Japanese petroleum demand has decreased to same level as 1960's

Refinery crude oil throughputs in Japan during the first half of October dropped below 2.5 million barrels per day for the first time since the late 1960's, according to data released by the Petroleum Association of Japan. 

The nation's petroleum demand basically has shown a downward tendency after peaking out in the middle of the 1990's. Even so, recent slump presents an impression that irreversible direction led by the change of social structure is accelerating the decrease regardless of the economic cycle.

The real gross domestic product in Japan indicates relatively steady growth after lowered by the global financial crisis in 2008 and the regional heavy earthquake in 2011. However, crude oil throughputs keep apparent decrease since even before the financial crisis. 

The recent breakdown for petroleum products shows that motor gasoline accounts for 31% of the total production, while 24% are gas oil outputs followed by fuel oil that is used for electric generation and industrial fuel, then petrochemical naphtha etc. Thermal power generation also uses low sulfur crude oil besides the fuel oil. Typically, 20-30% more amounts of fuel oil than crude oil are utilized for the purpose.

Regarding automobile fuels that are the majority of Japanese petroleum products, we have concerns about slowing down of domestic car sales especially for young generations. Although the number of passenger vehicles owned keeps steady growth since the beginning of this century despite the slow sales, fuel demand doesn't track the same path. Gasoline production has deepened decrease after the 2011 earthquake.  Constriction of household spending seems to be one of the major causes as well as increasing hybrid cars. Meanwhile, gas oil output is not impacted by a gradually decreasing number of tracks owned. Track utilization rate in the transportation industry looks to be rising. Industrial efficiency is improving but consumer spending is shrinking.

The petroleum industry is also pursuing efficiency. The total oil refinery capacity in Japan has been scrapped by 25% in the 2010's after utilization rates had dipped to the 70% level in the late 00's. The operational efficiency in the oil industry has improved significantly through the aggressive streamline of facilities.

What has occurred about electricity generation fuel that is the next major usage following motor fuel? There were 59 nuclear units with a total of 51 million kW of power generation capacity before the serious earthquake in March 2011. All those units ceased operations due to damage or security inspections. Then only 9 nuclear units have been approved to resume. Current total available capacity is 9.1 million kW. 22 units including those in Fukushima-1 and 2 nuclear power plants will be scrapped, and no specific restart plan has been decided for rest of units. Nuclear power accounted for 27% of the total electricity generation in Japan in 2010; however, it was merely 3% in 2017.

Electricity supply in Japan was in the severe turmoil after losing the entire nuclear power generation. There were many aged thermal power units urgently resumed from the idling status. However, such high necessities for oil-burning power was finished in 2012, and it was already backing to the normal level in 2014 despite all nuclear units were still suspended. Petroleum demand for electricity generation is declining further due to lower entire power demand, steady growth of generation with burning coal or liquefied natural gas, and resume of some nuclear units. The era that needs petroleum for electricity generation is going to end.

Japanese manufacturers have moved their factories overseas and domestic infrastructure and lifestyle are changing to that need less energy usage. Meanwhile, as the country requires importing almost all of the primary energy resources, such transition could reduce the vulnerability of its security.

China crude oil production declining with no shale oil development

Although China is one of the major countries that have shale oil reserves, about 48 billion tonnes of her proven reserves have almost not developed yet. Overall Chinese crude oil production with the downward tendency has recorded 29 consecutive months of year-on-year decrease since November 2015, according to the National Bureau of Statistics. The nation’s crude oil demand, however, increased by 13% during the same period. Thus, import dependency is growing to fill the gap between supply and demand. As the declining self-sufficiency is critical, China was unable to include crude oil in the tariff list for retaliate round of the trade war with the U.S.

In July 2018, China produced 3.75 million barrels per day of crude oil, while the General Customs data shows that imports reached 8.5 million bpd in the same period. Imported amount of crude oil was 2.3 times than domestic outputs. The import dependency is extraordinarily high for crude oil among energy supplies in China. Coal production in July was 282 million tonnes compared with 29 million tonnes of imports, and natural gas outputs were 13 billion cubic meters against 1 billion cubic meters of imports. China's coal and natural gas imports stay at about 10% level of domestic production respectively. However, monthly coal production already has peaked out at around 300 million tonnes, while only the natural gas output is still showing growth.

