Interview with Mr. Yoshiyuki Iwai (left), Director General for Natural Resources and Fuel Department, Ministry of Economy Trade and Industry (METI) and Mr. Toshio Ochiai (right), Executive Vice President of Japan Oil, Gas and Metals National Corporation (JOGMEC)

Hello Mr. Iwai and Mr. Ochiai, thank you for taking time to speak with our readers. Before we begin, can you tell us a little about your backgrounds?

(Mr.Iwai) I joined Japan's Ministry of International Trade and Industry (MITI), the precursor to today's Ministry of Economy, Trade and Industry (METI) after graduating from the University of Tokyo Faculty of Law in 1978. In recent years I have held several senior positions inside METI's Agency of Natural Resources and Energy (ANRE). This includes assignments in fields such as nuclear energy, electricity market maintenance, energy conservation, and renewable energy. This includes directing activities to drastically reform Japan's electricity rate system and with the ratification of the Kyoto Protocol, introduction of the Rationalization in Energy Use Law to maximize efficiencies in the transportation sector.

One achievement I am especially proud of was the adoption of a New National Energy Strategy last May. This includes comprehensive measures to secure essential natural resources. One important goal is to strengthen Japan's overall relationship with oil producing countries. We are seeking to bring the oil volume ratio on exploration and development by Japanese companies to 40% by 2030. I plan to draw on my background in developing bilateral and multilateral trade and economic cooperation agreements to help realize these targets.

To do so, however, we must actively diversify our oil and energy supply sources from the Middle East to Africa, South America, the United States, Canada, Australia and Russia. A plan to enhance the national benefits for all countries that are part of these agreements is essential. That will require adopting a balanced mid- to long-term perspective so that success can be achieved and sustained over time. We must also strengthen economic relationships through cooperation -- not only in the energy and resources sector -- but in a wider context dealing with a range of critical issues such as social infrastructure. To achieve this goal, we wish to strategically utilize overseas development assistance and to promote summit level diplomacy that addresses these issues.

(Mr. Ochiai) I also joined MITI after graduating from the University of Tokyo, Faculty of Law in 1967. At MITI I spent over 10 years in positions that focused on natural resources and energy. This included assignments that dealt with the public regulation of electric power & gas business, promotion for oil exploration and production (E&P), energy efficiency & conservation, the development of new alternative energy sources like fuel cell & hydrogen strategy, mine pollution control, and nuclear safety regulation.

From 1980-1983 I was also fortunate enough to serve as economic consul in the Japanese Consulate-General in New York. During that time I developed good ties and relationships with many U.S. major oil and resource companies.

When I was the deputy director of the petroleum exploration division at MITI, I helped to enact international treaties and domestic laws regarding joint development in the Continental Shelf between Japan and South Korea. Moreover, as a director of the Japan National Oil Corporation (JNOC), I was heavily involved in tough negotiations with China about off-shore oil E&P activities in China.

After retiring from MITI in 1997, I accepted the post of Managing Director of the Nippon Steel Corporation. As head of their engineering division, I helped to direct projects such as the construction of oil and gas on/off-shore pipelines and off-shore oil E&P platforms in domestic areas as well as South-East Asia. One of my biggest achievements was the construction of a 140-mile oil pipeline from Chayvo to DeKastri Terminal as part of the Shakalin-1 project.

Since 2006 I have been the Executive Vice President of Japan Oil, Gas and Metals National Corporation (JOGMEC).

Mr. Iwai, can you tell us about METI, its role in Japan's energy and resource market, especially its activities in respect to promoting efficiencies, deregulation and other measures to enhance the competitiveness in energy sector in Japan?

(Mr.Iwai) Securing a stable energy supply is the most important mission of our country's natural resources and energy policy. At the same time, however, we must also address the high-cost structure, and enhance the international competitiveness and security of, our energy sector.

