16.7 10.2 9.3 4.2 521 2.4 1995 54.8 16.5 10.9 11.9 3.5 585 2.5

2000 50.8 18.1 13.0 12.2 3.4 609 2.8

2005 49.0 20.3 13.8 11.3 2.9 614 3.0

2009 45.2 20.3 17.4 11.1 3.0 561

0 100 200 300 400 500 600

Source: METI

I Final Energy Consumption Trends Unit: million kl crude oil equivalent

(FY) Transportation 1973 Industrial 188 Civil 52 47 286

1975 168 53 50 271

1980 165 61 59 286

1985 157 71 64 292

1990 180 95 83 358

1995 185 112 98 395

2000 186 125 101 412

2005 182 134 97 413

2009 159 125 88 371

0 100 200 300 400 Source: METI

19 5 Securing Stable Supply Japan’s Oil Stockpiling System Law, enacted in December 1975, 90-day oil stockpiling (History and Present Situation) held by private oil companies was started in April 1976. In response to OECD advice in 1962, which obliged At the time of its start, various measures were taken member countries to hold oil stockpiling at a 60-day such as expanding interest subsidies, the establish- equivalent to the nation’s oil demand, the Energy ment of joint stockpiling companies including a rise in Committee under the Industrial Structure Council investment ratio, and the foundation of a subsidy made a proposal for the necessity of oil stockpiling, scheme for oil storage locations in order to lessen the stating that “holding a certain level of oil stockpiling burden of the enormous cost of funds associated with meets the requirement for energy supply security as a the buildup of stockpiles. transitional measure to rectify a supply and demand With recognition of the need for the government imbalance until converting to alternative supply itself to take an initiative in maintaining the oil stock- sources at a time of temporary supply shortage”, in pile, government stockpiling by Japan National Oil December 1963. Corporation (JNOC) was started in 1978. The target At the outbreak of the third Middle East War in 1967, volumes of the government oil reserve were Japan’s oil dependency reached 65% of the primary achieved: 30 million KL in February 1989, and 50 mil- energy supply. With a rapid rise in risk awareness in lion KL in February 1998. During this 20 years period, Japan, the Petroleum Council of the Advisory Com- 10 national oil stockpiling bases were constructed mittee for Natural Resources and Energy compiled its across the country. interim report in 1971, which indicated the necessity In accordance with the expansion of government for establishment of the petroleum special account as stockpiling, the private sector stockpiling was reduced a subsidy measure from financial aspects in order to by 4 days each year from 1989 to 1993, and since then achieve 60-day oil stockpiling by the end of FY1974. a 70-day equivalent stockpiling system has been Accordingly, the oil stockpiling system in Japan virtu- maintained. ally started from FY1972. At the time, it was decided that holding of oil stock- Oil Stockpiling System after piling by the private sector with governmental subsi- Deregulation dies was more appropriate than holding it directly by the government, and the following measures were As a result of the abolition of the Provisional Mea- taken: sures Law on the Importation on Specific Refined 1. Long-term low-interest loans for purchasing crude Petroleum Products (Fuel Import Restriction Law) in oil for stockpiling April 1996, importation of petroleum products was 2. Japan Development Bank loans for constructing virtually liberalized. After that the petroleum industry oil reserve facilities legislation under normal times has been regulated by 3. Accelerated depreciation deductions for oil storage (1) the Act on Quality Control of Gasoline and Other tanks Fuels (Fuel Quality Act), which was reformed from the The first oil crisis occurred after that. As oil consti- previous Gasoline Retail Business Law and (2) the tuted about 77% of the primary energy supply at that amended Petroleum Reserve Law, which stipulates time, people’s lives were severely impacted. At the the requirements for new entrants of oil importers. Ministerial Meeting on Energy Measures in December In response to the abolition of the Petroleum Indus- 1975, it was decided to raise the target days of oil try Law in January 2002, the new Oil Stockpiling Act stockpiling to 90 days, and plans were drawn up to was enforced. From the viewpoints of ensuring fulfill- increase stockpiling volume to a 90-day equivalent by ment of oil stockpiling obligations as well as strength- the end of FY1979. ening the foundations for emergency responses, the With the enforcement of the Petroleum Reserve following provisions were amended in the new act:

20 I Overview of Past Emergency Periods

Hurricane 1st Oil Crisis 2nd Oil Crisis Gulf Crisis Katrina

Time Oct 1973 ~ Aug 1974 Oct 1978 ~ Apr 1985 Aug 1990 ~ Feb 1991 Aug 2005 ~ Dec 2005

Crude oil supply cut due to oil Suspension of Iranian crude Invasion of Kuwait by Iraq Damage to oil-related facilities export suspension by Arab export and interruption of resulted in economic in the Gulf of Mexico area in Background countries at the outbreak of tanker traffic in the Gulf due to sanctions, and escalated into the USA due to the destructive the 4th Middle East War the Iranian Revolution the Gulf War hurricane Katrina

Oil Share of Primary 77.4% 71.5% 58.3% 50.0% Energy (FY1973) (FY1979) (FY1990) (FY2003) Supply

Arabian Light (Posted Price) Arabian Light (Spot Price) Dubai (Spot Price) Dubai (Spot Price) Rate of Crude 3.9 Times 3.3 Times 2.2 Times 1.1 Times Oil Price Hike ($/Bbl) Oct 1973 Jan 1974 Sep 1978 Nov 1980 Jul 1990 Sep 1990 Jul 2005 Sep 2005 3.0 11.6 12.8 42.8 17.1 37.0 52.83 56.54

Crude CIF (Highest) (Yen/Liter) 21.5 (Aug 1974) 55.2 (Aug 1981) 27.6 (Nov 1990) 42.7 (Oct 2005) Gasoline Retail Price 114 (May 1975)*1 177 (Dec 1982)*1 142 (Nov 1990)*2 131 (Oct 2005)*2 (Yen/Liter) Stockpiling Days 67 (as of Oct 1973) 92 (as of Dec 1978) 142 (as of Dec 1990) 170 (as of Sep 2005) - Private 67 Days 85 Days 88 Days 80 Days - Government 0 Days 7 Days 54 Days 90 Days

Crude Oil 288.61 Million kl 277.14 Million kl 238.48 Million kl 241.81 Million kl Import Vol. (FY1973) (FY1979) (FY1990) (FY2004)

Ratio of Crude Import Amount 23% 43% 19% 20% to Japan (FY1973) (FY1980) (FY1990) (FY2005) Total Imports

Crude Oil 77.5% 75.9% 71.5% 89.5% Dependence on Middle East (FY1973) (FY1979) (FY1990) (FY2004) Foreign 298 246 128 113 Exchange Rate (Aug 1974) (Apr 1982) (Nov 1990) (Oct 2005) (Yen/$) • Hoarding of toilet paper, etc. • Partial release of private oil • Voluntary ban on purchasing crude oil • Voluntary ban on gasoline imports • Setting of wholesale & retail prices stockpiles (Apr '79~Aug '80) at high prices • Partial release of private oil by Administrative Guidance • Setting of wholesale prices by • Restraint of fuel imports and shift to a stockpiles (3 days) domestic production structure (Mar~Aug '75) Administrative Guidance • Setting of wholesale prices by • Urgent gasoline export to USA Events of • Setting of Standard Prices by the (Mar '79~Apr '82) Administrative Guidance & Moving to the Period Petroleum Industry Law • Implementation of energy saving "Monthly Settlement Method" and (Dec '75~May '76) measures such as target (Sep '90~Apr '91) Government • Restraint of large lot electric power temperatures for air conditioning • Partial release of private oil stockpiles Responses use and voluntary ban on private • Introduction of lighter summer (4 days) vehicles clothing • Implementation of energy saving measures such as higher air • Enforcement of two laws for • Enforcement of Energy Saving Law conditioning temperatures during emergency responses (Dec '73) (Jun '79) summer and environmentally-friendly • Enforcement of Petroleum Reserve • Enforcement of Alternative Energy driving campaign in government & Law (Apr '76) Promotion Law (May '80) private sectors

*1 Government Statistics *2 Oil Information Center

21 Securing Stable Supply

1. Notification requirements for business commence- redefinition of the roles of both government and pri- ment of oil refiners, distributors and retailers; clari- vate sectors’ stockpiling obligations, and the appropri- fication of registration requirements for oil ate levels of each sector’s reserves. The subcommittee importers issued its report, which recommended mitigating the 2. Clarification of the provisions concerning a release private sector stockpiling obligation from 70 days to a order of the government oil stockpiles by the min- level of 60-65 days and increasing the government ister of the Ministry of Economy, Trade and Indus- sector stockpiling with appropriate timing in order not try (METI) to lower the nation’s energy security level. In 3. Advice to increase the crude oil processing vol- response to these developments, the Petroleum umes above planned volumes Council’s Petroleum Policy Subcommittee was set up The subcommittee on Petroleum Stockpiling and in December 2005. The subcommittee recommended Emergency Preparedness under the Petroleum Coun- the following measures in May 2006 from the necessi- cil of the Advisory Committee for Natural Resources ty for forming a responsive oil stockpiling system: and Energy, started in March 2005, deliberated the 1. Increasing of the stockpile volume (by buildup of n Current Status of Oil Stockpiling in Japan (as of Dec 2010) Private Stockpiling Government Stockpiling

Stockpile Days 85 days 113 days

Stockpiling Volume 35.8 million kl 47.5 million kl

Obligation Days 70 days of domestic demand 50 million kl (attained in Feb 1998)

Through production Holding Method In sealed designated storage tanks and distribution processes

Private sector tanks in refineries a Tanks of national stockpiling bases Holding Location and oil terminals b Tanks borrowed from private sector

Crude oil : 50% Crude oil : 99.7% Composition Oil products: 50% Oil products: 0.3%

a 10 national stockpiling bases (2/3 of government reserve) Administrative Body Oil refiners and importers b Private oil companies (1/3 of government reserve)

a Prompt supply to distribution markets as a strong psychological effect on the market when stockpiles are held at refineries and oil terminals the government announces its decision to b Flexible release of stockpiles depending on release its stockpiling to increase oil supply in Effect of crude procurement status and seasonal the market Stockpile Release demand fluctuation b Reduced mobility of released stockpiling, c Weak psychological effect on the markets, compared with the private sector release, compared with the government announcement as reserves are stored at remote national on releasing its stockpiles stockpiling bases

a 2nd Oil Crisis (Mar 1979~Aug 1980) Cases of b Gulf Crisis in response to CERM None Stockpile Release (Jan~Mar 1991) (Only for stockpile release training exercises) c Hurricane Katrina aftermath (Sep~Dec 2005)

Subsidy for oil purchasing costs Government's budget Financial Measures and tank construction costs (Petroleum and Coal Tax)

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

22 the government stockpile) ing Base in Kagoshima Prefecture in December 2009. 2. Introducing oil product reserves by the govern- In addition, under the basic agreement on a joint proj- ment ect between ANRE and Saudi Arabian Oil Company Regarding the government product reserve, it was (Saudi Aramco) in June 2010, the first crude oil tanker decided to implement kerosene stockpiling in July (about 300 thousand kiloliters) is scheduled for arrival 2009. Kerosene reserve stockpiling at a level equiva- at the Okinawa Stockpiling Base in Okinawa Prefec- lent to one day’s consumption during the peak season ture after February 2011. Such crude oil reserves are (130 thousand kiloliters) is underway in the five used commercially by these oil producing countries regions (Hokkaido, East Japan, Kanto, Chubu & Kinki, under normal times; however, in an emergency situa- and Shikoku & Kyushu) in Japan. However, neither tion Japanese oil companies receive preferential reduction of the private sector stockpiling days nor crude oil supply from their reserves under these buildup of the government stockpile volume was agreements. This scheme is expected to reinforce taken. energy security and at the same time to enhance the formation of strategic relationships with oil producing Toward New Emergency countries. Countermeasures On the other hand, in accordance with moving In FY2007, the Subcommittee on Next Generation ahead with global warming countermeasures, pro- Fuels and Petroleum Policies under the Petroleum moting the introduction of renewable energies is Council of the Advisory Committee for Natural underway. Since such energies as solar and wind Resources and Energy made a review based on active power generally have a supply instability problem, oil, promotion of international cooperation for oil stock- as the last resort of energies, which complements the piling with countries in and surrounding I Oil Stockpiling Obligation Trends: Unit: 10,000kl, (days) Asia, where oil consumption is rapidly Volume and Days (end of Mar each year) increasing. It was also based on Japan’s 10,000 cooperation toward stabilization of the 8,948 8,816 8,806 international oil market in an emergency, 8,743 (175) 8,614 8,670 (157) (156) (166) 8,277 (177) (184) 8,301 taking into account the possible direct (144) (199) 8,075 (193) release of its stockpile to overseas coun- 8,000 tries. 6,949 6,593 (128) Private Stockpiles In line with such movements, a Japanese (95) 5,945 6,048 (90) (88) oil company successfully won an interna- 6,000 tional bid in 2009 for preferential sales and (90) (81) (88) (97) (89) (81) (72) (74) (80) (77) (81) (84) (79) purchase of its crude oil stockpile, based on an intergovernmental agreement conclud- 4,000 ed with New Zealand. In June 2009, the Agency for Natural Resources and Energy

(ANRE) in Japan made an agreement on Government Stockpiles the Joint Stockpiling Project with the 2,000 Supreme Petroleum Council (SPC) of the United Arab Emirates. Based on this agreement, stockpiling of crude oil from Abu (7) (7) (31) (55) (76) (84) (92) (95) (99) (102) (115) (114) 0 Dhabi National Oil Company (ADNOC) had 1978 1979 1980 1985 1990 1995 2000 2005 2007 2008 2009 2010 2011 (FY) started with receiving the first cargo (about volume: Product equivalent basis 300 thousand kiloliters) at the Kiire Stockpil- days: Petroleum Reserve Law Source: METI

23 Securing Stable Supply

supply instability, will play an ever-greater role. It is however assumed that Japan’s domestic oil demand will continue to show a structural downward trend. In order to keep playing roles as being the last resort of energies and for providing flexible responses in an emergency, it is an important policy issue to reduce the petroleum industry’s burden of huge costs associated with holding the private stockpiling.

I Outline of Japan’s Response Measures for an Emergency Period (as of Apr 2011)

Oil Stockpiling Measures Oil Supply Measures Government Stockpiling Revised Petroleum Stockpiling Act Private Sector Stockpiling

JOGMEC* At a normal Maintain reserves time

Registration of oil refiners, importers & distributors for information gathering

At a time of Secure stable supply by releasing oil reserves Control Measures on Supply Measures on threat Oil Consumption Major Commodities

Petroleum Supply & Demand Adjustment Act Act on Emergency Measures for Stabilization of Emergency National Life Declaration Cooperative actions by industries under government Stop making up Establish oil supply Restrict oil direction/supervision oil reserves targets consumption

Determine standard Draw down oil Indicate Restrict prices reserves production/import operations at SS plans In the Indicate commodity event of an Cooperative actions by the oil industry production emergency under government direction/supervision

Order oil holdings, Indicate/order sales/deliveries commodity imports

Mediate/guide Indicate commodity oil supplies holdings

Allocation/Ration Systems of Oil Products Order sales/deliveries

Allocation/Ration Systems of Major Commodities

* Japan Oil, Gas & Metals National Corporation

24 Japan’s Petroleum Resource Development

Petroleum resource development in Japan started in the 1870s primarily in Niigata Prefecture. Currently, commercial production is carried out in Hokkaido, Akita and Idemitsu Petroleum UK Niigata Prefectures. In addition, exploration activities have been conducted in the area Idemitsu E&P Shetland around Japan’s continental shelf since the1970s, and several oil and gas fields were Idemitsu E&P UK ◎Norske AEDC found and developed such as the Iwaki Offshore Gas Well (production was terminated ◎Idemitsu Snorre Oil Development ◎Nippon Oil Exploration & Production UK in mid 2007) and the Iwafune Offshore Oil/Gas Well (still in production today). Associ- ◎CIECO North Sea ◎Marubeni Oil & Gas (U.K.) ated natural gas produced with oil is utilized as city gas or power generation fuel in ◎CIECO Energy (UK) most adjacent areas and contributes to the local economies of such communities. INPEX UK Summit Petroleum Although Japan is the third largest oil consuming country, domestic oil resources are limited. Domestic oil production is less than one percent of Japan’s consumption requirements and more than 99% of crude oil demand is dependent on imports. Independent development of offshore oil and natural gas resources by Japanese firms contributes not only to ensuring long-term supply stability of energy resources, but also to establishing and strengthening mutual relationships between Japan and oil and gas producing countries. Fostering business links with those national oil compa- ◎Arabian Oil ◎Abu Dhabi Oil nies and oil majors has great significance for energy security. ◎United Petroleum Development ◎Japan Oil Development Today, Japanese firms are involved in 130 oil and gas development projects around ◎INPEX ABK the world in areas such as the Middle East, South-east Asia, Africa, South and North ◎Mitsui Gas Development Qatar ◎Qatar Petroleum Development America, and the former republics of the Soviet Union, of which 70 have performed ◎JJI S&N Azadegan Petroleum Development well in commercial production (at the end of June 2010). The import share of crude oil ◎Mitsui E&P Middle East JAPEX Garraf from independent crude oil and gas development projects is about 23% of the total import volume. ◎MPDC Gabon ◎Teikoku Oil (D.R.Congo) Idemitsu Oil & Gas ◎Angola Japan Oil Moeco Merangin ◎AJOCO Exploration Japan’s Independent Oil and Natural Gas Development in ◎Nippon Oil Exploration (Myanmar) ◎AJOCO '91 Exploration ◎Mitsui Oil Exploration Future CIECO E&P (Namibia) ◎Moeco Thai Oil Development ◎Mitsui E&P Ghana Keta ◎Japan Vietnam Petroleum INPEX West Congo Petroleum ◎INPEX Natuna Oil and gas exploration development is a difficult business, requiring a huge amount Moeco Vietnam Petroleum ◎Moeco Thailand of investment and advanced technologies. To acquire promising areas for exploration, Moeco Southwest Vietnam Petroleum Idemitsu Cuu Long Petroleum it is essential for the government to take diplomatic initiatives for opening up access as Moeco Cambodia well as for building and enhancing cooperative relationships with oil and gas produc- Siam Moeco Teikoku Oil (Con Son) ing countries. As Japan’s oil development firms are latecomers to this business sector ◎Orange Energy ◎B 8/32 Partners and inferior in both capital and technologies to oil exploration companies such as the Japex Block A Moeco Tuna E&P oil majors in the USA and Europe, they have been subsidized by the government Moeco (Son Hong) through Japan National Oil Corporation (JNOC) and, then a newly established organi- Japan Energy E&P Malaysia Nippon Oil Exploration zation called Japan Oil, Gas and Metals National Corporation (JOGMEC) which suc- (Peninsula Malaysia) Moeco (Phu Khanh) ceeded JNOC when it was abolished in April 2005. Nippon Oil Exploration (Cuu Long) The government and the private sector are expected to effectively cooperate with each other in such a framework as this, in which the government provides the private sector with a favorable business environment for oil development and, in turn, oil development firms invest and distribute business resources to achieve their targets.

