Sino-Japan Energy Cooperation Inspired by East China Sea Dispute Settlement Prospect

International crude oil prices have risen to $122 per barrel, and the dispute over oil and gas fields in the East China Sea is a distinct obstacle on the road to any Sino-Japanese harmony. Chinese President Hu Jintao’s is using his present visit to Japan as an opportunity to push towards a resolution of the problem and promote energy cooperation between the two nations.

A war for East China Sea oil?

Prior to Hu’s visit, a Japanese political critic told an oil company president at the gathering of a journalists�club that Japan and China could not avoid a war in the future, just for the oil in the East China Sea. But the oil man replied that if the war broke out, neither country would get the oil. By a show of hands, nine of the seventeen people present opposed the war, five of them worried it was inevitable, and the other three declared it impossible.

President Hu said in Tokyo that the two countries had made significant progress in talks on the joint exploitation of East China Sea resources, and the two parties had seen prospects for resolution, deciding to accelerate the talks to reach an agreement as soon as possible.  

Meanwhile, PetroChina, China’s biggest oil company, has signed a letter of intent in Tokyo with Nippon Oil Corporation (NOC), Japan’s largest oil and gas processor, to set up a joint venture refinery. This will be the largest recent China-Japan energy project. PetroChina enjoys advantages in resources and sales experience in the Chinese market, while NOC has excess refining capacity.  

PetroChina general manager Jiang Jiemin is now in Japan accompanying President Hu. PetroChina will acquire a 49% stake in a NOC’s refinery based in Osaka, which will be the first joint refinery project between the two countries�oil firms. NOC declared the two parties would finish negotiations before April 2009. In the joint venture PetroChina will take charge of the crude oil supply and product sales.

Watari Fumiaki, president and CEO of NOC, emphasized that this was only the first step in the cooperation with PetroChina to expand its Asian business. "We plan to construct the Osaka refinery into an export center," Mr. Watari said. With an aging population and younger drivers looking for more fuel-efficient cars, oil consumption growth is slowing and Japanese oil firms, with excess refining capacity, are seeking overseas business opportunities.

To increase oil product exports, Japanese oil companies are now erecting infrastructural projects such as port facilities, aiming to develop business in the fast growing China-India-Asia market.

Mr. Watari also said that, at the moment, NOC was not considering an equity swap with PetroChina.

NOC and China

NOC has been exporting oil products to China since 2004 when it signed an oil-refining contract with PetroChina. PetroChina International, a PetroChina subsidiary, sources the oil from the Middle East and has it processed by NOC in its refineries in Osaka, Sendai and other cities. The Osaka refinery has the smallest capacity among NOC’s six refineries, while its biggest, in Negishi, has a capacity of 340,000 barrels a day. At the beginning, NOC provided PetroChina with 20,000 barrels a day. In 2007, that amount reached 70,000 barrels a day.

The two companies have signed a 2008 contract for processing 3.5 million tons of crude oil.

The NOC-PetroChina relationship has deepened since Premier Wen Jiabao’s visit to Japan last year. The two firms signed a memorandum to further expand their collaboration during Wen’s visit.

The cooperation between the two also includes NOC promoting car maintenance services in PetroChina’s gas stations in Beijing and processing of PetroChina’s refrigerator oil from the Karamay oil field.

 

Besides its deals with PetroChina, NOC has also set up join ventures in Tianjin and Guangdong with the other Chinese oil colossus, Sinopec.

After the release of the announcement of its arrangement with PetroChina, NOC’s share price experienced its biggest single day jump in nearly eight months. 

Prudence in the East China Sea

NOC has always showed caution in the exploitation of resources in the East China Sea. Mr. Watanabe, a former NOC president, said when he was still working for NOC that Japan should remain prudent on the exploitation of oil and gas fields in "seriously disputed sea areas". In 2005, when Teikoku, another of Japan’s big oil companies, applied for an oil and gas exploitation license in the East China Sea, Watanabe said the government should consider a commercial relationship with China. But in July of that year, Teikoku was licensed to drill in fields east the "middle line".

Due to the convention of equity swap between Japanese companies and additional purchases in the stock market, by November 15, 2005, NOC had become Teikoku’s largest shareholder, with a 20.4% stake. The latter formed a joint holdings company with Inpex Holdings, Japan’s largest oil developer, in April the next year, and the two will merge completely into one firm by the end of this year. NOC suggested to Teikoku/Inpex when they declared their merger that the two parties should reinforce their collaboration and gradually realize a merger of all three companies.