NS4960 Spring Term 2018 Japan: Energy Security Oxford Analytica China Coal Trends Signal Deep Economic Shifts, April 2016

Overview Japan’s approach to energy security is shaped by island’s Poor resource endowment and Virtually total dependence on imported energy which must be delivered over sea-lanes In 2010 95% of Japan’s energy needs were imported energy 83% oil, natural gas and coal 12% imported uranium to fuel nuclear power generation The Middle East accounts for 90% of Japan’s oil needs and More than one quarter of its LNG supplies Hence energy security for Japan is the same as national security.

Diversification I Although Japan remains highly dependent on imported energy – made great progress in strengthening its energy security over past 4 decades First path through diversification of energy sources Oil powered Japan’s economic miracle and country grew dramatically for the two decades leading up to early 1970s By 1973 oil accounted for 75% of Japan’s total energy Country hard hit by 1970s oil shocks – led to sharp recessions in 1973-75 and 1980-82

Diversification II Since then Japan has worked to diversify its energy mix away from oil toward Natural gas, Coal and Nuclear power generation. Early rule for energy security became the two e’s of energy security, and economic efficiency Which later became the three e’s when environmental protection was added

Diversification III Between 1973 and 2010 oil’s share of energy use reduced from 75% to 42% as replaced by coal, natural gas and nuclear. Use of coal doubled in volume and energy share rose from 17% to 22% total energy Coal largely replaced oil in the power sector. Natural gas increased from 4% to 19% as Japan practically invented the LNG industry Japan sponsored large trading companies in a string of LNG projects in Indonesia, Malaysia, Brunei and UAE

Diversification IV Japan has become the world’s largest LNG importer – 30% of global market and one half Asian market in 2010 Japan also built a large nuclear power generation fleet and nuclear industry that became a major exporter of technology Nuclear generation rose from nothing to 13% of total energy and 30% of electricity by 2010

Improved Energy Efficiency I Second way to strengthen its energy security was through radical improvements in domestic energy efficiency Japan’s energy efficiency has reached the highest in the world, improving by 40% from 1973 to 2009 – in terms of energy used per unit of GDP By comparison Germany used 60% more energy per unit GDP United States 100% more and South Korea 200% more Japan has led in industrial efficiency as well as pioneering development of more fuel-efficient vehicles and hybrids.

National Companies I Japan has also pursued a second track of its own brand of mercantilist energy and resource diplomacy After the oil shocks of the 1970s Japan sought to create competitive Japanese national oil companies Japan National Oil Company (JNOC) was the umbrella Government initially boosted its direct state support of JNOC in attempt to secure control of overseas oil supplies Result has been disappointing Despite large subsidies and investments, Japan’s overseas equity share of oil imports has remained stable at 15% of oil supplies

Improved Energy Efficiency III Under Junichiro Koizumi 2001-06 Japan shifted away from an interventionist approach to energy The upstream oil industry was reorganized JNOC was dissolved and Japan oil, Gas, and Metals National Corporation (JOGMEC) was created JOGMEC was to assist Japanese oil and gas companies in their projects abroad With end in 2006 of Koizumi years, Japan returned to its emphasis on nationally controlled oil supplies In New Basis Energy Policy Act of 2006, government raised its target for oil imports by Japanese companies from 15% to 40% of imports by 2030

National Companies II The Japan Bank for International Cooperation has also been mandated to expand its financial support for Japanese companies in their international oil and gas projects. In the 2020 Strategic Energy Plan, Japan set a goal of raising energy self-sufficiency from 18% to 36% by 2030. Implied an enormous increase in Japanese oil and LNG investments In 2012 the government authorized another $1 billion fund for JOGMEC to support the overseas expansion of Japan’s oil and gas industry Despite these efforts Japan has been largely unable to gain national control over significant amounts of oil abroad or to diversify its heavy dependence on the Middle East

National Companies III Japan has also worked over the past decade to gain access to Russian Far East oil and gas to help diversify its dependence on the Middle East Even though a pipeline was constructed to bring oil from East and West Siberia to the Pacific coast, the results have also been disappointing compared to earlier hopes Japan’s energy security profile in LNG much more positive. Country and its trading companies have successfully developed a diverse range of supplies from nearby and reasonably secure countries. Roughly 27% of LNG comes from the Middle East, mainly Qatar and the UAE Australia is now a major LNG supplier, replacing Indonesia which has diverted gas to domestic market

Nuclear Dilemma I March 2011 earthquake and Fukushima nuclear disaster have triggered resurgence of Japan’s energy security anxieties Most importantly over future LNG supplies The disaster led to the shutdown of the entire 54 unit nuclear power generation fleet and loss of 30% normal electricity supplies On emergency basis shortfall addressed by Rationing electricity Restricting supplies Imposing conservation and efficiency measures and Significantly raising electricity prices

Nuclear Dilemma II At same time country has sharply increased imports of LNG and crude oil to increase thermal capacity Crisis triggered major new energy security concerns over reliable and affordable access to growing but uncertain LNG needs In 2011 power sector accounted for 65% of Japan’s total LNG consumption Much higher imports of LNG needed in the future Also the buying spree after Fukushima disaster led to a severe spike in Asian LNG prices The Asian LNG premium was already a serious concern for Asian LNG buyers

Nuclear Dilemma III LNG import bill rose 52% from fiscal 2010 to fiscal 2011 – about 1% of GDP Increase led to the first trade deficits for Japan in years Adding to Japan’s worries about LNG is uncertainty about the outcome of the domestic debate over nuclear power. Japanese pubic remains deeply opposed to restring nuclear power while government and industry believe the costs of doing without nuclear energy are too high Pre-crisis plans called for nuclear power to increase to 50% of generation by 2030 Filling gap will be extremely difficult and costly

Nuclear Dilemma IV In late 2012 Democratic Party of Japan announced a new plan that would restart existing nuclear power plants but gradually phase out nuclear power by 2040 as plants reached their 40 year life spans Election in December 2012 returned the Liberal Democratic Party which is much more favorable to return to nuclear generation. Abe government announced plans to restart the nuclear plants gradually New Nuclear Regulatory Agency needs to certify plants one by one Still great uncertainty over the scale of returning nuclear supplies