China is not the only country that is showing a diminution of crude oil production. The upward movement of world crude oil output in the 2010's is mostly aligned with that in the U.S. It is because of the Shale Revolution, as you know. Even if in the major shale production area, the reduction pace of production in legacy wells is expanding. So that development of new wells is the key factor to boost production. Investments in shale oil/gas development are concentrating in the specific zones like Permian Basin in the U.S. where production costs are the most competitive. It accelerates production efficiency in that areas further and depresses on traditional oil field developments in other regions. Booming shale oil productions in the Permian Basin has caused a lack of transport capacity by pipelines and output was capped as a result.

China has the world third largest shale oil proven reserves and the biggest shale gas proven reserves. However, the majority of these reserves are located in the remote places like Sichuan where developments are quite difficult. There are many issues regarding drilling and transportation. Additionally, large water usage for the Hydraulic fracturing is also an obstacle. Shale oil/gas wells said to require typically from about 10,000 tonnes to 60,000 tonnes or more of water per well depending on each depth. Although China may not need to care about environmental issues that raise counter-movements against shale oil/gas development in the U.S., spending valuable water resources to produce crude oil seems not so reasonable compared to importing crude oil.

The U.S. Energy Information Administration expects that shale oil production in the U.S will maintain growth towards 2030. Crude oil development in China may not be expanded at least until then. Since the country can't yield more coal as well, the lower energy self-supply could cause arguments. However, we are unable to forecast the future exactly. Before the Shale Revolution, the U.S. was also in similar oil production diminutions as current China. And no one knows how long demand of the fossil fuel in China will continue to enlarge. 

How China's crude oil imports are exaggerated

Accumulated domestic crude oil supply/demand balance, that deducts processing volume from the total supply of net imports and productions, reached 23.4 million metric tons in Jan-May 2018, according to the government stats. That throughout 2017 was 44.6 million mt. The monthly balance rarely shows negative figures and total accumulation since Jan 2006 attains 270 million mt.

However, China's National Bureau of Statistics said that strategic petroleum reserves in the nation are only 37.73 mt as of mid-2017. This volume was higher than a year ago by 4.48 million mt and the International Energy Agency estimated that China's SPR stood at 39.2 million mt as of end-2017.

Meanwhile, commercial crude oil inventories in China as of end-2017 were estimated at 27 million mt by Xinhua News. The latest figure as of end April 2018 was 27.4 million mt. The commercial crude oil inventories have been swung between 25 and 35 million mt during the 2010's. It is basically under the downward tendency after peaked in Sep 2014. Petroleum products inventories are also indicating a seasonal cycle and no significant upward trend is seen.

Therefore, the statistically calculated crude oil surplus is clearly larger than the actual increase in the stockpile. It is a mystery where the surplus is gone. Many people believe that Chinese stats are not reliable, but even that, the discrepancy looks too large.

Crude oil processing volumes released by the NBS are about 50 million mt recently. These figures are the sum of collected data from enterprises that have more than 5 million RMB of annual sales. Since oil refiners are unlikely to have less than US$0.8 million of annual sales, the processing volume could cover all eligible firms. Additionally, it is not realistic to estimate that those firms report much smaller production than they actually do.

Current estimated total of the strategic petroleum reserves and commercial oil inventories in China are close to 90 million mt. It equivalents to about 55 days of the nation's recent consumption volume. Although this level is still far from 90 days that is recommended by the OECD, a significant progress is seen as Chinese petroleum demand has doubled from a decade ago when its stockpile only covered less than a month of consumption.

On the other hand, China may have equipped nearly its 170 days of consumption equivalent petroleum stockpiles based on the above surplus calculation. However, we can't find their storage facilities for such large volume. Thus, it is reasonable to guess that import figures are overblown. Based on the discrepancy among estimated stockpiles, China's actual crude oil imports are likely to be below the customs reported volume by about 10%. Chinese influence in the global crude oil market should be discounted.