The repeal of the Provisional Measures Law on the Importation of Specific Refined Petroleum Products in 1996 and the Petroleum Industry Law in 2002 brought an end to our country's regulations governing adjustments to supply and demand in peacetime and liberalized our oil market. As a result, companies are learning to compete through their own management efforts and oil is now supplied in a more efficient and stable manner.

Oil refiners and wholesalers have also begun to use merger activity as a means of streamlining their systems to procure and to supply oil, minerals and other resource products and commodities.

As a result, refining capacity in Japan has decreased by 10% during 2002 and 2006. This has caused large declines in the number of employees in the sector, from about 36,000 in 1994, which can be see as a period of "peak" employment to about 20,000 today. These numbers show how market liberalization has enhanced the competitiveness of our domestic oil industry.

This reduction of refining capacity has contributed to the development of far more efficient domestic supply systems. As an outgrowth of these efforts, the prices of oil products, particularly gasoline, has declined drastically. This is true even though global prices of oil products have been trending upwards in recent years due to soaring crude oil prices, and other developments that have impacted both supply and demand.

Additionally, even though the introduction of market mechanisms is helping to rationalize and introduce greater efficiencies in the sector, energy security is becoming a much more serious concern given geopolitical concerns and the dramatic changes that are currently emerging within the international oil market. I believe these improvements have led to a more competitive and efficient oil industry. This should be viewed positively, since it will contribute to energy security, both within and outside Japan. For example, in spite of the reduction we have seen in Japan's oil refining capacity, we are still able to obtain sufficient oil products to meet domestic demand. At the same time, our emergency response policy is secured by our Petroleum Stockpiling Law, which was revised in 2001. We will continue to carefully examine our practices and policies, including those related to petroleum product stockpiling, to raise our energy security to a higher level.

Mr. Ochiai, can you tell us about JOGMEC, its history and current mission? In addition to support that promotes exploration and production activity, can you also talk about its role in facilitating new extraction, conservation, and other relevant technologies and to help stockpile resources in Japan.

(Mr.Ochiai) JOGMEC is a 100% government owned organization. It was established in February 2004 by integrating what was formerly the Japan National Oil Corporation (JNOC) and the Metal Mining Agency of Japan (MMAJ). Both organizations had a 40+ year history, and had helped to secure a stable supply of natural resources and energy to Japan. JOGMEC has inherited this mission, but has also achieved efficiencies by integrating human resources and other relevant functions. More than 450 staff now devote themselves to JOGMEC's activities, funded by a budget that amounts to about $1.4 billion US dollars in fiscal year 2007.

JOGMEC has three main functions. First, in cooperation with other government agencies, JOGMEC supports Japanese companies that are active in exploration and the development for oil, natural gas, non-ferrous metals and minerals. One of our primary tools is to provide financial assistance, such as the provision of equity capital and liability guarantees to encourage E&P activities. JOGMEC also possesses cutting-edge technologies, such as that reqired to enhance oil recovery in oil fields, or bioleaching and recycling technologies in metals. This helps us to attract many resource developers and partners.

Second, JOGMEC is engaged in the national stockpiling of oil, Liquefied Petroleum Gas (LPG) and rare metals. Most importantly, JOGMEC is responsible for the management operations of about 300million bbl of oil stockpiling. This is the second largest volume in the world. We manage these materials and stockpiling facilities in a safe and efficient manner. This includes their expeditious release in case of emergency.

Third, JOGMEC provides technical assistance to municipal governments or private companies that have responsibility for mine pollution control over suspended or abandoned mines all over Japan.

In summary, JOGMEC is dedicated to establishing a stable supply of natural resources and energy to our nation. This helps us to contribute to the industrial development of Japan and to enrich the lives of all Japanese people through the broad range of activities outlined above.