25 Securing Stable Supply

n Major Independent Oil Development Projects by Japanese Firms (as of the end of Nov 2010)

Arabian Oil ◎The Egyptian Petroleum Development ◎Japan Ohanet Oil and Gas Teikoku Oil Algeria Teikoku Oil Suez SOB INPEX Libya Japex Libya Teikoku Oil Libya UK Moeko Libya ◎Canada Oil Sands ◎Japan Canada Oil ◎ITOCHU Oil Exploration (Azerbaijan) ◎INPEX Canada INPEX North Caspian Sea ◎INPEX Southwest Caspian Sea ◎Summit Discovery Resources Ⅱ INPEX BTC Pipeline ◎Summit Discovery Resources ITOCHU Oil Exploration (BTC) ◎Mid Continent Oil & Gas ◎NOEX USA ◎Teikoku Oil de Burgos ◎JAPEX (U.S.) ◎Teikoku Oil (North America) CIECO Energy (US) MOEX Offshore 2007 LLC ◎Mitsui E&P USA ◎Sakhalin Oil and Gas Development ◎Sakhalin Energy Investment ◎Mitsui E&P Mozambique Area 1 JAPAN CARABOBO INPEX North Peru ◎Teikoku Oil (Venezuela) PT Moruy ll S.A. Teikoku Oil (Suriname) ◎JGC Energy Development (USA)

INPEX Offshore North Campos ◎Albacora Japão Petróleo INPEX Offshore Southeast Mahakam INPEX OFFSHORE NORTHEAST BRAZIL INPEX South Makassar JAPAN CBM ◎Ravva Oil（Singapore） ◎Nippon Oil Exploration (Malaysia) ◎Nippon Oil Exploration (Sarawak) Idemitsu Oil & Gas ◎Universe Gas & Oil Company Moeco Merangin ◎INPEX Corporation ◎Nippon Oil Exploration (Myanmar) ◎INPEX Tengah ◎Mitsui Oil Exploration Indonesia Natural Gas Resources Muturi ◎Moeco Thai Oil Development KG Wiriagar Petroleum ◎Japan Vietnam Petroleum ◎Nippon Oil Exploration (Berau) ◎INPEX Natuna ◎KG Berau Petroleum Moeco Vietnam Petroleum ◎MI Berau B.V. ◎Moeco Thailand ◎Japan Papua New Guinea Petroleum Moeco Southwest Vietnam Petroleum ◎Southern Highlands Petroleum Idemitsu Cuu Long Petroleum Murray Petroleum ◎NOEX (Dampier) Moeco Cambodia INPEX Offshore North Mahakam ◎Japan Australia LNG (MIMI) Siam Moeco JAPEX Buton ◎INPEX Alpha Teikoku Oil (Con Son) INPEX SERAM SEA INPEX Browse ◎Orange Energy Nippon Oil Exploration (Niugini) Cosmo Oil Ashmore ◎B 8/32 Partners Moeco West Papua 1 INPEX Masela Japex Block A Moeco West Papua 3 ◎INPEX Sahul Moeco Tuna E&P INPEX Timor Sea Moeco (Son Hong) INPEX DLNGPL Japan Energy E&P Malaysia ◎Mitsui E&P Australia ◎Mitsui E&P Australia Nippon Oil Exploration ◎CIECO Energy Australia (Peninsula Malaysia) CIECO Exploration & Production (Australia) JAPAN ENERGY E&P AUSTRALIA Moeco (Phu Khanh) ◎Mitsui E&P Australia JAPAN ENERGY E&P JPDA Nippon Oil Exploration (Cuu Long) OSAKA GAS AUSTRALIA OSAKA GAS CRUX ◎Energy Mega Pratama OSAKA GAS SUNRISE (PSC19) OSAKA GAS SUNRISE (PSC20) OSAKA GAS GORGON

Remarks: ◎projects in production Source: Japan Petroleum Development Association

26 Regulatory Reform and Petroleum 6 Industry Progress in Deregulation response measures and an increase in the volume of the government oil stockpiling. The report also point- Amid the ongoing globalization and easing of regu- ed out that “it is extremely important from the view- lations in the Japanese economic society, the Japa- point of security measures to have a healthy nese petroleum industry reached almost complete petroleum industry which runs a stable business even liberalization at the end of 2001 when the Petroleum in a severe management climate.” Industry Law was abolished. Taking into account the above report and others, the In consideration of the importance of oil, regula- Petroleum Industry Law was abolished at the end of tions of the petroleum industry had been enforced by December 2001. At the same time, the Petroleum giving the highest priority to the concept of securing a Reserve Law was partially amended and reformulated stable supply under the Petroleum Industry Law, as the new Oil Stockpiling Act, enforced in January which was enacted in October 1962 as a fundamental 2002, to strengthen the infrastructure for emergency law. The Petroleum Reserve Law, the Gasoline Retail responses. As a result, major petroleum industry reg- Business Law, and the Provisional Measures Law on ulations are limited to oil stockpiling requirements by the Importation on Specific Refined Petroleum Prod- the Oil Stockpiling Act, and to fuel quality by the Act ucts (Fuel Import Restriction Law) were enacted since on Quality Control of Gasoline and Other Fuels. then to complement the Petroleum Industry Law. In the midst of such ongoing regulatory reforms, Consequently, a broad range of regulations as well as the excess capacity of oil refining facilities became an administrative guidance on petroleum imports, refin- issue under a decline in domestic oil product demand ing, manufacturing, and marketing were in effect. mainly attributable to the enhancement of the post-oil However, as the gap between domestic and foreign policy, the falling population, a low birthrate and prices during the deregulation process became a aging population, a rapid increase in crude oil prices, political issue, the shape of petroleum industry regu- and growing awareness of energy conservation dur- lations was reviewed. As a result, a series of deregula- ing the economic recession after the Lehman Shock. tion measures concerning the administrative While the petroleum industry is making voluntary guidance and its procedures under the Petroleum efforts to reduce its refining capacity, it was decided Industry Law and the Gasoline Retail Business Law that oil refiners need to hold at least a certain level of were implemented during the period between 1987 the capacity of heavy oil cracking units by the Law and 1992. After April 1996, when the Fuel Import Concerning Sophisticated Methods of Energy Supply Restriction Law was abolished, the objective of Japa- Structures. Consequently, each oil company is nese petroleum policy became the realization of an requested to cut its refining capacity through this reg- efficient oil supply using market mechanisms, in addi- ulatory measure. tion to securing a stable oil supply. In June 1998 the Petroleum Council compiled a Business Environment Changes after report outlining the future direction of the petroleum Deregulation policy with a main focus on the following points, aiming at implementation in 2001: With deregulation and the abolition of the Fuel a The abolition of supply and demand adjustment Import Restriction Law as a turning point, the petro- regulations such as the need for approval for business commencement and facility investments PAJ's Oil Statistics b The abolition of regulations on pricing based on Weekly Website setting standard prices The council then deliberated the optimum form of https://stats.paj.gr.jp/ oil stockpiling and emergency responses, and proposed in its report in August 1999 to establish specific

27 Regulatory Reform and Petroleum Industry leum industry has been forced to face a difficult busi- mechanisms. Before deregulation, however, the avail- ness environment under sluggish market conditions able information on oil supply and demand was limit- and worsening corporate profits due to severe price ed to the statistics collected and publicized by the competition in distribution markets. For this reason, government. As these statistics were mainly for ana- each oil company has been making efforts to lower its lyzing the nation’s macroeconomic trends, it was operating costs in every aspect of business, such as insufficient for use as an up-to-date tool to allow mar- the rationalization of refining and distribution func- ket mechanisms to function effectively. tions, restructuring by large-scale workforce reduc- Under such circumstances, PAJ developed the PAJ tions in marketing and administrative functions, and Oil Statistics Weekly, an accurate, prompt and precise the reengineering of corporate organizations. database, to provide data on oil supply situations on a In the ongoing process of liberalization in each weekly basis in January 2003. Since then, data on phase of manufacturing, importing and marketing, petroleum product supply by area (East Japan and after such regulatory reforms as the abolition of the West Japan), petroleum product export, and refining Fuel Import Restriction Law and the Petroleum Indus- capacity utilization ratios were added. PAJ continues try Law, it has become much more important for the to extend its information coverage and expects the petroleum industry to conduct business activities establishment of a transparent oil market by provid- under market mechanisms. The introduction of a mar- ing up-to-date oil supply information which can be ket mechanism helps to promote the streamlining of used to allow the full functioning of market mecha- manufacturing and supply systems through appropri- nisms. ate distribution of resources in a market. To that end, extensive disclosure of appropriate market information is essential for the effective functioning of market

I Petroleum Industry Regulatory Reform History in Japan

Year During Normal Periods During Emergencies

1960 Jul '62 Enactment of Petroleum Industry Law 1965 Dec. '73 Two Emergency Laws: • Emergency Law for Stabilization of National Life • Petroleum Supply and Demand Optimization Law

1975 Apr '76 Enactment of Petroleum Reserve Law

May '77 Enactment of Gasoline Retail Business Law 1985 Enactment of Provisional Measures Law on Importation of Jan '86 Specific Refined Petroleum Products (Fuel Import Restriction Law)

Jul '87 Automatic Approval for Installation of Product Upgrading Facilities

Mar '89 Abolition of Guidance on Gasoline Production Quota

Oct '89 Abolition of Guidance on Kerosene Inventory Build-up for Winter 1990 Abolition of Guidance on SS Construction (Scrap-and-Build Rule) Mar '90 and on Transfer of SS Brand between Primary Distributors

Sep '91 Flexible Approval for Installations of Crude Processing Facilities

1st Phase Deregulation Mar '92 Abolition of Guidance on Crude Processing (Throughput)

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

1995 Mar '96 Repeal of Fuel Import Restriction Law (Import liberalization of fuel products) Enactment of Act on Quality Control of Gasoline and Other Fuels Apr '96 by revising Gasoline Retail Business Law

Apr '96 Revision of Petroleum Reserve Law Automatic Approval of Petroleum Product Exports Jul '97 (Export Liberalization of Fuel Products)

Abolition of SS Certificate System for Fuel Supply-source by its Dec '97

2nd Phase Deregulation Branded Primary Distributor

Apr '98 Lifting of the Ban on Manned Self-service SS

2000 Dec '01 Repeal of Petroleum Industry Law

Jan '02 Enactment of New Petroleum Stockpiling Act

Partial Revision of Act on Quality Control of Gasoline and Other Fuels Feb '09 (Registration and Quality Assurance Obligation of Processors)

28 Establishment of Fair and Equal new tax rates for FY2015 will be 2,800 yen/KL for oil, Competitive Conditions among Energy 1,860 yen/KL for LNG and LPG, and 1,370 yen/KL for Sources coal. Since the petroleum industry had been insisting on conducting a close investigation beforehand of the More intensified competition than ever among global warming countermeasures in the existing bud- energy sources is projected with the progress of get, which exceeds 1 trillion yen, it is regrettable that a deregulation. In such a situation, compared with other tax hike merely for obtaining tax revenue was decid- energies, oil is unfavorably treated to a significant ed. As Petroleum and Coal Tax is levied on crude oil, degree in terms of taxation and its stockpiling obliga- the oil companies are responsible for all tax collections. tions and payments. Contrary to the electricity and the From April 2003 coal was added as a taxable prod- city gas industries, the petroleum industry is in open uct under the Petroleum and Coal Tax scheme, and competition based on market mechanisms. Thus, no the tax rates of LNG and imported LPG were raised, cost recovery system including such tax collections is taking into account the reinforcement of measures to provided. Essentially, taxes on oil consumption are reduce CO2 emissions originating from fossil fuels considered to be borne by its end-consumers. The and the fairness of tax burdens among energy sourc- taxpaying capacity of oil companies reaches a critical es. Though the tax gaps between oil and other ener- limit during a downturn in domestic demand. The gies were narrowed, still higher tax rates versus other petroleum industry therefore seeks a political consid- energies were imposed on oil (more than double) eration for ensuring the collection of the tax increases. even after April 2007 when the final tax rates were On top of that, new fuels like alcohol fuels (100% applied as shown below: alcohol) and compressed natural gas for CNG vehicles have neither any Diesel Oil Transaction Tax nor - Oil : 2,040 yen/Kiloliter(KL) Gasoline Tax imposed on them. Since those fuels are - Coal : 700 yen/ton for use in automobiles, the impartiality of tax imposi- (1,050 yen/KL on an oil calorie equivalent basis) tion is being seriously ignored. - LNG : 1,080 yen/ton Oil stockpiling became a very useful policy measure (757 yen/KL on an oil calorie equivalent basis) as a pillar for energy security after the oil crises. As for - Import LPG: 1,080 yen/ton the stockpiling obligation of imported energy resourc- (822 yen/KL on an oil calorie equivalent basis) es other than oil, however, only LPG has a 50-day requirement, but there is no obligation for natural In addition, a rise on the tax rate of Petroleum and gas. As it is assumed that natural gas demand will

Coal Tax, in accordance with the amount of CO2 increase from now on, prompt actions regarding nat- emissions, is planned in phases from October 2011 ural gas stockpiling are necessary from the viewpoint as a tax for global warming countermeasures. The of maintaining a stable energy supply.

I Petroleum Industry Rationalization in Production, Distribution and Sales Facilities (Example)

Production Facilities Unit: 10,000b/d Distribution Facilities Retail Outlets Work Force (Refining Capacity) (No. of Oil Storage Terminals) (No. of SS) (No. of Employees) ±600 550 ±535 600 65,000 40,000 60,421 36,363 60,000 35,000 ±499 500 500 50,000 30,000 ±452 400 40,357 40,000 25000, 450 20,912 300 20,000 30,000 400 ±190 15,000 200 20,000 10,000 350 100 10,000 5,000

0 0 0 0 Mar '00 Dec '03 Mar '11 Mar '93 Mar '04 Mar '95 Mar '10 Mar '95 Mar '10

29 Regulatory Reform and Petroleum Industry

On the other hand, the Law Concerning Sophisticat- has occurred since then. As a result, the petroleum ed Methods of Energy Supply Structures was enacted industry entered an era centering on a four-group- in June 2009 to enhance the efforts towards the for- Motouri framework; i.e., the Nippon Oil and Cosmo mation of a low-carbon society. The Law Concerning Oil Group, Exxon Mobil Group, Japan Energy and Promotion of the Development and Introduction of Showa Shell Sekiyu Group, and Idemitsu Kosan as of Alternative Energy (Alternative Energy Law) was also 2000. revised, so that the past mindset of promoting alter- Moreover, backed by soaring crude oil prices and

native energies at the expense of an excessive tax strong demand for oil and petrochemical products in burden only on oil has been changed. Realizing com- Asia, such movements as the formation of strong petitive conditions on an equal footing among energy partnerships between oil companies in Japan and sources is important to form a fair market where mar- Middle Eastern oil producing countries through capi- ket mechanisms are allowed to function effectively. tal alliances, and the entry into Japan’s oil market by foreign capital companies from Brazil and China were Movements toward Petroleum Industry seen around 2007. Reorganization In 2008, reorganizations beyond conventional business tie-ups have been accelerated as management In view of the global realignment of oil majors, reor- integration, mainly led by Nippon Oil, in view of ganization of domestic financial institutions, and recent high crude oil prices and fierce competition in fierce competition in the domestic oil market after the the total energy market. Further reorganizations are abolition of the Fuel Import Restriction Law, a realign- continuing such as the birth of JX Nippon Oil & Ener- ment of domestic oil refiners and primary oil distribu- gy in July 2010. tors (Motouri) was put in motion after the merger of With the progress of such reorganization, each oil Nippon Oil and Mitsubishi Oil in April 1999. Unprece- company made efforts to streamline all of its business dentedly large-scale and rapid market reorganization segments such as their own refineries, fuel storage

