IEEJ: October 2005

Our challenges for the new era ofhigh crude oil price2005Northeast Asia Petroleum Forum
September 21, 2005
Hiroyuki SatoGeneral ManagerCrude Oil & Products Acquisition Dept.
Japan Energy Corporation

IEEJ: October 2005

Backgrounds of the Steep Rise in Crude Oil Prices
JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO

¾ Robust demand growth

Spare Production Capacity of OPEC& Crude Oil Prices(Dubai)
Million B/D6¾ Lack of spare production
capacity

45540354¾ Tightness of global
refining capacity$/B
503025320¾ Geopolitical risks

2151010019931994199519961997199819992000
20012002200320042005¾ Flow of new speculative
funds into the commodity
market5Spare Capacity

Dubai Price

Source:IMF
2IEEJ: October 2005

Medium-Term Outlook of Crude Oil Prices
JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO

¾ Market dominance byOPEC¾ Arc of instability in Eurasia¾ Crude oil becomes afinancial instrument

OPEC and Non-OPEC Oil Supply(History & Projections)
Million B /D%

7046
OPECNon-OPEC
Share of OPEC

60

4442504040¾ Need for investment inquality upgrading

3830362034
10Crude oil prices expected
to stay strong and volatile

32030
1990

20022005

2010

2015

2020

2025

Source:EIA

3

IEEJ: October 2005

Implications of High Crude Oil Prices
JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO¾ Wide light-heavy crude oildifferential¾ Increase of products tradevolume in the Asian region¾ Changes of demand structure¾ High dependence on theMiddle East
¾ Oil producing countries’interests in downstream

API diffrential among ourselected 16 crude oil(￠/API)
7060
504030201009 7 99 8 99 9 00 0 00 1 00 2 00 3 00 4 00 591112222224

IEEJ: October 2005

Restructuring of the Japanese Oil Industry
JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO

¾ Oil policies promote “efficient supply” based on market mechanism¾ Increase of products imports and sluggish domestic market¾ Rationalization of refining capacity in response to demand decrease¾ Utilization of reformate gasoline for petrochemical business¾ Utilization of residue fuel for IPP
Employees of Oil Industry

Number of Service Stations

Crude Oil Distillation Capacity(10,000B/D)

40000
540

60000

530

58000

35000

56000

30000

520
510
500

54000

490

52000

480

25000

50000

20000

470
48000

460

440

15000

46000

450

199319992004

44000

1000019931999

2004

19931999

2004

5IEEJ: October 2005

Changes in Crude Oil Acquisition Section
JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO

¾ Procurement of lighter
crude oil
¾ Reduction of number ofloading ports to cut costs

10,000B/D

480

Trends in Crude Oil Imports %95

470

Quantity

460

Share of theMiddle East90

450
440
85

¾ Low inventory policy tostreamline financialconditions

430
420
80
410
400

¾ Use of oil derivatives forhedge operations

39075380370

7094 95 96 97 98 99 00 01 02 03 04
19 19 19 19 19 19 20 20 20 20 206IEEJ: October 2005

Implications of Wide Light-Heavy Differential
JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO

¾ Need for investment inSingapore Rifining Margins
secondary units to cope with $/BBL
7demand structure changes
CrackingMargins
and products export
6Hydroskiming①How long will current lightheavy differential continue?
②How long will China continue
to import products?
③Sluggish domestic prices dueto over- capacity of supplyMargins

54321

Wide light-heavy differential 0causes competitiveness gaps -1 2000 2001 2002 2003 2004 2005
among oil refineries
Sources:PLATT’S & Other Sources
7

IEEJ: October 2005

Implications of Expansion of Products Trade in Asia
JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO

¾ Need for transparency andinformation sharing in theAsian products market

Trade Balance of Petroleum
Products in Asia
(Projected by IEEJ)←Net Import Net Export→Japan¾ Matured products market
could affect pricing schemeof Middle Eastern crude oilChinaS.Korea
Taiwan
Northeast Asia Total¾ Internationalization ofJapanese domestic pricing
system may be required

Other East Asia
East Asia Total
Other Asia
Asia Total-3500 -3000 -2500 -2000 -1500 -1000 -500

2010

2015

0500

1,000B/D

8IEEJ: October 2005

To Cope with High Dependence on the Middle East
JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO JOMO¾ Enhancing multilateralrelationships withMiddle East oil
producing countries¾ Crude oil source
diversification¾ Other measures forsupply security

Crude Oil Imports by Source inEast Asia (History & Projections)

2002

2020

2030

- Pipeline project- Securing sea lanes- Oil stockpiling, etc.

1,000B/D

0Middle East

10,000FSU

20,00030,000AfricaOthers

Source:IEEJ
Contact: report@tky.ieej.or.jp

9