Japan has developed the world's second largest economy -- yet has few of the natural resources it needs to meet its energy and mineral requirements. This is true both domestically and as a major manufacturer of products for sale around the world. Can you tell us about Japan's relative market size and the resulting demand for energy and mineral resources, its importance within energy and mineral resource markets and where it currently obtains its supplies?

(Mr.Iwai) While energy and mineral consumption in our country is very large and we occupy an important position of world consumption share, we are heavily dependant on overseas sourcing. This is because only a very small portion of these resources can be found within Japan. The main producer countries are different for each resource and can be seen in the table below.

You will see we depend on the Middle East for nearly 90% of our oil imports. As for natural gas, Japan imports almost all our needs in the form of liquefied natural gas (LNG). We depend on Southeast Asia, including Indonesia, Malaysia and Brunei for over 50% of our supply. For this reason, stable supply of energy and mineral resources from overseas is one of our most important concerns.

We often speak with US and international investors and industry professionals who have little knowledge of Japan's resource sector. It is therefore difficult for them to obtain exposure or to develop partnerships given there is a scarcity of foreign listings for, and published information about, these firms. Is resource activity in Japan largely confined to large trading companies and other major firms? Are there also smaller exploration and service firms? How is the industry structured, and how might it differ from what we see in the US, Canada or other markets?

(Mr.Iwai) Oil and natural gas exploration activities in Japan are not confined to large companies. On the contrary, those Japanese companies engaged in resource activities are generally smaller than the large-cap "major" firms seen in the United States and Europe.

Given intensifying global competition for oil and natural gas resources, however, we think it necessary to develop and reinforce larger "core" companies that can play a pivotal role in Japanese oil and natural gas exploration activity. This is necessary so that they can obtain the scale and the financial and technical capacity needed to fund and manage a more globalized project portfolio.

INPEX Corporation (1605.JP), for example, is one such core company that went public in 2004. In 2005, the corporation agreed on management integration with Teikoku Oil Co., Ltd. and a joint holding company was created in April 2006. As a result, this integrated company is equipped with technological capacity and certain funding ability and now has become a full-fledged core company in Japan.

Beside these exploration firms, which specialize in the upstream sector, general trading companies and oil distributor-affiliated exploration firms are also engaged in oil and natural gas exploration in foreign countries.

In the mineral resources sector, resource activities are not confined to major companies. The Japanese mining industry has a tradition; once "Zaibatsu" (large industrial and financial conglomerates) played a central role in developing gold, copper and coalmines throughout Japan in vertically integrated operations. However, domestic mines, except for some coalmines, have been closed and firms are now buying raw materials from overseas suppliers. As a result, this industry is now primarily composed of moderate sized companies that are engaged in exploration and sourcing from foreign countries, with their main aim being to secure raw materials for processing at their domestic smelting facilities. One of the salient differences from American and European markets, however, is that we do not have companies carrying out exploration activity on a global scale.

One major problem in the resource industry has been the reluctance of investors to reward exploration, due to the recognition of the risk of this activity. As a result there has been a dearth of new projects at a time when the BRIC (Brazil, Russian, India and China) and other emerging economies are growing as never before and causing large increases in demand. At the same time, analysts such as Matthew Simmons talk about "peak oil" and a lack of basic material inventories and major firms such as Royal Dutch announce downward revisions in their reserves, making it unclear how they will ensure adequate supply moving forward. How do you view this phenomenon and what is JOGMEC, METI and/or Japanese resource firms doing to address this problem?

(Mr.Iwai) The peak oil theory is based on diverse assumptions about such factors as the ultimate recoverable oil reserves, the rate of a drop in oil production in each oil field, oil price trends, and production estimates of non-conventional oil such as oil sands. It remains to be seen whether these analyses are justifiable as a result. However, as the world's oil demand is expected to further increase, given expected growth, particularly in the emerging economies, there is a concern that uncertainties may increase about the timely expansion of oil production capacity to meet expected increases in demand.