I Reorganization of Oil Companies in Japan (as of March 2011) Idemitsu Kosan Idemitsu Kosan Refining alliance in Dec 2002 *1 Nippon Oil Merger in Apr 1999 Nippon Mitsubishi Oil Nippon Oil Mitsubishi Oil JX Nippon Oil Name changed in Jul 2002 & Energy Refining & distribution Merger Daikyo Oil alliance in Oct 1999 in July 2010 Merger in Apr 1986 Maruzen Oil Cosmo Oil Cosmo Oil Merger (Former) Cosmo Oil in Oct 2008 *1 Nippon Oil and Idemitsu Kosan concluded distribution alliance in 1995 Kyushu Oil *2 Merger of 4 companies -Esso Sekiyu Nippon Mining Merger in Dec 1992 -Mobil Sekiyu Japan Energy -ExxonMobil Marketing Service Kyodo Oil -ExxonMobil Business Service Refining & distribution alliance in Oct 1999 Showa Oil Merger in Jan 1985 Showa Shell Sekiyu Showa Shell Sekiyu Shell Sekiyu

*2 Esso Sekiyu Merger in Jun 2002 ExxonMobil Mobil Sekiyu ExxonMobil Group Tonen Merger in Jul 2000 TonenGeneral Sekiyu General Sekiyu

Taiyo Oil Taiyo Oil

Mitsui Oil Mitsui Oil

30 Regulatory Reform and Petroleum Industry terminals and service stations. Consequently, Japan’s same time, the company extended its business alli- total refining capacity decreased by 0.83 million bar- ance with Nippon Oil to the refining function in addi- rels per day (BPD) or more than 15% during the past tion to the current distribution function. 11 years from 5.35 million BPD in March 2000 to 4.52 In June 2006, Nippon Oil and Japan Energy con- million BPD at the end of March 2011. In addition, on cluded a wide-ranging business tie-up agreement September 30, 2010, JX Nippon Oil & Energy from upstream operations to refining and distribution announced plans to reduce its group’s crude process- operations, fuel cell business, and technology devel- ing capacity by 400 thousand BPD versus December opment. Furthermore, JX Nippon Oil & Energy was 2008 to 1.39 million BPD at the end of October 2010 as established due to their management integration in well as to move up by one year the schedule for an July 2010. Management efforts toward further ratio- additional capacity reduction of 200 thousand BPD, nalization and efficiency improvement apart from the which was originally planned to be completed by the existing four-group structure continue. end of March 2015, to the end of March 2014. In addition, aiming at becoming integrated energy With the efforts towards management efficiency firms, some oil companies are expanding into other improvement and rationalization such as mergers and energy businesses, such as electric power, LNG, and business consolidation, the total workforce of oil refin- the distributed energy sector, where new energies like ers and Motouri was reduced significantly during the fuel cells and solar photovoltaic power generation are past 10 years, and at the end of March 2009 it was expected to grow. Beside the progress in streamlining about 21,000 employees, compared with about 36,000 management style, creation of holding companies employees at the end of March 1995. among affiliated firms is seen in some cases. Shaping the future evolution of the Japanese petro- Enhancement of Rationalization and leum industry, oil companies have been making Efficiency Improvement after efforts to enter new or other energy fields like electric- Reorganization ity, since oil demand will continue to decrease. They are also accelerating their movement toward becom- Excess refining capacity remains an industry-wide ing a total energy industry through realizing integrat- issue. Even after reorganization into four major ed operations with various industries such as nationwide groups, Japan’s Exxon Mobil group fur- petrochemical companies through Refinery Integra- ther integrated with four affiliated companies into tion for Group-operation (RING) projects, while work- ExxonMobil Yugen Kaisha in June 2002. Idemitsu ing on further rationalization and efficiency Kosan closed its Hyogo Refinery in April 2003 and its improvement of their core oil business. affiliate Okinawa Sekiyu Seisei’s refinery in November 2003 to resolve its group’s facility surplus. At the

I Crude Oil CIF and Gasoline Retail Price Trends in Japan Unit: yen/l 140 Repeal of "Fuel Import Repeal of "Petroleum Restriction Law" (Mar 1996) Industry Law" (Dec 2001) 120

100

80 National Average Gasoline Retail Price (excl. Taxes) 60

40 Crude Oil CIF 20

0 90/1 90/7 91/1 91/7 92/1 92/7 93/1 93/7 94/1 94/7 95/1 95/7 96/1 96/7 97/1 97/7 98/1 98/7 99/1 99/7 00/1 00/7 01/1 01/7 02/1 02/7 03/1 03/7 04/1 04/7 05/1 05/7 06/1 06/7 07/1 07/7 08/1 08/7 09/1 09/7 10/1 10/7 11/1 11/7 Source: Oil Information Center

31 Petroleum Product Distribution and 7 Marketing Distribution Rationalization and Business Climate Changes Efficiency Improvement due to Surrounding Service Stations Deregulation The Japanese petroleum industry entered a period Petroleum products are delivered to consumers by of full-scale globalization and liberalization after the coastal tankers, tank trucks, railroad tankers and pipelines abolition of the Petroleum Industry Law in December in Japan. A large portion of oil distribution is carried out 2001. The industry has faced unprecedented structural by tank trucks and coastal tankers. changes, as the domestic oil market became linked A number of developments have taken place to cope with international markets. Besides, an increase in with the changes in the management climate since the new generation vehicles such as electric vehicles (EV) abolition of the Provisional Measures Law on the Impor- and plug-in hybrid vehicles (PHV) is expected in the tation of Specific Refined Petroleum Products (Fuel future. Import Restriction Law) at the end of March 1996. In the To cope with such changes, it has become the most logistics segment, the petroleum industry has pushed pressing issue for oil refiners, primary oil distributers forward relocation and integration of distribution facili- (Motouri) and retail dealers (SS) to make joint efforts ties, expansion of product exchanges with other oil com- to establish a sound distribution market and to create panies, as well as joint use of refining and distribution new additional services at SS by further upgrading facilities. As a wave of business alliances and integration quality, promoting value-added sales activities and beyond the corporate framework has been taking place, improving operational efficiency. especially after 1999, further efficiency improvement and cost reduction measures in the industry have been taken. Rapid Increase in Numbers of Self-service SS Meanwhile, deregulation in coastal and land transpor- In April 1998, a manned self-service SS, where a tation has been executed from the viewpoint of the qualified SS attendant could watch car drivers’ refuel- industry’s efficiency improvement in physical distribu- ing operations, was introduced. Over 8,000 self-service tion. For example, in the area of land transportation, the SS are in operation. This accounted for about 19% of introduction of tank trucks with a larger capacity was pro- the total SS at the end of March 2010. moted, as trucks with a cargo capacity of 26-28 kiloliters In Japan, self-service SS were first developed by for- (KL) were allowed by regulation amendments in Novem- eign capital Motouri, with long experience in the USA ber 1993, and “ultra-compact” tank trucks (more com- and Europe, and by small and medium-sized Motouri pact than conventional trucks but with the same 24KL in the early stages of introduction. Other major cargo capacity) as well as those with a cargo capacity of domestic capital Motouri actively joined the develop- 30KL were developed by further partial mitigation of the ment after 2002. Retail dealers have recently been regulation and safety standards in October 2003. highly motivated to develop self-service SS. However, Besides, unloading of fuels at a service station (SS) by with increased keen competition among self-service the tank truck (T/T) driver alone (SS staff presence is not SS, some of these have closed. required) was permitted from April 1999 to improve In addition to an increase in non-brands and private delivery efficiency on condition that safety countermea- brands, the number of self-service SS are also increas- sures should be more strictly adhered to. The permission ing and there is concern that this may trigger a severe was expanded in October 2005 to include deliveries to price war in the future. tanks at kerosene distribution depots and to customer owned tanks. Safety Measures at Self-service SS It is also expected that expansion of the T/T driver The number of incidents caused by drivers at self- unloading system will enhance safety, reduce distribu- service stations is increasing, such as gasoline spills tion costs and boost convenience for SS operation and and refueling with the wrong fuel. PAJ is disseminat- for customers. ing information on how to fill gasoline properly at self-

32 service SS through posters and the PAJ website. this issue with the central and local governments, as As refueling is done by drivers at self-service SS, the well as community residents, in order to fulfill the petroleum industry is actively taking safety counter- social responsibility for stably supplying petroleum measures such as strengthening monitoring of refuel- products. ing, ensuring good conductivity of refueling nozzles to prevent static electricity spark-induced fires and install- Responses to Environmental Issues at SS ing splash guard units to prevent spills in order to The petroleum industry’s efforts in regard to envi- improve safety at self-service SS. ronmental issues have focused mainly on refineries; however, there are many cases in which SS have ear- Increase in New Generation Vehicles nestly dealt with environmental issues in recent years. Along with an increase in new generation vehicles Some examples are the notification of the emission (NGV) such as EV and PHV, the services provided at quantities of harmful chemical substances such as SS would be greatly changed from the conventional benzene under the Pollutant Release and Transfer Reg- ones. Therefore, it would be a challenge for the indus- ister (PRTR) Law enforced from April 2002, and the try to create new additional services at SS such as the world’s first nationwide supply of sulfur-free gasoline infrastructure development of solar photovoltaic and diesel fuel (10ppm or less) from January 2005. power generation and car-sharing, to cope with Considering the importance of the soil and ground- changes in the business climate surrounding SS. water pollution issue at SS, PAJ has created the “SS Soil Environment Safety Book” for early identification Issue of SS in Depopulated Areas and prevention of soil pollution at SS. With fierce market competition due to declining In addition, in response to the Fire and Disaster Man- petroleum fuel demand, the number of SS has been agement Agency’s issuance of a partial revision of the decreasing. Consequently, the diminishing number of notification concerning the construction techniques of SS in the depopulated areas has become an issue of synthetic resin plumbing, etc. in August 2009, PAJ pre- concern. Due to closures of SS, the areas which face pared its master specifications of the standard con- difficulty in obtaining supplies of fuels such as kero- struction method for using synthetic resin plumbing sene, an essential commodity in cold regions, and and its fire-resistant connection boxes to be used vehicle fuels for agricultural and forestry vehicles and underground in March 2010, as a part of the industry’s machinery have been increasing. This has become a efforts towards this pollution prevention issue. PAJ social problem in such regions. promotes the dissemination of using such synthetic It is important for the petroleum industry to address resin plumbing in view of its low risk of corrosion in underground piping. I Main Distribution Channels of Gasoline A partial revision of the fire regulation on the control

Domestic Production Product Imports of hazardous materials was made in June 2010 to cope with accidental oil spills from underground tanks

Primary Distributors (UGT). With the revised regulation, operators are (Motouri) obliged to take measures for the prevention of oil leak- Trading Zen-Noh* Houses age from single-hull UGT in accordance with the number of years the UGT has been buried, the design

Dealers performance, etc. Though this regulation stipulates a moratorium until the end of January 2013, the petro- Sub-dealers leum industry is making efforts to assess the reality of Retailers the situation and to advance measures for prevention

Consumers of soil pollution.

* National Federation of Agricultural Cooperative Associations

33 Petroleum Product Distribution and Marketing

Living in Harmony with the Local concerns of supply instability. As a backup to these Community renewable energies, the buffer role of oil will be of increasing significance from now on. From the perspective of corporate social responsibil- The petroleum industry is not only a typical process ity (CSR), PAJ aims at living in harmony with local industry but also a network industry. In order to secure communities by ensuring as stable as possible a sup- stable supply, therefore, it is necessary for the industry ply of petroleum products even in the event of a large- at all times to maintain its total “supply chain” from oil scale disaster. resource development and importation to refining, Petroleum products are considered to be flexible in distribution and marketing in a sound manner and supply at the time of disasters like earthquakes, with long-range planning. because they can be delivered to SS and consumers Vast amounts of money are required to maintain through various means such as vessels and tank huge facilities and equipment such as ocean tankers, trucks from nearby refineries or oil storage terminals. crude oil storage tanks, oil refineries, fuel product stor- Actually at the time of the Great Hanshin-Awaji age tanks, tank trucks and SS. However, different from Earthquake in January 1995, nearly 800 SS in the the electric power and the city gas industry, the petro- stricken area suffered no outbreaks of fire and sup- leum industry is not guaranteed a systematic cost plied necessary fuels for recovery operations. In other recovery. recent large-scale earthquakes, the petroleum industry Moreover, oil demand is projected to decrease by also made utmost efforts to supply petroleum prod- 30% toward 2020 due mainly to such structural factors ucts to SS and consumers smoothly by determining as energy efficiency improvement, progress in fuel the extent of the damage at the product shipping facili- conversion and changes in lifestyle, together with ties promptly. such policy factors as enhancement of global warming In November 2008, PAJ and the Tokyo Metropolitan countermeasures. Consequently, disposal and consoli- Government concluded an agreement on “Stable dation of excess facilities, as well as maintenance of Supply of Oil Products in Case of a Large-scale Disas- the supply chain present big challenges for the petro- ter”, which stipulates preferential fuel supply to impor- leum industry. It would be desirable for the industry to tant public facilities for deploying disaster relief be furnished with political support measures from the operations in case of an earthquake with an intensity viewpoint of ensuring a stable energy supply. of lower 6 on the Japanese scale. The first field exer- cise based on this agreement was conducted in Octo- ber 2010, and the industry continues making efforts to improve the effectiveness. I Number of Service Stations at the End of Each Fiscal Year (March) Total Importance of Maintaining 70,000 60,421 59,990 59,615 60,000 58,263 56,444 Supply Chain 55,172 53,704 52,592 51,294 50,067 50,000 48,672 47,584 45,792 44,057 42,090 According to the government’s energy out- 40,357 40,000 Total 38,777 look, oil will account for the maximum share, 30,000 i.e., a little less than 40%, of the primary energy supply even in 2020 and 2030. Therefore, 20,000 ensuring a stable oil supply continues to be an 10,000 8,296 8,449 important issue for the national security of 8,000 7,774 7,023 6,162 Japan. 6,000 4,956 In addition, oil has played a buffer role in 4,104 4,000 3,423 Self-service energy supply as an alternative fuel in cases 2,523 2,000 1,353 such as the temporary shutdown of nuclear 422 85 191 0 power plants. Besides, renewable energies 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 such as solar power and wind power raise Source: METI, Oil Information Center

34 Toward a Fundamental Reexamination of 8 Petroleum-related Taxes Exorbitant Amounts and High Rates of sumption tax is also levied on those petroleum prod- Petroleum-related Taxes ucts (5% of product sales revenue). Consequently, total petroleum-related taxes amount to about 5.32 trillion Because oil accounts for about 40% of the primary yen, equivalent to about 47 US dollars per barrel. Such energy supply and is the central energy source to exorbitant amounts and high rates of tax raised ener- support people’s daily lives and industrial activities, gy supply costs significantly and had a severe impact cost reduction is an important issue from the view- on people’s daily lives and industrial activities. point of the national economy. Since exorbitant amounts and high rates of taxes are imposed on Unreasonable and Unfair Petroleum- petroleum products in a multiple-layered and multi- related Taxes stage way, such tax revenues have reached nearly 4.4 trillion yen per year (FY2011 budget). At the time of the introduction of the consumption Currently, customs duty and various taxes are taxation in April 1989, the streamlining, including abo- imposed on crude oil and petroleum products. Specif- lition, of existing indirect taxes was carried out and ically, customs duty is imposed on imported petro- adjusted with the existing taxes so as not to increase leum products and Petroleum & Coal Tax (National) is consumers’ overall tax burden. However, Gasoline levied on imported crude oil and petroleum products Tax and other petroleum-related taxes were neither at the import stage. When refined products are deliv- abolished nor reduced due to their connection with ered in the domestic market, the following indirect specific revenue sources for road construction. The taxes are imposed: government took unreasonable and unfair measures • Gasoline: Gasoline Tax and Local Road Tax by simply adding consumption tax to petroleum (National) product sales prices including the respective petro- • Diesel Fuel: Diesel Fuel Transaction Tax (Local/Pre- leum-related taxes, namely, a tax on tax. When the fectural) 3% rate of consumption tax was subsequently raised • Jet Fuel: Aircraft Fuel Tax (National) to 5% in 1997, no corrective actions were taken. • LPG: Petroleum Gas Tax (National) The system of the Specific Revenue Source for In addition, about 920 billion yen of general con- Road Construction such as from Gasoline Tax was

I Multiple & Multi-stage Imposition of Petroleum-related Taxes (FY2011 Budget)

Petroleum Gas Tax LP Gas 9,800yen/kl 24 billion yen

Gasoline Tax Gasoline 53,800yen/kl 2,916 billion yen

Diesel Fuel Transaction Tax Diesel Fuel 32,100yen/kl 874 billion yen Petroleum and Coal Tax Aviation Fuel Tax Imported Crude Oil Jet Fuel 18,000yen/kl 59 billion yen 2,040yen/kl

Customs Duty Naphtha 512 billion yen Consumers 1.4 billion yen Products

Kerosene Consumption Tax 5% Imported Oil

Heavy Fuel

Others

Import Stage Product Stage Consumption Stage Consumption Tax Total Petroleum-related Tax Approx. 4.4 trillion yen 920 billion yen Total Approx. 5.32 trillion yen (Crude Oil at 47 $/bbl and 85 yen/$)

