Japan Oil and Gas Report Q1 2007

The latest Japan Oil & Gas Report from BMI forecasts that the country will account for 19.8% of Asia/Pacific regional oil demand by 2010, while not contributing significantly to regional supply. Asia/Pacific regional oil demand rose to an estimated 24.74mn barrels per day (b/d) last year and should average 25.36mn b/d in 2007, before reaching 27.64mn b/d by 2010. Asia/Pacific gas consumption in 2006 is estimated at 419bn cubic metres (bcm), with demand of 602bcm targeted for 2010. Production last year of 342bcm should reach 490bcm by the end of the decade. Japan's share of gas consumption in 2006 is put at 20.5%, while it has no meaningful share of production. By 2010, its share of demand is forecast to be 16.45%. For the whole of last year, our preliminary estimates of average prices are US$61.30 per barrel for the OPEC basket, US$65.03 for Brent, US$66.24/bbl for WTI and US$61.30 for Urals. For 2007, the revised BMI forecasts are for the OPEC basket to average US$55 per barrel.

Based on last year's typical price differentials, this implies Brent at US$58.72, WTI averaging US$59.94/bbl, and Urals at US$55 per barrel. Our central view is that the OPEC basket price will slip from US$55/bbl this year to US$50 in 2008, before settling around US$45/bbl in 2009/2010. Japanese real GDP growth is forecast by BMI at 2.2% for 2007, down from an estimated 2.6% last year. We are assuming 2.5% growth in 2008, 2.4% in 2009, followed by 2.2% in 2010. There is little domestic upstream activity, with local state and private firms concentrating on international exploration efforts. The outlook for domestic oil and gas production therefore remains poor. Oil consumption is forecast to increase by around 0.5% per annum to 2011, implying demand of 5.48mn b/d by the end of the forecast period. The country should also be consuming 102.6bcm of gas by the end of the period, all of which will be imported in the form of liquefied natural gas (LNG). In the BMI Business Environment Ranking matrix, Japan receives an unchanged composite score of 30 which now ranks the country equal ninth out of 14 states included in the Asia/Pacific region, alongside the Philippines and Pakistan. The overall business environment can be considered neutral in a regional context, thanks largely to a low level of perceived political risk and a deregulated oil industry. The country has virtually no oil or gas resources, which restricts its appeal to IOCs. However, the regulatory regime is benign and an effective competitive framework exists. Japan is a major oil and gas consuming country, although growth in oil demand is progressing very slowly.