The Japanese government intends to focus its efforts on upstream-sector exploration of oil and natural gas. This includes diversifying energy supply sources by further promoting conservation measures as well as nuclear power development, and expanding the use of natural gas. These and other measures are designed to help us maintain a stable energy supply.

(Mr.Ochiai) The so-called "peak oil" theory, which claims that peak oil production will come before 2010, is based on an under-estimation of world oil resources, lying at around 2 trillion barrels, while most of the oil companies support the study of the US Geological Survey, which asserts that the ultimate oil resources of the world should be estimated at 3 trillion barrels, one and a half times larger. In that case, oil production will be able to meet global demand far beyond 2010. And what's more, continuous investment in oil and gas development and the effort to accelerate R&D activities for exploration and production technology will expand the total volume of the world oil resources and push away the shadow of a creeping oil peak.

In addition, unconventional resources such as ultra heavy oil, natural gas liquids and deep-water oil as well as the oil sands will be increasingly supplied to the oil market. This will surely postpone the arrival of peak oil. The effect of energy saving technology should not be ignored either, since it will lengthen the period of oil production. The timing of peak oil depends on how these efforts will be accomplished by the oil and gas industry and the public sectors.

So far, however, Japanese firms have shown no reluctance to make investment in the field of oil and gas developments and JOGMEC will keep supporting these efforts to expand supply.

Many major producers prefer to make minority investments in smaller firms rather than to assume risk on their balance sheets. As they achieve success, they increase their exposure as circumstances warrant. Many of the smaller firms we speak with, however, complain they are not adequately rewarded and would prefer to see projects through to a more advanced stage. How interested are Japanese firms in making strategic investments, and developing production and other business relationships with, smaller non-Japanese exploration companies? What are there preferred methods of cooperation? Are there Japanese government programs that encourage this activity?

(Mr.Iwai) Japan's oil and natural gas exploration business is primarily composed of numerous small project firms and a few small- and medium-sized firms. As global competition for oil, natural gas and mineral resources intensifies, however, we think it imperative to nurture and strengthen core companies that are large enough to be competitive in the international marketplace and have both the management and technological capabilities needed to encourage oil and natural gas exploration by Japanese companies.

Under these circumstances, the integrated energy company, INPEX Corporation, which I references earlier, has become as large as many of the world's middle-standing oil exploration firms in terms of production. This company also has substantially improved its engineering staff and, consequently established a foundation that enables it to successfully compete or cooperate with foreign oil exploration forms.

The Japanese government intends to continue its efforts to nurture and reinforce core companies of this kind. It also encourages the formation of alliances and other business relationships between smaller firms as well.

(Mr.Ochiai) As Mr. Iwai noted, Japanese oil and gas companies are relatively weak in terms of financial and technological ability or the size of their technical staff, compared with European and American major companies. More time will be needed to foster and strengthen Japanese core exploration and development companies with international competitiveness. Therefore JOGMEC's financial and technological assistance is expected to reinforce the future competitiveness of Japanese firms.

How can JOGMEC more effectively support these companies? In addition to the financial and technical assistance I described at the start of this interview, JOGMEC also conducts its own activities. For example, we directly approach, and deal with, National Oil Companies (NOCs) within host countries to enhance Japan's ability to enter into promising projects. Now that higher oil prices are bringing ample budgetary revenue to oil producing countries, they want foreign advanced technologies for future sustainable development, not simply capital alone. Joint research and practical training programs based on JOGMEC's cutting-edge technologies are welcomed and highly evaluated by many NOCs. Another example is where JOGMEC proposes preparatory and basic exploration work plans. This includes geological and geophysical surveys or exploratory drilling in frontier areas where some NOCs cannot take sole action due to high technological risk.

Making reliable partnerships with host countries will be more important to each party because we do business with exhaustible energy and natural resources. The recent case of the Shakalin-2 project illustrates this clearly. As a government organization, JOGMEC emphasizes enhancing co-operation and partnership with host countries and building win-win situations. As such, our efforts will pave the way for the future participation of Japanese companies in a greater number of projects in the decades to come.