35 Toward a Fundamental Reexamination of Petroleum-related Taxes

abolished in April 2009 and those tax revenues have Global Warming Countermeasure Tax been incorporated into the general revenue account. With this abolition, any grounds for argument that The global warming issue is a key issue for all adjustments could not be made for the consumption humanity to be tackled for a long period of time on a tax on the petroleum-related taxes were nullified; worldwide basis. The petroleum industry in Japan, as however, specific measures for such adjustments an advanced environmental industry, has been taking have not been taken. positive actions such as participating in Nippon For this reason, PAJ continues to work on the real- Keidanren’s “Action Plans for a Low-carbon Society” ization of adequate tax adjustment measures, espe- and launching supply of biomass fuels. cially the termination of such a tax-on-tax treatment, The Government Tax Commission decided the which is worth 170 billion yen. introduction of a new tax concerning global warming

I Petroleum-related Taxes I Ratio of Petroleum-related Taxes in Total National Taxes per Liter of Gasoline (as of Jul 2011) (FY2011 Budget)

Corporate Tax 21.6% (Example: Gasoline Retail Price at 151 yen/R) Liquor Tax 3.1% Stamp Duty 2.4% Inheritance Tax 3.3%

151 yen/R Tax on Tax 2.8 yen Consumption (Consumption Tax 7.2 yen) Tax 23.6% Total National Revenues 43.2309 trillion yen Income Tax 143.8 yen/ Consumption Tax on R Net Gasoline Price 4.4 yen Automobile 31.2% Tonnage Tax 1.7% Tobacco Consumption Tax 2.2% Gasoline Gasoline Tax 53.8 yen others 2.7% Tax 6.7%

Customs Duty on Oil Petroleum and Coal Tax Indirect Tax Direct Tax Petroleum and Coal Tax 2.04 yen Petroleum Gas Tax Aviation Fuel Tax 43.9% 56.1% 1.4% Net Gasoline Price 88.0 yen Total Petroleum-related Taxes 8.1% Source: Ministry of Finance (MOF)

I Current Status of Petroleum-related Taxes and Consumption Tax (FY2011 Estimate)

Consumption Tax Amount from Oil Product Sales

920 billion yen Current Consumption Consumption Tax on Oil Portion Tax-on-Tax Portion Tax Rate 5% 750 billion yen 170 billion yen

Petroleum Gasoline Tax and Coal Tax Other Taxes 2,916 512 25 Diesel Fuel Aviation Fuel Tax billion yen billion yen billion yen Transaction Tax Approx. Approx. 59 Sales Amount excluding Taxes 874 billion yen Approx. 14.9 trillion yen Approx. 3.45 trillion yen billion yen

Petroleum-related Taxes Approx. 4.4 trillion yen

Oil Product Sales Approx. 18.35 trillion yen (Excluding Consumption Tax)

36 countermeasures, hereafter referred to “Global Warm- taxpaying capacity, however, reaches its limit during a ing Countermeasure Tax”, in its FY2011 Tax Reform downturn in domestic petroleum product demand. Package compiled in December 2010. Specifically, a Essentially, a tax should be borne by an end-con- new scheme is to add corresponding tax rates to the sumer. Global Warming Countermeasure Tax should existing Petroleum and Coal Tax in accordance with the also be levied at the stage of product consumption. amount of CO2 emissions by setting up a special treat- However, because Petroleum and Coal Tax is levied ment provision for imposing a tax for global warming on crude oil, consumers cannot recognize their tax countermeasures. It was decided that Petroleum and burden directly, and all tax collection and payments Coal Tax, currently 2,040 yen/KL, will be raised in are solely the responsibility of oil companies. The phases to a final level of 2,800 yen/KL in April 2015. petroleum industry, under complete open competi- A bill for the tax reform package including Global tion, is not provided with a scheme for recovering Warming Countermeasure Tax has not yet been taxes and costs. It is concerned about a greater bur- enacted as of July 2011 due to political turmoil. den on oil companies due to Global Warming Coun- PAJ had been persistent in its opposition to choosing termeasure Tax, because there is a possibility of not the easy way to introduce new taxation on global being able to pass this tax on to consumers. warming countermeasures from the following aspects: • First of all, a thorough investigation of the existing Shifting of Road Construction Specific budget for global warming countermeasures Revenue to General Revenue should be made. • On that basis, careful discussion should be carried out. Based on the Cabinet decision regarding the “Basic • Despite all of the efforts made toward efficient use of Policy on a Specific Revenue Source for Road Con- the existing budget and careful consideration, if the struction” in May 2008 and in line with the subse- implementation of such taxation is essentially inevi- quent ruling parties’ agreement in December about table, the tax scheme can only be implemented on a incorporating the specific revenue for road construc- minimum scale on the premise of imposing tax on tion into general revenue, this specific revenue source each fossil fuel based on carbon content. was abolished in April 2009 and incorporated into the • It is necessary to gain public understanding and con- general revenue account. sent through broad-ranging discussion on overall Taking such circumstances into consideration, PAJ policy measures such as the specific plans for believes that fundamental reexamination of the meth- achieving a greenhouse gas (GHG) reduction target. od, object, and usage of tax imposition on Gasoline However, such discussion was not held. It is very Tax and Diesel Fuel Tax is necessary, since these are regrettable that Global Warming Countermeasure Tax no longer the Specific Revenue Source for Road Con- will be implemented. struction. Currently all costs for construction and For obtaining understanding and consent of the tax- maintenance of roads are paid from the general reve- payers, i.e., energy consumers, Global Warming nue account. It is believed that road construction is Countermeasure Tax should be a specific purpose tax financed by general revenue because everybody can for global warming countermeasures, from the aspect use roads and this benefits public interest. However, it of ensuring consistency among tax purposes, tax bur- would be appear that the costs for road maintenance den and its usage. It is also important to clarify at all and repair should be covered at road users’ expense times the tax usage through verifying the validity of based on their utilization levels. Therefore, it is desir- and necessity for how it is used, and its effects, in able to conduct a comprehensive study on how to order to avoid rigidity of the funding system. determine the cost burden by road users who cause While fulfilling its responsibility for stable oil supply, road deterioration, as is the case in Europe where tax the petroleum industry has been paying 5 trillion yen imposition is based on the weight and mileage of a or more of petroleum-related taxes each year. This vehicle (Mileage Charged Taxation).

37 Toward a Fundamental Reexamination of Petroleum-related Taxes

I Trends in Indirect Taxes Imposed on Petroleum Products since the 1973 Oil Crisis Unit: yen/kl (Apr 2010) 53,800 (Jun 1979) 50,000 53,800 (May 2008) Gasoline Tax (General Term for 53,800 (Jul 1976) Gasoline Excise Tax and Local Road Tax) 43,100 (Apr 2010) 32,100 40,000 (May 2008) (Apr 1974) 32,100 34,500 2nd (Dec 1993) Oil Crisis 32,100

30,000 Aviation Fuel Tax 28,700 (Apr 1979) (Apr 2008) 28,700 1st 26,000 Oil Crisis (Apr 1976) (Jun 1979) (Apr 2011) 20,000 19,500 24,300 Diesel Fuel Transaction Tax 18,000

15,000 (Apr 2008) 15,000 Petroleum Gas Tax 10,400 (Apr 1974) 10,000 13,000 (Jan 1970) 9,800 Petroleum Tax Gulf Crisis Petroleum and Coal Tax (Oct 2011) (Aug 1988) Extraordinary Petroleum Tax 2,290 2,040 (Jun 1978) (3.5%) (Sep 1984) (4.7%) 0 1,020 (Apr 2003) 1973 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 (Apr 1991) (Mar 1992)

In addition, the provisional tax rates of Gasoline Tax and Diesel Fuel Tax had been raised under the benefi- I Comparison of Tax Burden Rates on Retail ciaries-pay principle to secure revenues for road main- Prices among Commodities (as of Jul 2011) tenance and improvement. By shifting such tax Unit: % revenue into general revenue, there is no foundation 80 for imposing provisional taxes. At the time of the gen- 70 eral election in August 2009, the new ruling Democrat- 64.5 60 ic Party of Japan (DPJ) issued a manifesto including 50 the abolition of the provisional tax rates. However 44.4 41.7 after that, DPJ states that the current provisional tax 40 29.8 level will be maintained, though the provisional tax 30 27.3 scheme is terminated because of revenue shortages. 20 10.9 Considering the following two points, convincing 10 4.8 explanations to taxpayers, i.e., automobile users, are 0 Tobacco Beer Sake Automobile Piano Gasoline Diesel Fuel requested: Source: PAJ (1) Drivers of gasoline and diesel fuel vehicles have to bear more taxes for general revenue. countermeasures and it significantly ignores impar- (2) There is a gap in the tax burden between urban tiality with other energy sources. areas and rural areas where gasoline and diesel fuel consumption is large. Currently, a large amount of petroleum-related taxes An opinion was raised during political deliberations are levied at each stage. Considering the issues of a tax for converting the provisional tax portion into Global on tax, incorporation of Gasoline Tax and Diesel Fuel Tax Warming Countermeasure Tax. Such an opinion is into general revenue, and Global Warming Countermea- unacceptable to the petroleum industry by any sure Tax, a fundamental reexamination of petroleum- means, because there is no justification for automo- related taxes is necessary. bile users to be overly burdened by global warming

38 9 Reinforcement of Corporate Structure Vital Need to Reinforce Corporate material prices and subsequent falling market prices, Structure etc. The performance of the oil and gas exploration The petroleum industry continues to be requested development segment is expected to continue firm, to supply environmentally-friendly petroleum prod- backed by a high crude oil prices, etc. in the medium ucts which mitigate global warming as well as meet and long terms, despite a factor of profit decline due environmental regulations in a stable and inexpensive to the exchange rate impact (a strong yen). manner. Earnings of the petroleum product segment had The petroleum industry faces difficult business con- been largely affected by the inventory valuation meth- ditions due to soaring resource prices and a projected od which was used. During a period of rising crude oil tight oil supply in the medium and long terms. Under prices, an oil company with the gross average inven- such circumstances, it is essential for the industry to tory valuation method generated a huge “inventory make efforts to enhance oil resource development for valuation impact”, reflecting relatively lower costs of energy security and to make investment in facilities as product inventories. As a result, a high level of appar- well as in R&D to respond to environmental require- ent profits was booked. On the other hand, in a time ments. of falling crude oil prices, such oil companies booked To comply with such requests, it is necessary for the significant losses in a short period of time due to the petroleum industry to ensure a fair earnings level and opposite effect of the “inventory valuation impact”. to make further improvements while reinforcing the The “inventory valuation impact” means that a petroleum industry’s business structure. product’s sales cost is calculated as the sum of the opening inventory cost and the inventory acquisition Financial Results cost during the term, minus the closing inventory cost. Consequently, product costs fluctuate depending The recent earnings structure of the petroleum on what inventory valuation method is applied. In industry, however, is in an extremely severe situation. case of the gross average inventory valuation meth- Under a declining trend of domestic petroleum prod- od, which the majority of oil companies apply, the uct demand on a medium- and long-term basis, the level of the opening inventory volume affects the up- main factor behind the low performance is thought and-down movement of the book value product costs attributable to the difficulty in passing the higher cost, (for financial closing). beyond a certain level, on to the consumer through Such an “inventory valuation impact” has a signifi- higher product sales prices during the time of rising cant influence on the extreme fluctuation in earnings crude oil prices. In addition, the record-breaking sharp from the petroleum product segment. In FY2009, rise and the great fall in crude oil prices in 2008, and crude oil prices showed an upward trend again; con- the subsequent world recession arising from the glob- sequently, apparent profits due to the positive direc- al financial crisis led to a rapid decrease in petroleum tion of the “inventory valuation impact” were product demand as well as to a destabilization of mar- generated, but ultimatedly a low level of profit was ket conditions. However, it is projected that the declin- booked for the full business year. However, the real ing trend in domestic oil demand will not change in operating income, excluding the inventory valuation the medium and long terms even in a period of falling impact of the petroleum product segment, recorded a oil prices. Efforts to ensure earnings have become an significant loss. For FY2010, it is expected to secure a increasingly important issue for the industry. surplus due to each oil company’s effort to improve The recent financial results of the petroleum indus- the supply and demand situation, as well as economic try show that the profitability of the petrochemical recovery and demand growth due to the intensely hot segment, which had at times been extremely good in summer. the past, has worsened rapidly, reflecting soaring Each oil company has been taking various counter-

39 Reinforcement of Corporate Structure

measures such as exporting petroleum products, the business environment, it is essential for each oil reinforcing their oil exploration business, and invest- company to properly analyze the situation and take ing in new businesses to strengthen their manage- further rigorous measures. Though companies may ment base. In recent years, various business efforts be forced to reexamine investments in facilities and have been made, such as the improvement in the R&D which are necessary for business execution, it is supply and demand situation through reformulating necessary for each company to make utmost efforts the wholesale pricing scheme to properly reflect to make a more efficient and stronger corporate struc- crude oil price fluctuations and the reduction of ture by taking careful but even further thoroughgoing excess facilities. restructuring measures. To cope with such rapid and substantial changes in

I Sales Revenue and Ordinary Income in the Petroleum Industry (All Refineries and Primary Distributors) Unit: billion yen

30,000 Sales Revenue 28,999 28,818 28,000 Ordinary Income 26,135 26,164 26,000 24,000 22,754 22,000 21,352 20,323 20,000 19,416 18,786 18,000 17,474 17,782 16,450 16,000 15,652 15,420 15,687 15,507 14,780 14,118 14,044 13,886 14,000 13,259 12,000 10,000 536 521 461 500 402 343 343 370 375 400 288 317 221 246 300 188 214 166 200 114 136 62 40 100 L18 0 -100 -200 L299 -300 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (FY) Source: PAJ

I Financial Data Comparison between the Petroleum Industry and Other Industries (FY2010)

Ratio of Ordinary Profits to Sales Unit: % Shareholders' Equity to Total Assets Unit: % 8

7 6.3 6 Manufacturing City Gas 5.5 49.9 45.1 5.0 5

3 2.3 Electric Power Oil 2 18.7 20.6

0 City Gas Electric Manufacturing Oil Power

40 10 Thorough Safety Measures Appropriate Safety and Disaster- In terms of safety measures for plant workers, sev- prevention Measures eral training programs are conducted in each working unit to elevate workers’ hazard awareness. Experi- The petroleum industry has developed a safety ences of past incidents at refineries are studied collec- management system using the latest technology and tively to develop incident prevention measures, which provides a strict prevention system to deal with unex- are incorporated in the safety training programs. pected disasters in such operational stages as refin- From FY2002, information on facility-related incidents ing, storage, transportation, and sales. There are two has been shared among industry members so as to aspects of these safety measures, the hardware and develop proactive measures preventing similar inci- software. dents. Preventive actions taken by each oil company are compiled and shared as common information to On the hardware side, all possible safety measures prevent incidents in the petroleum industry as a are taken into consideration in facility construction, whole. from a safety review on construction materials in the design stage to the management of construction Disaster Prevention against Longer- work. cycle Seismic Vibration

Facility layouts are planned so that safe distances In September 2003, a large-scale tank fire broke out are kept between the petroleum processing and stor- at the time of the Tokachi Offshore Earthquake. This age sites and the nearby residential areas, and fire- was caused by longer-cycle seismic vibration that had breaks are also installed between all facilities. Each not been experienced in the past. To cope with earth- plant facility and storage tank is also designed to with- quakes of such a nature, the Petroleum Complex stand massive earthquakes. In the case of the Great Disaster Prevention Law and related regulations were Hanshin-Awaji Earthquake in January 1995, there updated to include anti-earthquake safety measures were almost no fires or oil spill incidents at refineries for floating roof tanks and fire-fighting tactics in case a and oil storage terminals in the area. full-scale fire involving such a tank occurs. The petroleum industry is proceeding with a plan to reinforce On the software side, facility maintenance is the the “wide-area joint disaster prevention organiza- core part of safety management. This includes peri- tions” by installing mass foam discharging systems, odic shutdown inspections, on-stream inspections, in cooperation with the national stockpiling facilities, daily inspections and special inspections. An emer- the petrochemical industry and the electric power gency shutdown system is in place and oil and gas industry. By November 2008, the “wide-area joint leak detectors have been installed. Patrol teams make disaster prevention organizations” were established continuous rounds so they can act immediately when in 12 nationwide blocks, and the installation of mass abnormal phenomena are detected, or can extinguish foam discharging systems was completed in May any fire at an early stage. Also, “In-company Disaster- 2009. Furthermore, the framework of mutual assis- prevention Organizations” and “Joint Disaster-pre- tance among these 12 blocks was established in vention Organizations” have been formed. These are March 2010. composed to include personnel from large-scale industrial plants nearby with trained workers on a full- Maintenance of Mobile Mutual Support time basis for prompt action in case of unexpected Systems fires or oil outflows. In such organizations, chemical fire engines, elevated water spraying vehicles, foam PAJ set up a policy named “PAJ Mutual Support liquid carriers, oil skimmers, oil recovery vessels, and Policy for Petroleum Refinery/Facility Disasters”, fire-floats are in place and ready to operate. assuming a case in which wide-area and extensive

41 Thorough Safety Measures

assistance is needed beyond the Designated Disaster- performance standards so as to promote voluntary prevention District specified by the Law on the Pre- safety maintenance. vention of Disasters in Petroleum Industrial Complexes and Other Petroleum Facilities. An appro- As part of this activity, PAJ jointly issued the priate, prompt and mobile support system has been “Handbook on Evaluation of Appropriate Useful developed for keeping damage to a minimum level Life” with the Japan Petrochemical Industry Asso- with this policy. Refineries and oil storage terminals ciation, and developed a software program to eval- are thus protected by double and triple safety mea- uate whether damage detected within a given piece sures. of equipment’s normal lifespan would affect its future continued operation. Also jointly with the Efforts to Develop New Technological Japan Petroleum Institute, PAJ compiled inspection Innovations and maintenance technologies into the “Mainte- nance Standard for Piping, Pressure Vessels, Out- Introducing the latest innovative technology is side Storage Tanks, Rotating Machines, Electrical essential for improving equipment reliability and Equipment and Process Control Instruments” to disaster prevention capability. As old-fashioned tech- improve the reliability of facility maintenance. nical standards not only impede safety improvements but also require a heavy cost burden, it is an alarming 3. Introducing New Inspection Technology problem in view of international competitiveness. Improving inspection technology is extremely PAJ, therefore, plays a leading role in advocating important to maintain facility operations safely. incorporation of performance standards into the Fire However, new inspection technologies cannot be Defense Law and other safety-related regulations, and employed based on facility staff’s own judgment also is working on the introduction of new technolo- since the inspection methods are specified by the gies for plant facility maintenance and disaster pre- existing Fire Defense Law and High Pressure Gas vention as voluntarily taken safety measures. Safety Law. PAJ requests that the Fire Disaster Management Agency legislate the performance 1. Introduction of Large-capacity standards to avoid such an adverse effect. At the Extinguishing Foam Cannon System same time, PAJ is conducting open demonstrations A large-capacity extinguishing foam cannon sys- of new inspection technologies, which are already tem was installed at the wide-area joint disaster accepted in foreign countries, so as to obtain prevention organizations to cope with a full-scale domestic acceptance of the technology. fire involving a large storage tank. A foam cannon used in this system has a capacity equal to ten conventional foam fire trucks. To operate the system effectively and efficiently, PAJ conducts regular education and training.

