Japan's Oil Sector Lags Behind Competitors, Report Urges Reform

Japan's oil sector is underperforming due to a lack of strategic investment in productive oil fields and insufficient returns on assets, according to a report by Booz-Allen & Hamilton. The consulting group advises the government to acquire more overseas reserves, consolidate exploration companies, and align with foreign oil groups to improve efficiency and reduce reliance on imports. The report highlights the industry's failure to monitor project performance, leading to low productivity and return on assets. Japanese oil companies' management decisions have resulted in a ratio of after-tax earnings to fixed assets of only 3.2%, compared to an average of 13.7% at major western oil groups.

Key Takeaways:

• The Japanese oil sector is underperforming due to a lack of strategic investment in productive oil fields and insufficient returns on assets.
• Booz-Allen & Hamilton advises the government to acquire more overseas reserves to improve the industry's efficiency and reduce reliance on imports.
• The report recommends consolidating the number of exploration companies from 25 to as few as three and aligning with foreign oil groups to gain better access to reserves overseas.
• Japanese oil companies have failed to monitor project performance, leading to low productivity and return on assets of only 3.2%.
• The industry's management decisions have resulted in a high ratio of operating costs, making it difficult to compete with foreign oil groups.
• The report suggests that Japanese oil companies are too diversified geographically and have made investment decisions with little concern for marketability.
• The government's subsidies for exploration projects have created huge debts in the sector and given companies little financial incentive to seek high returns on investments or assets.
• The reforms proposed by the report would dramatically reduce the number of companies that receive subsidies from the Japan National Oil Corporation (JNOC).
• JNOC has already confirmed that an exploration group was forced to abandon its stake in an oil and gas project off southern Indonesia due to smaller-than-expected reserves.

Statistics:

• The ratio of after-tax earnings to fixed assets in Japan is 3.2%, compared to an average of 13.7% at major western oil groups.
• The Japanese oil sector has invested heavily in exploration rather than seeking a balance with acquired reserves.
• Up to 70% of exploration costs are funded by the Japan National Oil Corporation (JNOC), whether the project finds oil or not.
• The industry is too diversified geographically, with a focus on Asia and the Middle East, where taxes are higher.
• The government's subsidies for exploration projects have created huge debts in the sector.

Sources:

• Booz-Allen & Hamilton, report compiled for the Ministry of International Trade and Industry (Miti).
• Financial Times Limited, 1999.