As you noted, much of Japan's hydrocarbon supply is coming from the Middle-East, an area of increasing political tension. As the risks emanating from that region are not likely to be rectified for some time, are other sources of supply assuming greater importance? To what regions are you now turning your attention? How do you perceive the present environment for political risk and how do they manage their exposure?

(Mr.Iwai) As Japan relies on imports from the Middle East for nearly 90 percent of its oil requirements, we think it important to diversify sources of oil supply. Specifically, we are making it a policy priority to push ahead with the Sakhalin projects and the Pacific pipeline project as well as oil exploration outside the Middle East. This includes activities in Central Asian countries such as Azerbaijan and in African countries such as Libya.

Meanwhile, as resource-supplying countries step up state control over their natural resources and there is increasingly keener resource-seeking competition among consuming countries, we think it necessary that the Japanese government and related agencies such as JOGMEC enhance support measures for exploration activity by Japanese oil exploration firms.

Accordingly in this fiscal year's budget, the upper bound on JOGMEC's investment in, and debt guarantee to, companies has been raised from the present 50% to 75%. In addition, a new trade insurance system has been created to support exploration investment and a supply of capital has been raised to secure resource concessions.

We will continue to devote these public-private sector concerted efforts to enhance exploration and the development of oil and natural gas resources by Japanese companies.

(Mr.Ochiai) The goal of the New National Energy Strategy is to bring the national flag oil volume ratio on exploration and development by Japanese companies to 40% by 2030. How can JOGMEC help to achieve this goal? Our challenge is to determine how JOGMEC can meet the needs of Japanese private companies as well as how JOGMEC itself can take the initiative and play a key role for Japan's energy security.

At present, JOGMEC sets the strategic fields or target areas where we should concentrate our investment and advantageous technologies. For oil and gas exploration and development, we focus on existing oil and gas producing countries, deep-water areas, heavy oil and ultra heavy oil areas and frontier areas. For metal exploration and development, we are paying more attention to the Pacific Rim, and frontier areas like Africa, and Central Asia where we can expect a great amount of uranium and rare metals reserves.

High risks still exist for Japanese companies even though they are interested in investing in those fields or areas. So JOGMEC needs to mitigate their hesitation and push them forward, and our financial and technological supporting tools must be attractive for them. In this sense, the recent buildup of JOGMEC's financial ability is deeply related to the government's strategy. This move was welcomed by many Japanese companies.

As international competition accelerates, the current Japanese government's policy for securing natural resources and energy abroad becomes more important. It is necessary for both the Japanese government and JOGMEC to get together and drive forward to achieve this national goal. Recently, JOGMEC's top management visited the Middle East and Central Asia as members of the government-people joint delegation led by Prime Minister Abe as well as METI Minister Amari. There were good results in that we strengthened energy security ties with Saudi Arabia and the United Arab Emirates, and signed joint development agreements of oil, natural gas and uranium with Uzbekistan and Kazakhstan. As an energy specialist organization, JOGMEC will be expected to become more active and to take a leadership role in facilitating this process.

A growing concern in the mining and energy sector is the need to address environmental, safety and other areas of social concern, including the needs of workers and other local constituencies. One can see, however, as two of many possible examples, the case of Newmont in Indonesia or Grupo Mexico in respect to alleged water contamination, that problems arise, even when major firms seek to address this challenge. How do Japanese firms perceive this issue and what steps are they taking to ensure good relationships in the counties in which they operate, many of which may not possess the same degree of legal and regulatory clarity that one might find in Japan, the US or other developed markets?

(Mr.Iwai) The awareness of environmental protection and need to contribute to society is growing all over the world. Even in the mining sector, the reduction of environmental impact and contribution to the local community is required for Japanese as well as U.S. and European companies. Japanese companies participate in the private activity such as The International Council on Mining and Metals (ICMM) and cope with the environmental protection and local community.