2. Establishment of Facility Maintenance Standards As the existing law stipulates strict criteria for facility maintenance and repair, even fully usable equipment sometimes has to be replaced or repaired by law. PAJ has been addressing the need for the establishment of private sector voluntary standards, aiming at legally stipulating equipment

42 11 Preparation for Major Oil Spill Incidents PAJ Oil Spill Response Stockpiles Education & Training

PAJ established six domestic and five overseas Under this OSR equipment stockpiling program, bases by the end of March 1996 for stockpiling and because all the equipment, including foreign prod- lending oil spill response (OSR) equipment in the ucts, consists of new large-scale and high perfor- event of a major oil spill incident upon request by the mance devices, it is necessary for concerned parties parties concerned. The domestic Wakkanai sub-base to undergo training to familiarize them with the han- was added in July 2010. dling of such equipment for quick and smooth response activities. PAJ not only participates actively In preparation for a spill incident, domestic bases in anti-disaster drills conducted by local Coast Guard are located at oil refineries/storage terminals on headquarters or anti-disaster cooperatives in the 24-hour operations in close proximity to the waters areas where the domestic stockpile bases are located, where there is heavy traffic in marine transportation but also conducts periodic training courses in the of oil. bases for OSR staff of PAJ member companies and their subsidiaries nearby to familiarize staff with the Overseas bases are in the United Arab Emirates handling of OSR equipment. PAJ also gives training (UAE), Saudi Arabia, Indonesia, Malaysia and Singa- to the stockpile base staff to train experts to be on- pore along the major oil routes from Middle Eastern scene commanders by dispatching them to overseas oil producing countries to Japan. institutions specializing in oil spill responses. Joint OSR drills with the staff of the overseas bases are also Cases Involving OSR Equipment held abroad. Lending Research & Development on Oil Spill As of October 2010, PAJ had lent out OSR equip- Response ment 25 times (13 times for domestic spills) since the establishment of the first stockpile base in November PAJ has conducted research and development 1993. activities on OSR for many years. To cite one typical example, it started in 1992 to develop a “Diffusion/ A substantial quantity of large-scale oil booms, Drifting Simulation Model for Spilt Oil (a trajectory skimmers, temporary storage tanks, etc. were lent out model)” so that the model could be utilized for quick at the request of ship owners and/or other parties and effective containment and cleanup work of an oil concerned in such major lending cases as a tanker spill incident. The model has been upgraded in accu- stranding incident off Yeochon in the Republic of racy and convenience of use since then by expanding Korea in July 1995, a spill incident from a Russian- the coverage of sea areas, giving changes with the flagged tanker in Japanese territorial waters off Shi- passage of time, showing geodesic change, etc. Sim- mane Prefecture in January 1997, a tanker collision ulation models are available at the PAJ OSR website incident in the Singapore Strait, and the submergence (http://www.pcs.gr.jp) and are easily downloadable for of a large-scale barge in the Arabian Gulf in January use on personal computers. 1998. Especially in the incident of the Russian tanker Nakhodka, PAJ fully contributed to the response activ- Oil Slick Detection Technology Using ity by continuously dispatching OSR equipment Satellite Imagery instructors in cooperation with the storage/maintenance companies of the domestic bases. Satellite monitoring is considered an important technology for the detection of oil slicks in a spill incident at sea. In particular, a synthetic aperture radar

43 Preparation for Major Oil Spill Incidents

I PAJ Oil Spill Response (OSR) Equipment Stockpiles Japan & Overseas Bases Domestic Bases Wakkanai Branch of Overseas Bases #5 Hokkaido #5 Hokkaido

#2 Saudi Arabia

Hormuz Straits #6 Okinawa #4 Niigata #1 Singapore

#2 Setouchi Malacca Straits

#4 Abu Dhabi Makassar #1 Tokyo Bay Straits (Chiba) #3 Malaysia

Oil routes from Middle East to Japan.

Lombok Straits #3 Ise Bay #5 Indonesia

n PAJ OSR Equipment Stockpiles (as of Apr 2011) Main Equipment Japan Overseas Total Large Size 20,000m 20,000m Solid Boom Emergency Use 1,200m 1,200m Inflatable 9,800m 5,500m 15,300m No. of Unit 73 20 93 Skimmer Capacity(kl/h) 4,485 1,170 5,655 No. of Unit 38 10 48 Domestic Base Beach Cleaner Capacity(kl/h) 672 228 900 #1 Tokyo Bay

No. of Unit 26 26 Recovered Oil Storage Oil Bag, Barge Capacity(m3) 1,400 1,400 No. of Unit 222 40 262 Portable Tank Capacity(ton) 1,584 360 1,944

Overseas Base #4 Abu Dhabi

(SAR) carried by a satellite is a promising tool ments of international compensation systems, and because it works without being influenced by the technology development regarding oil spills. Recent- weather. However, oil slick detection by SAR data is ly, many cases of large scale oil spills have occurred not in practical use yet as it is difficult to detect a slick not from large crude oil tankers but from inland pipe- when the surface of the sea is too rough or too lines and from deepwater oilfields, such as the off- smooth. PAJ applied a new analytical processing shore rig explosion in the Gulf of Mexico in April method for oil slick recognition that uses SAR data, 2010. PAJ will hold its 2011 international workshop and has made progress toward technology that by inviting parties concerned about such oil spill acci- would increase the probability of recognizing a slick dents from the US, China and Australia. even in such extreme sea conditions.

Hosting of International Oil Spill ■ PAJ’s OSR Website Conferences It includes information on lending equipment, training, R&D and international PAJ invites oil spill specialists from Japan and conferences. abroad to its international oil spill conferences held http://www.pcs.gr.jp every year (14 symposia and one workshop were held between 1990 and 2010). The purposes are to exchange information among participants about responses to major oil spill incidents, recent move-

44 Environmental Measures in the Oil 12 Refining Sector Various Environmental Measures petroleum industry has improved the combustion method through low NOx burners and two-step com- The Japanese petroleum industry is striving for bustion; flue gas denitrification units further reduce cleanliness in refineries with special attention to air NOx in the combustion gas. and water quality, noise levels, the volume of industrial waste and areas of greenery. The industry is also Soot and Dust Reduction Measures dedicated to improving the environmental perfor- As a refinery makes the best possible use of its by- mance of product processing. The completion of the product gas released from various processing units as world’s first lead-free gasoline program and the on-site fuels, the amount of soot and dust emissions implementation of a phased sulfur reduction program becomes very small. Cyclones and electric dust pre- for diesel fuel have been highlights of the industry’s cipitators are installed in series in fluidized catalytic accomplishments. cracker (FCC) units and large boilers to minimize soot and dust emissions. The petroleum industry has also implemented environmental control systems to carry out appropriate Volatile Organic Compounds Reduction environmental management in refineries and fuel Measures storage facilities. One major example is the ISO Envi- Volatile Organic Compounds (VOC) are known to ronmental Management System, which came into change into suspended particulate matter (SPM) or effect in September 1996, and was enacted as the photochemical oxidants when released into the atmo- Japanese Industrial Standard in October 1996. Each sphere. Fuel storage tanks and their loading facilities oil company was accredited internationally by the are the main sources of VOC emissions from refiner- adoption of ISO 14001, and maintains a control sys- ies. Crude oil and gasoline are stored in tanks with a tem for improving environmental conservation. sealed-type floating or inner-floating roof to contain VOC emissions. In addition, hydrocarbon vapor Air Pollution Control Measures recovery units are installed at fuel loading facilities for railroad tankers and tank trucks. Sulfur Oxide Reduction Measures PAJ has been making efforts to control VOC emis- To reduce Sulfur Oxides (SOx) emissions from refin- sions under its Voluntary Action Plan, which set a tar- eries, low-sulfur by-product gas, which is released get of a 30% reduction in 2010 versus the base year of from various processing units and low-sulfur fuel oils, 2000, and is confirming the results periodically. is used as an on-site fuel for furnaces and boilers in refineries. Furthermore, the flue gas desulfurization process substantially reduces the SOx contained in the combustion gas. The process which reduces products’ sulfur content (such as the heavy oil desulfurization units and hydrotreating units for kerosene, gas oil and lubricating oil) generates by-product gas with a high concentration of hydrogen sulfide. The by-product gas is treated in a sulfur recovery unit to collect sulfur. The remaining sulfur compounds are then processed in a tail-gas processing unit.

Nitrogen Oxide Reduction Measures To lower the amount of Nitrogen Oxides (NOx) emitted from furnaces and boilers at refineries, the

45 Environmental Measures in the Oil Refining Sector

Countermeasures against Hazardous rator to recover oil contents, then goes through an Air Pollutants advanced treatment method using chemical coagu- lants, activated sludge and activated charcoal. Then it Chemical substances which were in relatively high is collected in a guard basin, a pond located near the concentration in the air and that would be hazardous final discharge point, where remaining contaminants to human health were investigated for the purpose of can settle out to ensure the water’s cleanliness before legally controlling their emission. Consequently, the its release from refinery sites. Air Pollution Control Law was amended, effective April 1997, to include benzene in the list of hazardous Noise Reduction air pollutants, even though it is only emitted in small Oil moving equipment at production, shipment and quantities. power utility sites produces a certain amount of noise. Each refining company makes every effort to mini- Regarding the benzene emission issue, PAJ mize such noise; locating storage tanks effectively so announced its “Control Program for Hazardous Air as to serve as a sound barrier, utilizing low noise Pollution Substances” in October 1996. In line with burners, and installing sound absorbers and sound- this program, various measures were taken to reduce proof walls around noise sources are some of the benzene emissions, including the decision to reduce countermeasures being employed. the benzene content in gasoline to less than 1%. Simi- larly, measures on the exhaust side were taken to Industrial Waste reduce volatile organic compounds (VOC). Various types of industrial waste are produced at refineries, namely waste oils, sludge, spent acid and In July 1999, the Law concerning Reporting of alkali, and dust captured by electrostatic collectors. To Releases to the Environment of Specific Chemical minimize industrial waste disposal volumes, each oil Substances and Promoting Improvements in Their company reprocesses waste oils, uses sludge and Management (PRTR* Law) was enacted. In compli- dust as raw materials for cement production, and pro- ance with the law, the petroleum industry continues duces caustic soda from spent alkali to minimize to monitor the release and transport of quantities of industrial waste volumes. The reduction in industrial specified chemical substances. waste was 3,000 tons in FY2009, a 97% reduction ver- *PRTR: Pollutant Release and Transfer Register sus the FY1990 level.

Measures to Increase Areas of Greenery Measures for Water Quality Oil companies maintain refinery sites and their Conservation, Industrial Waste vicinity with as much greenery as possible. About Handling, etc. 10% of a refinery’s lot area is allocated for greenery where lawns and trees are planted. The ratio of areas Conservation of Water Quality of greenery to the total site area is significantly higher Though a large quantity of heat-exchanging water than that of other industry sectors. is used at refineries, the water does not come into contact with oils in order to prevent water contamination. Industrial water is recycled after it is processed with oil separators to reduce the net quantity of efflu- ents from the refineries. In the case where seawater is used for cooling, it is strictly monitored so there is no chance of polluting the environment. Wastewater from refining processes is treated first by an oil sepa-

46 Environmental Measures in the Oil Refining Sector

I Environmental Regulations and Petroleum Industry Facility Investment Unit: billion yen I Environmental Regulations and Petroleum Industry Facility Investment Unit: billion yen

Heavy Oil Desulfurization ±550 Heavy Oil Desulfurization ±550

Unleaded Gasoline ±300 Capital Unleaded Gasoline ±300 InvestmentCapital Low-Sulfur Diesel Fuel Further Reduction in Sulfur Content Investment of Gasoline and Diesel Fuel Low-Sulfur Diesel Fuel Further Reduction in Sulfur Content ±200 of Gasoline±300 (Estimate) and Diesel Fuel ±200 ±300 (Estimate) Lower Benzene Lower±140 Benzene ±140 1970 1980 1990 2000 1970 1980 1990 2000 Court Decision on Diesel Vehicle Emission Control YokkaichiCourt PollutionDecision onLawsui t Ultra Low-sulfur (50 ppm) Sulfur-free (10 ppm) Diesel Vehicle-Short-term Emission (1993) Control UltraDiesel Low-sulfur Fuel (End-2004) (50 ppm) Sulfur-freeDiesel Fuel (10 (2007) ppm) Yokkaichi(1967-1972) Pollution Lawsuit -Long-term(1997-99) -Short-term (1993) Diesel Fuel (End-2004) Diesel Fuel (2007) (1967-1972) -Long-term(1997-99) Environmental Ultra Low-sulfur (50 ppm) Sulfur-free (10 ppm) Automobile Emission Control UltraGasoline Low-sulfur (End-2004) (50 ppm) Sulfur-freeGasoline (10(2008) ppm) MeasuresEnvironmental Setup of Benzene Automobile (1978)Emission Control Gasoline (End-2004) Gasoline (2008) Measures (1978) EnvironmentalSetup of Benzene Standar d Long-term Emission Environmental(1996-2000) Standard Long-termGas Control Emission Establishment of the Agency (1996-2000) (2005 for GasolineGas Control and Diesel Fuel) Establishmentof Environment of the Agency (2005 for Gasoline and Diesel Fuel) of Environment(1971) (1971) Source: PAJ Source: PAJ

I Heavy Oil Desulfurizaiton Capacity Trends (end of Mar each year) Unit: 1,000 b/d I Heavy Oil Desulfurizaiton Capacity Trends1,509 (end of Mar each year) ( ): number ofUnit: facility 1,000 units b/d ( ): number of facility units 1,441 1,509(43) 1,447 1,447 1,448 1,451 1,460 1,460 1,441(44) 1,387 (43) 1,447(40) 1,447(40) 1,448(40) 1,451(40) 1,460(40) 1,460(40) (44) 1,387(41) 1,358 (40) (40) (40) (40) (40) (40) (41) 1,358(40) 1,267 (40) 1,200 1,267(40) 1,200(37) 459 (40) (37) (12)459 500 616 Direct 459 548 548 548 550 550 550 Direct (12) (14)500 (16)616 548 548 548 550 550 550 Desulfurization (12)459 (14) (14) (14) (14) (14) (14) 289 (14) (16) DesulfurizationUnit (12) 415 (14) (14) (14) (14) (14) (14) Unit 289(7) (12)415 (7) 862 (12) (29)862 (29) 194 194(5) (5)

Indirect 911 982 928 852 858 893 899 899 900 901 910 910 DesulfurizationIndirect (30)911 (32)982 (29)928 (28)852 (26)858 (27)893 (26)899 (26)899 (26)900 (26)901 (26)910 (26)910 DesulfurizationUnit 668 (30) (32) (29) (28) (26) (27) (26) (26) (26) (26) (26) (26) Unit (24)668 (24)

1973 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 1(FY)973 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 Source: PAJ (FY) Source: PAJ

47 13 Quality Improvement in Automotive Fuels Efforts toward Fuel Quality the atmosphere, the petroleum industry voluntarily Improvements lowered the maximum vapor pressure standard for summer season gasoline from 2001, and reduced it to Improvement in Gasoline and Diesel Fuel 65 kPa in 2005. Quality The rapid increase in the number of motor vehicles Low Sulfur Kerosene in Japan, which started in the early 1970s, created Kerosene for heating use in Japan has the world’s serious air pollution problems, including lead emis- highest standard for reduced sulfur content, a maxi- sions, especially in urban areas. To cope with this mum of 80 ppm, to assure cleaner and safer indoor national concern, the Japanese petroleum industry combustion. initiated a program for the first time in the world to eliminate tetra-alkyl-lead blending with gasoline. The Fuel Quality Control Law phased lead elimination program was completed in February 1975 for regular grade and in December With the start of import liberalization of petroleum 1986 for premium grade. products effective April 1996, the Law on Quality Con- trol of Gasoline and Other Fuels (Fuel Quality Control In the 1990s and after, the petroleum industry Law) was enacted, replacing the Gasoline Retail Busi- focused on sulfur reduction programs for both gaso- ness Law, to maintain the world’s highest level of gas- line and diesel fuel in line with the development of oline, kerosene and diesel fuel quality. The new law more sophisticated exhaust gas aftertreatment sys- specified the existing quality standards as compulso- tems. The petroleum industry launched sulfur-free (10 ry ones from both environmental and safety view- ppm or less) gasoline and diesel fuel from January points. The law also introduced the display of a 2005 on a voluntary basis. Standard Quality (SQ) certificate at service stations for fuels satisfying the standard quality requirements. Complying with a new standard for the emission of hazardous organic compounds, the petroleum indus- At first, the compulsory standards were specified on try reduced the content of benzene in gasoline to 1% 8 items for gasoline quality, and on 3 items for both or less from January 2000. diesel fuel and kerosene quality. The Fuel Quality Con- trol Law has been amended since then to reflect the Airborne hydrocarbons are considered to be one of national concern regarding further quality improve- the main causes of photochemical smog in summer. ment. To reduce hydrocarbon emissions from gasoline in Through the progress of deregulation, alcohol-

I The Fuel Quality Control Law – Compulsory Standard (as of Feb 2011)

Gasoline Diesel Fuel Kerosene

Item Specification Item Specification Item Specification Lead Non-detectable Cetane index 45 min. Sulfur content 0.008 mass% max. Sulfur content 0.001 mass% max. Sulfur content 0.001 mass% max. Flash point 40˚C min. MTBE 7 vol% max. Distillation, T90% 360˚C max. Color, Saybolt +25 min. Benzene 1 vol% max. Triglyceride 0.01 mass% max. Kerosene 4 vol% max. FAME* 0.1 mass% max.

