Viewpoint: Abe’s Japan hits setbacks on energy security

Japanese premier Shinzo Abe's policies have gone some way to enhancing the country's energy security over his six years in power. But a shift in geopolitical and oil market dynamics has set back supply diversification efforts.

Abe took over as premier in December 2012, when his Liberal Democratic party (LDP) scored a major victory in a snap election. Voters, appalled by the rival Democrat party's poor management of the 2011 Fukushima Daiichi nuclear accident , turned to Abe and the LDP to overcome the unprecedented energy security crisis and reinvigorate the economy after years of stagnation.

Japan's energy security has since improved, at least on paper. The economy is set to mark its longest post-war growth streak in January 2019, after having already posted 73 consecutive months of expansion starting in December 2012. This has helped earn Abe another, and final, three-year term in LDP leadership until September 2021, which could make him Japan's longest-serving premier.

But questions remain over the extent to which Japan's energy security has actually improved over the six-year period, and how much of this is the result of Abe's policies.

Equity ratio rises Japan can now meet nearly 30pc of its total oil and gas needs from its own companies' output, up from about 23pc six years earlier. Upstream oil and gas output edged lower to 1.452mn b/d of oil equivalent (boe/d) during the 2017-18 financial year that ended on 31 March, from the 2016-17 record of 1.533mn boe/d, following the expiry of key Indonesian concessions at the end of 2017.

The equity output ratio has been steadily inching up towards Tokyo's 2030 goal of above 40pc, aided also by weakening domestic demand. And Abe's diplomatic efforts have helped Japan to retain key Abu Dhabi oil concessions , adding to the its upstream output.

A further boost came with the October start-up of Australia's Ichthys LNG export project led by Inpex, Japan's upstream champion that is partially owned by the government.

"The $40bn Ichthys marks record overseas energy investment by any Japanese company and is a tremendously dependable project that will supply 70pc of its output to Japan for 40 years," Abe said on 16 November at the project's official opening in Darwin.

Tokyo has long hoped the 8.9mn t/yr Ichthys facility will emerge as Japan's flagship upstream project following the loss of the Neutral Zone oil concession on the border between Saudi Arabia and Kuwait, as well as the operatorship of Iran's massive Azadegan oil development project. Output will further pick up when Inpex commissions the proposed 9.5mn t/yr Abadi LNG export project in Indonesia, although the target date for this has now been pushed back to the latter half of the 2020s.

Setbacks But the increase in upstream output masks a setback in Japan's oil diversification goal resulting from a shift in geopolitical and energy market dynamics. The government plans to reduce oil and LNG supplies from countries that export through chokepoints such as the straits of Hormuz and Malacca, but its heavy and continuing dependence on Middle East oil supplies is a particular concern.

Japan still relies on the Middle East for nearly 90pc of its crude supplies, up from 85pc six years earlier. Imports from Saudi Arabia, which has long been Japan's largest supplier, accounted for 39pc of total 2017-18 deliveries, up from 31pc in 2011-12.

Japan is fast losing its position as a key oil buyer, with demand having fallen by 10pc over the past six years to 3.2mn b/d. It has been edged out of emerging market flows by the rising buying power of its Asian rivals, particularly China and India, forcing it to rely more heavily on traditional suppliers, mostly in the Middle East. Japan is also likely to be replaced by China as the world's top LNG importer in the near future.

And a plan to increase oil and LNG imports from Russia, which Japan considers a key strategic supplier despite sanctions on Moscow, has also stalled. Abe's diplomacy with Russian president Vladimir Putin has so far failed to lead to joint oil and gas development in the Russian far east. Oil and LNG imports from Russia have remained steady over the last six years, totalling around 170,000 b/d and 7mn t respectively in 2017-18, accounting for 5pc and 8pc of Japan's total deliveries.

Japan has been steadily increasing oil and LNG imports from the US, its closest security ally, since the country's shale revolution. Oil imports from the US hit 34,000 b/d in January-October period, up from 28,000 b/d in 2017-18, while LNG imports more than doubled to 2mn t from 830,000t in the same comparison. Japan's imports of cost-competitive, flexible US LNG are likely to increase further, potentially helping offset any pressure from US president Donald Tramp for Japan to hike imports. Japanese companies have committed to take around 15mn t/yr of US LNG.

The US-China trade tension have worked in favour of Japan to some extent, by helping improve Tokyo's diplomatic ties with Beijing. But ties are still frayed. Abe and Chinese president Xi Jinping met at the G20 summit in Argentina in late November, when Abe personally invited his Chinese counterpart to visit Japan next year. But just days later, Tokyo officially lodged a protest against Beijing's unilateral deployment of a drilling vessel in a disputed area of the East China Sea. The two countries have made no progress on their 2008 agreement to jointly develop the East China Sea's massive gas reserves.

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