(Mr.Ochiai) With regards to mining activity, Japanese mining companies have been conducting exploration and the development of mineral resources overseas to ensure the principles of Sustainable Development and show consideration to all stakeholders. Especially, they actively work through the ICMM, as the idea of Corporate Social Responsibility has been widespread to focus on environmental and social outcomes. For example, many mining companies drafted their Sustainability Report based on guidelines set forth by the Global Reporting Initiative (GRI). They also recognize various international initiatives to improve transparency, including the Extractive Industries Transparency Initiative (EITI).

With regard to oil and gas exploration and development, Japan also has world-class technologies and procedures in the areas of health, safety, society, and the environment. In fact, Japanese oil and gas companies are taking the lead in environmental protection and sustainable development. Japanese companies were among the first operators in the Middle East to implement the zero-flare system in the region. In addition, some Japanese companies have conducted proactive measures such as mangrove afforestation, rather than reactive ones such as protection against environmental deterioration. For middle-size companies to make such investments, however, they need to undertake cautious analysis and make financial commitments that could be said to detract from their short-term profitability, but they understand the critical importance of such measures with regard to addressing longer-term environmental as well as social and quality of life issues.

To assist in this process, JOGMEC has taken over JNOC's HSE management system and the ISO 14001 and OHSAS 18001 certifications it obtained in August 2002. JOGMEC remains committed to providing risk-mitigating financing for oil, gas and metals exploration, development and stockpiling. JOGMEC has its HSE guideline based on international standards and guidelines such as those of the World Bank Group and the International Association of Oil & Gas Producers (OGP). In addition to technical evaluations, JOGMEC audits each project based on the JOGMEC HSE guideline before offering financial assistance to a Japanese oil company. JOGMEC also carries out monitoring of JOGMEC financing projects in terms of HSE.

Japanese firms have been very innovative in developing and advancing a wide range of produces with electronics and automobiles probably being the two best-known examples. In addition, however, Japanese industry has also been active in industrial applications, including many that are used in the resource sector. For example, one recent media report highlighted a new technology that Hitachi had developed to reduce the costs of extracting oil from tar sands in Canada. Can you tell us a little about the role that Japanese industry is playing in improving technology and the general efficiency of the resource sector?

(Mr.Iwai) Utilizing Japan's advanced technological capability to develop technologies related to oil and natural gas resources is certain to contribute to the world's stable supply of resources. At the same time, it enhances Japan's attractiveness to resource-producing countries and contributes to a more stable supply of resources for our country and the world at large.

For example - in October 2006 - JOGMEC and several private business enterprises jointly embarked on a project to develop GTL or gas to liquid. This process is expected to lead to an epoch-making technology that can use carbon dioxide-containing natural gas that is found naturally. It is expected to achieve both a stable supply of energy and harmonization of the global environment. Furthermore, Japanese companies are active in developing technologies that can use oil resources more efficiently. This includes heavy oil upgrading technology and oil refining process technology with a higher value added.

(Mr.Ochiai) Several Japanese industries, such as steel and shipbuilding, have significantly contributed to the advancement of technologies utilized in the natural resource industry. JOGMEC has also been working jointly with companies in this sector on a number of important technological developments. Examples include a research project on the deep-water oil field development system, and development of gas transportation technologies.

JOGMEC has also been providing R&D funds to these industries and to academia. In addition, it is proactively involved in technological developments in various areas in the upstream sector. This includes resource exploration, production facilities, and upgrading of heavy oil. We are also actively seeking advances in industries such as new materials, nanotechnology, and robotics, in order to enhance productivity and efficiencies to the oil and natural gas industry.

Thank you Mr. Iwai and Mr. Ochiai for this information on current trends and developments in Japan's oil, natural gas, metals and mining sector. We look forward to speaking again soon.