Methanol Non-detectable * This specification is applicable to diesel fuels without international blending of FAME (Fatty Acid Methyl Ester) Compulsory standards allow FAME upper blending limit of 5.0 mass%. In such a case, additional standards Washed gum 5 mg/100 ml max. include Color Orange • Methanol : 0.01 mass% max. • Acid value : 0.13 mgKOH/g max. • Formic acid + Acetic acid + Propionic acid : 0.003 mass% max. • Acid stability : 0.12 mgKOH/g max. Oxygen content 1.3 mass% max. Ethanol 3.0 vol% max.

48 blended automotive fuel was introduced onto the refiners invested 200 billion yen to install new facili- market by product importers. The quality and perfor- ties for high-performance gasoil desulfurization. mance of the alcohol-blended fuel were not covered by the scope of the Fuel Quality Control Law. Conse- In response to ongoing national concerns with PM quently, several fires involving vehicles using the emissions, the existing long-range diesel emission alcohol-blended fuel were reported. To ensure con- standard was revised to move forward the implemen- sumers’ safety, METI banned the sale of such alcohol- tation year from 2007 to 2005. The target emission blended fuel effective August 2003 and amended the level was achievable only with the installation of after- Fuel Quality Control Law to include the upper limit of treatment devices, such as a diesel particulate filter alcohol-to-gasoline blending as a maximum of 3% of (DPF), together with the reduction of diesel sulfur con- volume for ethanol and 1.3% in weight for oxygenate. tent. In this way, the requirement for diesel sulfur was lowered to 50 ppm or less by the end of 2004. In view of verification work on biofuels recently conducted in various places, effective March 2007, man- In the meantime, the Tokyo Metropolitan Govern- datory standards for FAME (Fatty Acid Methyl Ester), ment (TMG) started its own campaign named “Oper- Tri-glyceride and four other materials were added to ation No Diesel Vehicle” from August 1999, banning diesel fuel quality requirements in order to allow high emission diesel vehicles from entering the met- blending of bio-diesel components in diesel fuel. The ropolitan area. TMG mandated the installation of DPF additional requirements include an upper limit for on existing diesel vehicles effective October 2003, blending in diesel fuel. In February 2009, a registra- ahead of the national target in 2005, and urged vehi- tion system and quality assurance system were estab- cle manufacturers to implement early introduction of lished for newcomers in the business for blending new DPF-equipped diesel vehicles. ethanol and equivalent products in gasoline. Accordingly, the Fuel Quality Control Law should be In view of the urgent need for reduction of diesel revised as necessary from now on to properly assure emissions accelerated by the scheduled TMG regula- fuel quality in line with METI’s plan. tion, the petroleum industry announced its partial supply of low sulfur (50 ppm max.) diesel fuel from Sulfur-free Gasoline and Diesel Fuel October 2003 to meet the TGM regulation. Since then, several local governments, i.e., Osaka and Aichi, as Deterioration in air quality caused by diesel emis- well as large commercial diesel fuel users such as the sions, namely nitrogen oxides (NOx), soot and dust particulate matter (PM), had become a national con- n Sign of Sulfur-free Gasoline cern in the 1980s. In 1989, short- and long-term emission standards were established to reduce NOx and PM emissions from diesel engine buses and trucks. To achieve this diesel engine emission standard, engine manufacturers were required to install advanced exhaust gas aftertreatment systems (EGR: Exhaust Gas Recirculation and Oxidation Catalyst).

The petroleum industry cooperated with the engine manufacturers to achieve the emission standard smoothly by reducing the fuel sulfur content of diesel fuel from 5,000 ppm to 2,000 ppm in 1992 and further to 500 ppm in October 1997. Over this period, oil

49 Quality Improvement in Automotive Fuels

bus and truck industries, requested an earlier intro- same time for improving the fuel economy of these duction of low sulfur diesel fuel. engines. The introduction of sulfur-free fuels would contribute significantly to a clean environment by TMG also urged the introduction of a nationwide reducing vehicle emissions and to mitigating global supply of low sulfur diesel fuel prior to the implemen- warming by reducing CO2 production. tation of the local Tokyo regulation so that all DPF- equipped diesel vehicles could enter and drive The petroleum industry has invested 300 billion yen through the metropolitan area. The petroleum indus- of capital resources in developing cleaner fuel produc- try moved forward the facility investment schedule for tion technologies, and on construction and modifica- earlier production of low sulfur diesel fuel, and started tion of desulfurization facilities to ensure the supplying 50 ppm diesel fuel voluntarily from April production of sulfur-free fuels. As a result, the indus- 2003, 21 months earlier than the enforcement dead- try announced in September 2003 that the world’s line of government regulations. first supply of sulfur-free gasoline and diesel fuels would start from January 2005 in all areas of Japan. Needs for further reduction of fuel sulfur content to sulfur-free (10 ppm or less) were already reported on several occasions. In January 2002, TMG drew up its Basic Environment Plan in which sulfur content for both gasoline and diesel fuel was requested to be 10 ppm or less by 2008. In June 2003, the Petroleum Council Subcommittee referred to the appropriate timing for introduction of sulfur-free gasoline as 2008 and sulfur-free diesel fuel as 2007.

Availability of sulfur-free fuel is a prerequisite for developing technologies for exhaust emission aftertreatment to meet more stringent emission standards for both gasoline and diesel fuel engines, and at the

I Current Status for Unit: ppm I Current Status for Unit: ppm Sulfur Content in Gasoline Sulfur Content in Diesel Fuels

100 500 100ppm Governmental 500ppm Governmental Regulation Regulation Petroleum Industry's Petroleum Industry's Voluntary Measures Voluntary Measures 400 21 Months in Advance 300 50ppm 50 50ppm 50ppm 50 3 Years 2 Years in Advance in Advance 10ppm 10 10 10ppm 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Start of Nationwide Supply Start of Nationwide Supply

50 14 The Global Warming Issue and Oil Global Trends Regarding the Climate effective international framework by all major coun- Change Issue tries and an agreement on these ambitious targets.” This is generally recognized in Japan as the most Status of Approach Based on Kyoto Protocol severe target among those proposed by major coun- The Kyoto Protocol stipulates a concrete approach to tries such as the EU (a 20% reduction and a condition- the United Nations Framework Convention on Climate al maximum reduction vs. the 1990 level) and the US Change (UNFCCC) aiming at stabilizing the concentra- (a 17% reduction vs. the 2005 level, equivalent to a 3% tion of atmospheric greenhouse gas (GHG) and at reduction vs. the 1990 level). maintaining the current climate ever afterwards. The Also at COP16, held in November/December 2010, protocol sets legally binding numerical targets for Japan opposed the extension of the present Kyoto GHG emission reduction for 2008-12 versus 1990 in Protocol where only some of advanced countries bear industrialized countries (a 6% reduction for Japan). a reduction obligation. However, the U.S. decided to withdraw from the Kyoto Protocol in 2001, and no emission reduction Domestic Trends Regarding the obligation is stipulated for developing countries, Climate Change Issue including countries with massive emissions like China. Therefore, the coverage of reduction obliga- Measures for the First Commitment Period tions is limited to about one-third of the global of Kyoto Protocol amount of emissions, and its overall effect is said to A flash report on FY2009 GHG emissions shows a be questionable on a global basis. 1.5% increase vs. the 1990 level, although a 5.6% decrease was recorded vs. FY2008. Further measures Discussion on Post-Kyoto Protocol are necessary to achieve the 6% reduction target set A series of conferences were held including COP for the first commitment period. with a goal to establish a new global GHG reduction The industrial sector achieved a reduction of around agreement for the period after 2013 when the first 20% versus the FY1990 level, However, the business/ commitment period under the Kyoto Protocol termi- other sector as well as the household sector increased nates. However, especially with lack of accord about 30% versus the same period. between developed and developing countries, a concrete agreement has not yet been reached. Movement toward Post-Kyoto Protocol At the UNFCCC summit meeting in September 2009 The government is continuing the examination by and also at COP15 at the end of 2009, Japan present- experts utilizing model analysis regarding the cost, ed a plan for a reduction of 25% below the 1990 level, impact on the economy and public financial burden premised on ”the agreement of establishing a fair and necessary to achieve Japan’s 25% GHG reduction tar-

n COP 15 Copenhagen Accord – 2020 Targets n Marginal Cost of 2020 Target by Country

＄/t CO2 500 $476 400 China US EU Japan 300 Reduction -40〜-45% -17% -20〜-30% -25% Target *1 vs 2005 vs 2005 vs 1990 vs 1990 200 $135 *3 100 327〜 $60 vs 1990 -3% -20〜-30% -25% 366% *2 $3 *3 0 China US EU Japan 1 Each country’s target assumes enactment of domestic laws and other * *3 Note: -45% vs 2005 for China, and -30% vs 1990 for EU countries’ reduction level. *2 8% annual growth set in the 11th five-year plan is assumed. Source: Research Institute of Innovative Technology for the Earth

51 The Global Warming Issue and Oil

I CO2 Emissions Originating from Fossil Fuels by Country I Trends in Japan’s CO2 Emissions of Energy Origin by Sector

Emission Germany 3% Unit: million ton CO2 Kyoto Protocol Canada 2% covers only 30% of 500 UK 2% the world CO2 Russia emissions 5% Japan 482 4% 450 Industrial Sector 400 others 26% 386 (From base year -19.9%) 350 2008 others 7% CO2 Emission 300 29.4 billion t Transportation Sector 229 (From base year+5.4%) India Republic 250 5% 217 of Korea USA Commercial Sector 2% 19% 220 200 (From base year+33.6%) China 164 22% 150 162 (From base year+26.9%) France 1% Household Sector Australia 1% 127 Italy 1% 100 78.8 Countries obliged to reduce emissions by Kyoto Protocol 50 68 Energy Conversion Sector (From base year+16.2%) Countries not obliged to reduce emissions by not ratifying Kyoto Protocol 0 Countries not obliged to reduce emissions by Kyoto Protocol 1990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 2009 (FY) Flash ()Report Source: IEA CO2 Emissions from Fuel Combustion 2010 Source: Ministry of Environment (MOE) get presented at COP15. In consistency with Japan able energy purchasing system and a possible new Business Federation’s (Nippon Keidanren) Voluntary international framework. However, there is a possibil- Action Plan, “trial implementation of emission trading ity among governmental councils to study setting up in an integrated domestic market” was started in the reduction target by looking at the cap-and-trade FY2009, and many oil refining companies are partici- system in which the administration sets the emission pating in this scheme. cap that is currently used in European countries, and Full-scale discussion hereafter begins to realize the also considering the introduction of innovative reduc- 25% reduction target and also to introduce an envi- tion technology. ronmental tax and emission trading as the economic Reacting to the introduction of the government’s approach to the global warming issue. The petro- restrictive measures, Japanese industry, including the leum industry expects to realize a substantial GHG petroleum industry, announced the policy of achiev- reduction commitment through international cooper- ing a low-carbon society that harmonized the environ- ation with a focus on further improvement in efficient ment with the economy by releasing a “Low-carbon use and technology development of energy. Society Action Plan” in line with the Japan Business The government listed the following as a domestic Federation’s ongoing Voluntary Action Plan. policy for global warming countermeasures in the The petroleum industry agreed to this outline and future: a establishing a domestic emission trading prepared “Petroleum Industry’s Action Plan for Low- scheme, b introduction of a domestic global warm- carbon Society” with a main focus on energy conser- ing countermeasures tax, and c establishing a sys- vation at oil refineries. tem to purchase the whole quantity of renewable energy at a fixed price. Regarding the domestic emission trading scheme, Petroleum Industry’s Efforts the government stated, in December 2010, that it would examine thoroughly this scheme in consider- Being a frontrunner in taking environmental mea- ation of the effect of introducing new taxes, a renew- sures as “an advanced environmental industry”, the

52 Japanese petroleum industry has been making posi- n Energy Saving Projects at Refineries tive efforts to address global warming through meth- Energy Saving Measures ods such as launching sulfur-free automotive fuels in Thorough insulation of tower, tank and piping 2005. With a focus on the steady implementation of Installation, cleaning and replacement of furnace air-preheater, and installation of waste heat the Nippon Keidanren’s Voluntary Action Plan, each boiler PAJ member company has been implementing fur- Installation of various heat-exchangers ther energy conservation in its own business opera- Flare gas recovery Refining Reducing furnace air flow rate tions and making an active contribution to reducing plants GHG emissions in its transportation and operations Common use of heat among processing units Installation of process turbine (recovery of units where petroleum products are consumed. pressure energy) Optimizing pump capacity (cut impellers) Petroleum Industry’s Voluntary Action Plan Promoting computer control for Global Environmental Conservation Reviewing control limit of operation PAJ formulated the “Voluntary Action Plan for Glob- Repair and replacement of furnace wall and insulation material al Environmental Conservation by the Petroleum Installation, cleaning and replacement of air- Industry” in February 1997 to respond to Nippon preheater Keidanren’s initiative, and set a target to be achieved Utility Installation of preheater for boiler feed water by FY2012 for the improvement of unit energy con- plants High efficiency steam tubine for power sumption at oil refineries. Especially, the unit energy generation Optimizing pump capacity (cut impellers) consumption at oil refineries in FY2009 was improved Promoting computer control by 16% from FY1990 through the use of sophisticated Reviewing control limit of operation heat recovery units and efficiency improvement and optimization of refining facilities. In October 2007, the n Energy Saving Technologies Included in NEDO’s Support Projects on Energy Use Rationalization petroleum industry’s target in FY2010 was revised 1 Install high performance trays in the distillation column upward to a 13% improvement from FY1990, incorpo- Install heat exchanger to recover heat at top pump- rating progress in energy conservation and consider- 2 around of distillation column ing the projected decrease in oil demand in the future. Utilize the idle heat exchanger of heavy oil thermal cracking unit with existing air-fin cooler to recover heat 3 Refineries’ Energy Conservation Measures diffused from the existing air-fin cooler of distillate stream to pre-heat feedstock stream Energy conservation at refineries consists of a wide range of measures which include (1) sophisticated Increase capacity of feedstock line from the direct 4 desulfurization unit to the fluid catalytic cracking (FCC) operation control through innovative technology for unit to directly increase fresh feedstock process control and optimal operation, (2) expanding Reduce load for make-up gas compressor of the direct common use of heat among facilities and adding 5 desulfurization unit by installing automated flow capacity waste heat recovery units, (3) operating facility main- adjustment system tenance efficiently, and (4) adopting high-efficiency Recover waste heat efficiently from the furnace of 6 facilities and catalysts. These measures are being atmospheric distillation unit evaluated at the “National Excellent Energy Conserva- Install new heat exchangers at the feedstock furnace to 7 tion Examples Convention” carried out by the Energy reduce fuel consumption Install an exhaust gas turbine for power generation at Conservation Center of Japan, and many oil refineries 8 the FCC unit and reduce captive power generation are awarded for their excellence. The petroleum industry is actively utilizing the ener- tion technology to refineries. gy conservation project conducted by New Energy In addition, many refineries are participating in and Industrial Technology Development Organization “Kombinat (Refining and Petrochemical Complex) (NEDO), and introducing advanced energy conserva- Renaissance Program” which is aimed at advanced

53 The Global Warming Issue and Oil

I Comparison of Energy Consumption Index (Note 1) to Produce 1 KL of Petroleum Product I Results of Refinery Energy Conservation (FY2004 Actual) since 1990 (Change in unit energy conservation) 120

115 113

110 0%

High Efficienc↓ y 105 103 5% Target: 13% Improvement 100 101 100 Unit Energy Consumption FY2009 Improvement 10% 16% Improvement 95 vs. 1990

90 15%

Japan Asian Western US and 20% Countries Europe Canada 1990 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (Note 2) (15 Countries) Fiscal Year Prepared based on the result of the survey by Solomon Associates (SA) (Note) 1 SA's original index using equivalent throughput, and this has similar characteristics to the unit energy consumption used in the industry’s voluntary action plan 2 Including Korea, Singapore, Malaysia and Thailand and excluding China integral management of nearby factories in a Kombi- ogies like environmentally-friendly fuel cells and nat group, and working on the overall reduction of hydrogen refueling service stations. The oil compa- energy consumption as a joint project, not only by nies also promote international technical cooperation reducing direct energy consumption but also by pro- for GHG reduction on a global basis and participate in moting procurement of raw materials, utilization of overseas projects. In particular, regarding the United by-products and efficient process management. Nation’s Clean Development Mechanism (CDM), six As a result of these efforts, Japanese refineries have projects by four oil companies (PAJ members) were a world-leading level of energy efficiency. recognized by the Japanese government.

Sulfur-free Automotive Fuels as a CO2 Countermeasure Using sulfur-free gasoline and diesel fuel (sulfur content of less than 10ppm) contributes to the reduction of nitrogen oxides (NOx) and particulate matter

(PM), and also contributes to CO2 reduction due to fuel efficiency improvement. This is expected to be a useful global warming countermeasure. The petroleum industry launched the nationwide supply of sulfur-free fuels in January 2005 well in advance of government regulation.

Promotion of Technology Development and International Cooperation Technological breakthroughs are essential for global warming countermeasures. Each PAJ member company advances the development of emerging technol-

54 n Petroleum Industry’s Commitment to a Low-carbon Society - Coexistence of Stable Supply and Global Warming Countermeasure through Sophisticated Use of Oil - Basic Policy The petroleum industry actively contributes to global environmental conservation, the formation of a recycling society and sustainable economic development of society. With these as basic principles, the industry aims to pursue the formation of a low-carbon society and simultaneous achievement of the “3E” policy (energy security, environmental concern and efficient supply).

Specific Approach to FY2020

Manufacturing Stage of Petroleum Products (Refinery) Consumption Stage of Oil w Maintain and improve the world's highest level of energy a Renewable Energy (Biomass Fuel) efficiency by the introduction of state-of-the-art technology and w Introduce biomass fuel for which stable and economical cooperation with nearby factories, considering the demands of procurement is possible as the effect on greenhouse gas various countries and regions. reduction using LCA, competition with food, supply stability, and w Aim to achieve energy saving of 530 thousand KL *1,2,3 (crude oil ecosystem consideration are being verified. equivalent) per year on an accumulated average from FY2010 to w Promote the use of ETBE blended biomass fuel while ensuring FY2020 sustainability and stable supply in cooperation with the *1 Utilizes the mid/long-term plan of the Act on the Rational Use of Energy to sum up government, aiming at a steady introduction to meet the target energy saving effects (only for the first year). amount of 500 thousand KL *4 (crude oil equivalent) in FY2017 set *2 Includes measures for which government support is necessary. When a large fluctuation by the Law Concerning Sophisticated Methods of Energy Supply in demand and stringent quality requirements are identified, the target is subject to Structures. reexamination. *4 Approximately 1.3 million tons of CO2/year 3 Corresponds to approx. 1.4 million tons of CO2 per year * b Clean Diesel Powered Vehicle c Promoting High-Efficiency Water Heater (“Eco-Feel”) Transportation and Supply Stage of Petroleum Products d Oil-Based Fuel Cell w Further efficiency improvement in distribution system (joint use of w Expand the promotion of oil-based fuel cells for which the existing storage points, mutual accommodation of products, etc.) distribution network can be used (supply of hydrogen from w LED lighting at service stations, solar power generation, etc. kerosene and LPG)

Development of Innovative Technologies (2030 - 2050) International Cooperation

w w Heavy oil cracking using supercritical water Use the knowledge and the experience of the petroleum industry that achieves the world’s highest level of energy efficiency for w Membrane separation and adsorption of hydrocarbons personal and technical exchanges with developing countries w Carbon dioxide capture and storage (CCS)

Shifting to Diesel Vehicles (Diesel negative image connected to the noise and vibration Shift) of diesel trucks. Although recent technological developments enabled us to sweep away all of these con- Diesel engine vehicles are considered a more effec- cerns, customers’ acceptance still remains at a low tive countermeasure to global warming than gasoline level. vehicles as they have better fuel efficiency and conse- Under these circumstances, METI organized a study quently generate less CO2. In Europe, about 50% of group to forecast the viability of clean diesel fuel for newly registered passenger vehicles have diesel pow- passenger vehicles. The group concluded in the ered engines which have been technically improved report, issued in April 2005, that the promotion of die- since the late 1990s for better driving performance sel passenger vehicles (shifting to diesel vehicles) is and less exhaust emissions. On the other hand, 0.1% an effective means of reducing CO2 generation in the of passenger vehicles sold in Japan are diesel pow- transportation and industrial sectors. Some of the ered. The lack of popularity of diesel vehicles is due to advantages are as follows:

Japan’s more stringent NOX emission regulations 1. A 10% increase in the number of diesel vehicles compared with European standards, together with the would reduce CO2 generation by 2 million tons a

55 The Global Warming Issue and Oil

year in the transportation sector. “Clean Diesel Promotion Strategy” and “Clean Diesel 2. A 10% shift in production volume from gasoline to Promotion Policy (Detailed Strategy Version)”, were diesel fuel (4 million KL a year) would lead to a 1.7 compiled in June 2008. The reports reconfirm the sig-

million ton CO2 reduction in the oil refining sector. nificance of launching clean diesel vehicles which

Moreover, the Kyoto Protocol Target Achievement contribute to CO2 emission reduction in the transpor- Plan approved in April 2005 stated that “when a clean tation sector. In addition, image enhancement strate- diesel passenger vehicle that has exhaust emission gies and tax incentives were taken. As a promotional quality not inferior to that of a gasoline vehicle is measure for diesel vehicles, image improvement developed, the promotion of such a diesel vehicle events like exhibitions and test-ride events were con- shall be examined accordingly”. ducted at the G8 Hokkaido Toyako Summit in July Further to this, METI’s Basic Energy Plan, revised in 2008. This is because Hokkaido has the regional dis- February 2007, clearly stated that “Diesel Shift” tinction of having a high diesel vehicle ownership should be one of the energy conservation and CO2 ratio and of having many active environmental indus- reduction measures in the transportation sector. tries. Meanwhile, METI released a report called the “Next- Clean diesel vehicles, together with hybrid and elec- Generation Vehicle and Fuel Initiative” in May. The tric ones are regarded as key players in the environ- report compiled measures to implement the initiative, mentally friendly vehicle market in the short and such as a need for early introduction of clean diesel medium term. Therefore, market creation and wide- vehicles which meet the latest emission standards in spread utilization of clean diesel vehicles are emerg- view of global warming and energy security issues as ing issues. The petroleum industry looks forward to well as international competitiveness. significantly expanding the clean diesel vehicle mar- The petroleum industry has invested about 300 bil- ket based on the above strategy, and will continue col- lion yen of capital resources and started the world’s laborating with the central and local governments as first supply of sulfur-free diesel fuel in all areas of well as the automobile industry. Japan in January 2005 with an expectation of expanding demand for clean diesel vehicles with improved fuel efficiency. In recent years, clean diesel vehicles are being reevaluated in terms of both air pollution abatement and global warming viewpoints by many parties concerned, and its policy positioning has been significantly changed from that in the past. To achieve the realization of the “Next-Generation Vehicle and Fuel I Sales Share of Diesel Passenger Vehicles in Europe and Japan Unit: % Initiative”, national and local govern- 50 ments together with automobile and 45 petroleum industries set up the 40

“Clean Diesel Study Group” in Janu- 35 ary 2008 to discuss promotion plans 30 to expand the utilization of clean die- 25 Europe sel vehicles. Such issues as dissemi- 20 nation of clean diesel vehicles, image 15 enhancement, cost reduction, and 10 Japan the outlook for diesel technology 5 0 development were deliberated at the 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 meetings, and two reports, entitled Source: Annual Report of World Automobile Statistics

56 15 Utilization of Biomass Fuel Sales of Bio-Gasoline (Biotechnology For proper dissemination of bio-ETBE gasoline, PAJ Gasoline) issued display guidelines, such as posting of the bio- ETBE blending ratio. This provides the handling of the Biomass fuels can be produced from renewable name and the logo of “Bio-Gasoline” when bio-ETBE materials such as agricultural crops and trees, and blended gasoline is sold in the service stations of PAJ they are considered to be “carbon neutral” in terms member companies in an effort to establish a market- of carbon emissions. Thus, many environmentally ing environment where consumers are assured of conscious countries are showing great interest in bio- product quality. As of February 2011, bio-gasoline mass fuels. In the Kyoto Protocol Target Achievement was being sold at about 2,120 service stations, and it Plan of April 2005, the government specified the use is likely to meet 210,000KL of crude equivalent target of 500,000KL (crude oil equivalent) of biomass fuels volume. for transportation use. Furthermore, the Basic Energy Plan revised in June In January 2006, based on the request of the Agen- 2010 includes introducing biomass fuel as over 3% of cy of Natural Resources and Energy, the petroleum national gasoline consumption in FY2020. In line with industry announced a target plan to blend bio-ETBE this plan, the Law Concerning Sophisticated Methods (ethyl-tertiary-butyl-ether) produced from 360,000KL of Energy Supply Structure, enforced in November of bio-ethanol (210,000KL of crude oil equivalent) in 2010, specified blending about 820,000KL of bio-etha- FY2010 aiming to cooperate in the achievement of the nol (500,000KL of crude equivalent volume) directly government plan. into gasoline or in the form of bio-ETBE in FY2017.

With a basic policy of “Priority for Consumers”, Although bio-ethanol is drawing attention as a bio- “Safety, Security and Fairness”, and “Domestic Pro- mass fuel, there are several concerns as follows. a Its duction and Consumption”as an accountable fuel domestic production is practically not viable due to supplier, the petroleum industry is steadily striving to Japan’s limited cropland and high production costs. meet the whole quantity of the targeted amount set b Since Brazil is the only country which has a surplus forth by the Law Concerning Sophisticated Methods export capacity of bio-ethanol, there is a risk of not of Energy Supply Structures. In January 2007, the being able to secure a stable supply resulting from member companies of PAJ established a limited lia- uncertain weather conditions and food market prices bility partnership company (LLP) to jointly procure (Stable Supply). c The raw material is a high-priced bio-ETBE and related products. In FY2007, the sale of agricultural crop. d Its calorific value is 30% less than bio-ETBE blended gasoline was launched at 50 ser- that of gasoline (Fuel Economy). vice stations in the Kanto area and it was expanded in FY2008 to 100 sites including such areas as Osaka and Moreover, if bio-ethanol is blended directly with Miyagi. This received high acclaim from consumers, gasoline, a a small quantity of water contamination municipal governments and business owners due to would result in the phase separation of gasoline and its strong environmental considerations. The test ethanol to increase the possibility of fuel quality marketing of bio-gasoline (the government subsidized change (a lowered octane number), b the safety of project) was completed at the end of FY2008. The consumers might be threatened by corrosion and member companies of PAJ introduced 200,000KL of deterioration of distribution/marketing facilities, and bio-ETBE blended gasoline in FY2009 to the market c as the direct blending method increases gasoline prior to the nationwide sales plan of 840,000KL vapor pressure (an indicator for gasoline volatility), it (210,000KL of crude equivalent target volume) in would increase the emission of poisonous materials FY2010. such as the hydrocarbons that are considered to cause photochemical smog. Although the advantage

57 Utilization of Biomass Fuel

of bio-ethanol regarding CO2 reduction measures Biomass fuel sources as a competitor with those for tends to be emphasized, it should not be forgotten to food has been in the spotlight since early 2008 as the discuss pollution abatement measures in urban areas. worldwide use of biomass fuel was one of the causes of rapid food price increases. While the use of bio- On the other hand, the bio-ETBE method which is mass fuel is expanding around the world, various promoted by PAJ would never cause such problems. studies and discussions are ongoing in European As bio-ETBE is generally blended with gasoline at the countries, the U.S., as well as in the U.N., to establish refinery (in the production process), the evasion of tax standards for the development and sustainable use of and the circulation of inferior quality gasoline would biomass fuel, focusing on such concerns as competi- be prevented. Therefore, the oil industry considers tion with food and environmental problems of defor- the refinery blending of bio-ETBE be the most appro- estation. To cope with these moves, the Ministry of priate method to cope with those concerns, and rec- Economy, Trade and Industry organized the “Biofuel ommends this bio-ETBE should be used for Sustainability Study Group” in October 2008, with the automotive fuel. participation of the Cabinet Office, the Ministry of Agriculture, Forestry and Fisheries and the Ministry of Sustainability Standards for Biomass Environment. The group studied the requirements to Fuel formulate the Japanese version of biomass fuel sustainability standards. The group, considering the At first, great expectations were held regarding the importance of sustainability and stable supply in use of biomass fuel as an effective means for the order to expand the introduction of biomass fuel, reduction of greenhouse gas emissions. Recently, investigated European and U.S. trends, and identified some issues have arisen in relation to competition various problems to be solved, including effects on with food production and also impact on the ecologi- GHG reduction, land use for cultivation of biomass, cal system. In view of these concerns, Nomura competition with food, and stability of supply. (Report Research Institute, on behalf of the petroleum indus- toward Establishing the Japanese Version of Biofuel try, made a survey to assess the problem and the Sustainability Standards, April 2009) approach to these issues in other countries. “The Report Concerning Biomass Fuels” was published in “The Study Group on Sustainability Standards for December 2007. the Introduction of Biofuel” was then organized in July 2009 to develop Japan’s own standards and

I Self-sufficiency of Bio-ethanol in Major countries I LCA of the Effect of Bio-ethanol on GHG Emissions Reducation

Less CO2 emissions than Gasoline← →More CO2 than Gasoline

Imported Gasoline [Base] Domestic No change of land use 40% Brazil 100% 1% Sugarcane Grassland 108% 9%

Share in Ethanol Consumption 19% Savanna 336%

(including non-Fuel Use) 80% 40% High-yielding rice (1) 112% High-yielding rice (2) 70% Imported rice 73% 60% Unmarketable Land use change Japan wheat 54% 99% 100% 100% 97% (reference) Crop production Sugar beet 48% 91% Feedstock transport 40% 81% Construction debris wood 10% Conversion 60% Blackstrap molasses 68% Liquid fuel transport 20% 0 50 100 150 200 250 300 50% reduction over gasoline g-CO2/MJ 3% (Note) 0% 1 High-yielding rice (1) is produced in a paddy field with water management and high-yielding rice (2) is without water US US EU EU Brazil Brazil Japan management (2008) (2017) (2008) (2017) (2008) (2017) (2007) 2 LCA of gasoline GHG emission is assumed as 81.8g-CO2/MJ 3 In case of local production for local consumption, zero GHG emission during transportation is assumed

Source : Biofuel Sustainability Study Group (April 2009) Source: Interim Report of the Study Group on Sustainability Standards for the Introduction of Biofuel (March 2010)

58 Utilization of Biomass Fuel

operating procedures. The interim report issued in biomass fuels in future, it is essential to consider “sta- March 2010 is summarized as follows. a As one of ble supply”, and, in the long term to develop innova- the sustainability standards for biomass fuel, the life tive technologies for manufacturing low cost biomass cycle assessment (LCA) of the GHG reduction effect fuel by utilizing plants and trees that do not conflict should be more than 50 % of the GHG emission by with food production or supply. In order to abide by gasoline, b a high rate of self-sufficiency is necessary the sustainability standards set forth by the above for a stable supply of biomass fuel as the current sup- interim report, the petroleum industry plans to effec- ply is limited to imported products from Brazil and to tively utilize bio-ethanol as renewable energy within a a small part of domestic products, and c all related range where food supply and the environment are ministries should have a mutual view on biomass not negatively affected. This sound approach will be fuel’s competitive nature with food and examine the continued in the future for achieving the objectives of root cause analysis and the action plan. The sustain- 3E policy. ability standard of biomass fuel, which is to be introduced based on the Law Concerning Sophisticated Methods of Energy Supply Structures, will follow the directionality that had been shown by the interim report.

Since Japan is a country of limited natural resources, it is fundamental to satisfy the principle of 3E energy policy (energy security, environmental consideration and efficient supply) in a well-balanced manner and the use of biomass fuels as automotive fuel is not an exceptional case. In order to expand the promotion of

Biofuel Marketing Schedule

FY2009 April 2007 -March 2009 FY2010 Expanded Test Marketing Full Marketing Bio-Gasoline Marketing Sales Introduction of Verification Work on Distribution System* Bio-ETBE 0.21 million kl FY2007 50 service stations [Bio-ETBE 0.2 million kl] of Crude Oil Equivalent FY2008 100 service stations [Bio-ETBE 0.84 million kl] (Quantity of bio-ETBE introduction)

1 Import Terminal Maintenance Summer 2008; Contract Start to use Maintenance of Domestic 2 Ocean Tanker Procurement Infrastructure Summer 2008: Contract Start to ship

3 Coastal Tanker Procurement Winter 2008: Contract Start to ship

July 2008 September 2009 Bio-ETBE Supply Memorandum Conclusion in Brazil, Start to Trade Domestic Ethanol Purchase Contract with US company

*Supported by Governmental fund (Verification Work on Distribution System) for 2 years from FY2007

59 16 Efficient Use of Oil Efficient Use of Petroleum Products ment. Jointly with the Saudi Arabia government, the petroleum industry carried out the development of Demand for heavy fuels is projected to show a the HS-FCC process. In 2003, an HS-FCC plant was steady decline in the future, so the petroleum industry constructed in Saudi Arabia and was tested for verifi- is making efforts to develop innovative technologies cation of the HS-FCC process technology. This pro- to create effective uses for residual oils like Fuel Oil C. cess cracks heavy oils and produces a high yield of gasoline and also propylene, which is a high-value Integrated Gasification Combined Cycle (IGCC) is raw material for petrochemical products. As the the most prominent technology among them all for demand for propylene continues to expand mainly in using residuals in a cleaner and more efficient man- the Asian market, an increasing supply is required ner, and is gathering worldwide attention. IGCC is a from crude oil processing. In this regard, the commer- system that uses gasification technology on low-value cialization of the HS-FCC process is highly anticipated. residual oils like asphalt to generate electricity efficiently from a compound turbine powered by synthetic gas and steam. With this technology, impurities such as sulfur in fuel oils can be removed through the gasification process. In addition, sulfur oxides and I Characteristics of IGCC nitrogen oxides can be reduced to a minimum, and high thermal efficiency (46%) can be achieved. Also, a BTG*1 IGCC (Conventional Oil Thermal Power Generation) strong CO2 emission-reduction effect (15% lower than that of a conventional oil thermal power plant) can be Generating 46% 39% achieved by gas-turbine and steam-turbine combined Efficiency cycles. Commercial operation of an electric power CO2 Emission 598g–CO2/kWh 706g–CO2/kWh wholesale supply using IGCC fueled by residual oils (asphalt) began in June 2003. Emission Gas Level*2 ć

The high-severity fluid catalytic cracking (HS-FCC) 81 BTG=Boiler Turbine Generator 8 process is another example of technical advance- 2 Comparison based on NOx and SOx emissions

I IGCC: Integrated Gasification Combined Cycle

Air Nitrogen Air Separation Unit

Oxygen Asphalt Steam Compound Generation Unit

Hydrogen + Electricity Carbon Monoxide Gas Turbine

Steam Turbine Generator

Synthetic Gas

Steam Air

Gasification Unit Gas Turbine Exhaust Waste Heat Boiler

60 Effective Petroleum Product Use dur- High-efficiency Water Heater, “Eco-Feel” ing Consumption An innovative kerosene-based water heater was introduced in December 2006. In comparison with As part of its policy of enhancing energy saving and conventional water heaters, this unit uses less fuel improvement in fuel handling, PAJ has worked on the and reduces CO2 emissions, considered one of the development and wider range of consumer use of its causes of global warming. PAJ, jointly with the High Energy Efficiency Oil Utilization System since Japan Industry Association of Gas and Kerosene FY1993. The system aims to promote oil co-genera- Appliances (JGKA), registered a trade name for this tion systems, oil central heating systems, and district heater, ”Eco-Feel”, and started sales promotion of the heating and cooling systems. product.

Environmentally Friendly High-efficiency Boiler Jointly with the Petroleum Energy Center (PEC), PAJ developed and commercialized a high-efficiency (95%) low-nitrogen oxide (NOx) boiler fueled by Fuel Oil A, which attained NOx emission of less than 70 ppm, far below the Ministry of Environment’s “NOx Emission Guideline for Small-scale Burning Appliances”.

Listed below are the advantages of “Eco-Feel” 1. Waste Heat Recovery: An additional heat exchanger is installed to recover exhaust heat usually emitted into the air. The efficiency of “Eco-Feel” is improved to 95%, resulting in less kerosene consumption.

Exhaust Heat Approx. 200˚C Exhaust Heat Approx. 60˚C

Primary Heat Exchanger Secondary Heat Exchanger Heat Efficiency er

Primary Heat Exchanger

er Heat % ater Heater 83 t Wa I Lower NOx Emission Attained Neutralizer (ppm) Conventional Boiler Environmentally Frendly High Efficiency Boiler eel” 95%

NOx Concentration in Exhaust Emissions (ppm) Conventional W 140 “Eco-F

120 Kerosene 100 Water Kerosene 100 Water 100 50% Decrease 62.5% Decrease Hot Water 83 Waste Water Hot Water 95 in NOx Concentration in NOx Concentration 80

60 2. CO2 Emission Reduction: Compared with a con- 40 ventional water heater (83% efficiency), “Eco-Feel” 20 130 ppm 65 ppm 120 ppm 45 ppm required 12% less kerosene for burning and

0 decreased CO2 emissions by 12%. 2-Ton Boiler burning Fuel Oil A 2-Ton Boiler burning Kerosene

61 Efficient Use of Oil

I CO2 Emissions In addition, the price of kerosene per 1kW is about Annual Reduction 30% of the cost of electricity in daytime, and about 197kg-co2 60% that of city gas. Kerosene is more economical and friendly to household expenses than either elec-

1,560 1,363 tricity or city gas. kg-co2 kg-co2

Annual CO2 reduction equivalent I Waste Heat and Transportation Loss of Electricity to 14 cedar trees Conventional Eco-Feel

*For a typical family of four members, “Eco-Feel” emits 200kg less CO2 a year compared with a conventional heater. As it also saves 79 liters of kerosene a year, “Eco-Feel” is an ecological and economical water heater.

Central Hot-Water Heating System, “Hotto- Sumairu” (Hot Smile) Total energy efficiency 37%

As household heating and cooling performance is Waste heat and improving through the introduction of super-insulated transportation loss 63% which are not utilized houses, concerns about the safety and hygiene aspects of air conditioning are growing. To meet such concerns, the petroleum industry is disseminating the advantages of a kerosene-based central hot-water I Comparison of Energy Cost heating system. A registered trade name, “Hotto- Sumairu”, was chosen in agreement between PAJ Kerosene 1.00 and LGKA for joint promotion of the system. As the LP Gas 2.23 hot water made by a kerosene-fired boiler is used for heating, the room is free of exhaust gas and would be City Gas 1.65 Electricity kept in a pollution-free condition. “Hotto-Sumairu” (Nighttime) 11p.m.～7a.m. 1.03 promotion is directed not only at detached housing Electricity (Daytime) but also at housing complexes. 7a.m.～11p.m. 3.36

Electricity (Meter-rate 2.67 lighting)

0.0 1.0 2.0 3.0 4.0

Source: Oil Information Center (national average as of October 2010)

I Coefficient of CO2 Emission by Energy Source (kg/CO2/kWh)

Kerosene is Friendly to Environment and 1.00 Kerosene 0.244 Household Economy There are various sources of energy familiar to us LP Gas 0.213 besides kerosene such as gas and electricity. Among these, the amount of carbon dioxide exhaust attribut- City Gas 0.180 able to kerosene is actually less than that from elec- Electricity (Actual tricity. This is because the transmission loss and heat coefficient 0.412 of emission) loss occurs by as much as 63% before electricity Electricity (After CO2 reaches each home from the power plant. Kerosene, credit 0.351 adjustment) which is considered to emit a large amount of carbon 0.0 0.1 0.2 0.3 0.4 0.5 dioxide, is actually an environmentally friendly energy Source: Ministry of Environment, Ministry of Economy, Trade and Industry, and Federation of Electric Power Companies of Japan source.

62 17 Efforts toward Developing New Energies Expectations for Fuel Cells lized as a first stage of petroleum fuel supply.

With their high energy efficiency and low environ- For Popularization of Fuel Cells mental burden, fuel cells are expected to become a For promotion of fuel cells, the petroleum industry new form of energy supply for household and auto- is making positive efforts in the following areas: motive use. To promote the future popularization of • Technology development of fuel cell systems for fuel cells, the government is taking initiatives in tech- use in cold regions like Hokkaido and for use in nology development and field demonstration. The cases of earthquakes petroleum industry is also advancing its efforts to • Field performance testing of LPG and kerosene develop and spread the use of petroleum-based fuel type fuel cell systems in households and commer- cells as a new energy system. cial outlets • Infrastructure development for fuel cell populariza- Stationary Fuel Cell System tion such as deregulation and the establishment of domestic/international standards A stationary fuel cell system generates electricity, using hydrogen produced from petroleum fuels like Hydrogen Supply to Fuel Cell Vehicles kerosene and LPG, and oxygen in the air. The heat given off from power generation can be used for hot- The petroleum industry is increasing its efforts in water supply in kitchens and bathrooms as well as for developing hydrogen production technologies and in- the heat source of a floor heating system. the-field demonstration of hydrogen filling stations Its major features are: (1) good energy efficiency, (2) for fuel cell vehicles. Oil companies in Japan are par- eco-friendliness. ticipating in the national demonstration projects The advantages of using petroleum fuels are: (JHFC*1/NEDO*2 Projects) to operate various type of (1) Hydrogen for generating electricity can be pro- hydrogen filling stations. duced from common fuels such as kerosene and Future plans include the early establishment of a LPG; these fuels’ supply infrastructures have hydrogen supply infrastructure in four metropolitan already been established nationwide and storage areas to keep abreast of automobile manufacturers’ and transportation are easy. progress in the mass production of fuel cell vehicles (2) Kerosene and LPG supply infrastructures are scheduled for 2015. Furthermore, technology devel- highly disaster resistant, as shown at the time of opment to produce hydrogen from kerosene at a fill- the Great Hanshin Earthquake and the Niigata- ing station site is ongoing from FY2008. This includes Chuetsu Earthquake. Petroleum-based fuel cells a hydrogen manufacturing process using membrane would be an effective energy supply system in separation technology. the event of natural disasters. *1 METI’s Japan Hydrogen & Fuel Cell Demonstration Program *2 New Energy and Industrial Technology Development Organization

Petroleum Industry’s Efforts The petroleum industry has accumulated advanced Efforts toward New Technologies technologies and know-how regarding hydrogen production from petroleum fuels for many years. With Aiming at developing the highly efficient utilization that know-how and the fuel supply infrastructures, of petroleum and supplying high quality products, field demonstrations of a system of fuel cells using PAJ established the Petroleum Industry Technology petroleum fuels have been carried out in households and Research Institute, Inc. (PITRI) in December 1990 throughout the country. As a result, in 2009, sales in order to deal with various technical issues to be activity for fuel cells for household use was started tackled by the petroleum industry as a whole. PITRI under the trade name of "Ene-Farm". LPG was uti- has been conducting research and development

63 Efforts toward Developing New Energies

(R&D) on automotive, industrial and household fuels, Enhancement of Oil-based Heating/Cooling as well as safety management systems for oil refining Systems and storage facilities. In line with the “Oil-based System Promotion Policy In FY1991, PITRI started research activities at its lab- for the 21st Century” which started in February 2001, oratory in Chiba City in collaboration with the PAJ is disseminating the advantages of oil-based Advanced Technology and Research Institute (ATRI) heating/cooling systems to both industrial and house- under the Petroleum Energy Center (JPEC) to carry hold sectors. To support this, PITRI evaluated the per- out various R&D projects. formance and the comfort of “Hotto-Sumairu” (an oil based central heating and hot-water supply system) R&D on Combustion Technologies for and the positive results are being effectively used for Automotive Fuel this system’s promotion. In order to answer the national concern about environmental issues, it is essential for the petroleum R&D on Safety Management Systems for Oil industry to establish quality requirements for automo- Refining and Storage Facilities tive fuel that are attributable to improvements in auto- Aiming at the improvement of its own safety and motive vehicles’ fuel economy and exhaust gas security standards at refining and storage sites, the quality. petroleum industry is reviewing nondestructive With governmental support, the petroleum industry inspection methods and compiling field inspection and the automotive industry jointly completed a data in order to develop self-inspection standards. research program called the Japan Clean Air Pro- Regarding the facilities in operation, the petroleum gram, (JCAP) run in two steps (JCAP-I and JCAP-II). industry is preparing fitness-for-service evaluation The outcome of JCAP activities includes the verifica- standards, in cooperation with API and ASME, to tion of cleaner automotive exhaust gas and better fuel assess the material strength and the remaining life of economy by reducing the sulfur content of gasoline the facilities based on the inspection data acquired for and diesel fuel. Based on this, the petroleum industry these facilities in service. started sulfur-free gasoline and diesel fuel supply. In addition, as Japan is an earthquake-prone coun- In FY2007, a new research project (JTOP: Japan try, an ongoing research study is steadily collecting Auto-Oil Program) was initiated for developing opti- data regarding the effect of longer-cycle seismic vibra- mum automotive and fuel technology to fulfill three tion on oil storage facilities that will contribute to safe- requirements, namely "CO2 Reduction", "Fuel Diversi- ty control in the future. fication" and "Exhaust Gas Reduction", in view of the issues of preservation of air quality, global warming and energy security.

I Early Establishment of Hydrogen Supply Infrastructure

Set up on the Highway

* After the introduction of FCV, nationwide expansion of FCV sales and the maintenance of hydrogen supply infrastructure will proceed

Early Establishment in Four Metropolitan Areas

64 Appendix

I Location of Refineries and Crude Distillation Capacity (Unit: Distillation Capacity in b/d) in Japan (as of Jul 2011)

JX Nippon Oil & Energy (Muroran) 180,000

Idemitsu (Hokkaido) 140,000

Teiseki Topping Plant (Kubiki) 4,724

JX Nippon Oil & Energy (Mizushima) 400,000

JX Nippon Oil & Energy (Marifu) 127,000

Idemitsu (Tokuyama) 120,000 JX Nippon Oil & Energy (Sendai) 145,000

Seibu (Yamaguchi) 120,000

JX Nippon Oil & Energy (Oita) 136,000

Kashima (Kashima) 252,500

Cosmo (Chiba) 220,000 Kyokuto (Chiba) 175,000 Idemitsu (Chiba) 220,000 Fuji (Sodegaura) 143,000

TonenGeneral (Kawasaki) 335,000 Toa (Keihin) 185,000

JX Nippon Oil & Energy (Negishi) 270,000

Idemitsu (Aichi) 160,000

Taiyo (Shikoku) Cosmo (Yokkaichi) 175,000 120,000 Showa Yokkaichi (Yokkaichi) 210,000 Cosmo (Sakaide) 140,000 Cosmo (Sakai) 100,000 TonenGeneral (Sakai) 156,000 Nansei (Nishihara) 100,000 Osaka International Refining Company (Osaka) 115,000

TonenGeneral (Wakayama) 170,000

TOTAL: 27 Refineries (4,619,224 b/d)

65 Appendix

I Overview of the Japanese Petroleum Industry [Oil Refiners and Primary Oil Distributors (Motouri)]

Number of Oil Companies 16 Companies (as of August 2011)

Total Capital 563.0 billion yen (as of Mar 2011)

Annual Sales Revenue 22.754 trillion yen (FY2010)

Total Number of Employees Approx. 20,500 (as of the end of FY2010)

Crude & Product Import Volume 247.4 million kl (FY2010)

Crude & Product Import Amount 143.4 billion dollar (FY2010)

Oil Dependence on Imports 99.6% (FY2010)

I Main Product Specifications in Japan Motor Gasoline Lead Unleaded • 3 (JIS K2202) Density (max.) 0.783g/cm (15˚C) RVP 44~78kPa RON (min.) Premium 96; Regular 89 Sulfur content (max.) 0.0010wt% Benzene (max.) 1vol% MTBE (max.) 7vol% Ethanol (max.) 3vol% O2 content (max.) 1.3wt% •Kerosene Sulfur content (max.) 0.0080wt% (for fuel cell : 0.0010wt%) (JIS K2203) Smoke point (min.) 23mm (in winter season: 21mm) •Gas Oil Pour point (max.) Special No.3: -30˚C; (JIS K2204) No.3: -20˚C; No.2: -7.5˚C; No.1: -2.5˚C; Special No.1: +5˚C; Cetane index (min.) Special No.1, No.1: 50 No.2, No.3, Special No.3: 45 Sulfur content (max.) 0.0010wt% Density (max.) 0.86 (15˚C) Note: 5 grades depending on ambient temperature of seasons and/or districts. •Fuel Oil A Kinematic viscosity (max.) 20mm2/S (50˚C) (JIS K2205) Pour point (max.) 5˚C Sulfur content (max.) No.1: 0.5wt%; No.2: 2.0wt%

•Fuel Oil B Kinematic viscosity (max.) 50mm2/S (50˚C) (JIS K2205) Pour point (max.) 10˚C Sulfur content (max.) 3.0wt%

•Fuel Oil C Kinematic viscosity (max.) No.1 250mm2/S (50˚C) (JIS K2205) No.2 400mm2/S (50˚C) No.3 400mm2/S~1000mm2/S (50˚C) Sulfur content (max.) No.1 3.5wt% No.2, No.3. no specification

Note: Fuel oil is classified into 3 types by viscosity. Even though Fuel Oil A has the name "fuel oil", it's a kind of distillate product. This is used for marine diesel engines, small boilers, etc. Fuel Oil B had been produced in large quantities in the past, but this fuel is rarely produced nowadays. Average sulfur level of Fuel Oil C produced in Japan is about 1.5wt% recently (including all its grades).

Please refer to PAJ’s Oil Statistics Website for Details http://www.paj.gr.jp/english/statis.html

66 Petroleum Association of Japan Keidanren Bldg., 3-2,1-chome, Ohtemachi, Chiyoda-ku, Tokyo 100-0004 Business Environment Department Tel. 81-3-5218-2303 Fax. 81-3-5218-2320 Public Relations Tel. 81-3-5218-2305 Fax. 81-3-5218-2321 http://www.paj.gr.jp/