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Oct. 21, 2005, 12:01 a.m. EDT

Japan looks inward in renewed quest for fuel

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By Yuka Hayashi

TOMAKOMAI, Japan -- In order to reach the fuel deposits that lie below this small port city on the island of Hokkaido, an intricate web of underground, slanting wells has been built, spanning several miles and delving as deep as 16,000 feet. One well crawls under a busy highway lined with medical offices and pinball parlors, beneath railway tracks and a belt of white birch trees, before reaching a fuel deposit deep below a residential subdivision.

This otherwise ordinary industrial town of 170,000 has been witness to the latest twist in Japan's quest to reduce its dependence on imported fuels: the development of a tiny domestic fuel industry that depends on oil and gas fields once thought too small or expensive to exploit.

"If you were in a desert, you'd just dig straight down because it's so much cheaper," says Yoshifumi Yoshidome, superintendent of Tomakomai's Yufutsu field, which is operated by Japan Petroleum Exploration /zigman2/quotes/201212147/delayed JP:1662 +1.64% Co., or Japex, a joint venture between the Japanese government and a number of private companies. "We can't do that here because we don't have enough space."

Gas Plant

The Yufutsu field is emblematic of the lengths to which Japan is going in order to reduce its hefty reliance on imported oil and shield its economy from the ups and downs of global energy markets -- a theme that now resonates the world over.

Long dependent on imports for nearly all of its fuel needs, Japan is responding to recent surges in energy prices and worries about future supplies by giving a hard look at the domestic oil and gas fields it once thought were too small and expensive to develop.

Japanese geologists are looking deeper and farther for potential domestic oil and gas reserves, and applying new technology to enhance production at existing fields. By doing so, they are joining a global trend that sees energy companies using unconventional and expensive techniques to coax oil and gas out of the ground.

Last year, the Japanese government decided to have the country's first special ship built to survey offshore oil deposits. Japan has become more aggressive politically as well, accusing China of pumping out gas from disputed waters in the East China Sea that Japan claims as its own.

Now, with a combination of advances in technology and sheer persistence, Japanese companies like Japex are squeezing out energy supplies from any deposits they can find, no matter how small or hard-to-get.

Homemade

Japan is nowhere close to becoming a big energy producer. Domestically produced gas accounts for somewhere between 3% and 5% of the country's overall natural-gas use. Japan has gradually reduced its reliance on imported oil by boosting the use of nuclear power, coal and alternative energy sources such as thermal and wind power. In the year ended March 1991, oil accounted for 57.2% of the nation's overall energy use. By the year ended March 2002, oil dependency was down to 49.4%, according to the latest government statistics available. In that year, nuclear power represented 12.6% of consumption, natural gas 13.1% and coal 19.1%.

Experts agree that Japan will continue to rely heavily on imported fuel, unless a powerful new energy source is discovered. Still, domestic gas is beginning to play a significant role in the economy, aided by popular demand for cleaner energy products -- natural gas is considerably cleaner, when burned, than oil or coal.

Domestic natural-gas output in Japan reached a record 2.96 billion cubic meters in the fiscal year ended March 2005, up 30% from five years ago, according to government data. During the same period, the country's crude-oil output totaled 14,800 barrels per day, representing 0.3% of overall domestic oil consumption.

The executives say the company's domestic oil- and gas-production business accounted for a majority of its net profit of 13.2 billion yen ($114.5 million) in the year ended March 31, and that that Yufutsu operations are also profitable.

To find fuel at Yufutsu, one of Japan's largest energy production sites, scientists conducted a three-dimensional survey of the earth under Tomakomai. Then, they needed to crack hard granite rocks to let the oil and gas out, a difficult, cutting-edge procedure. Usually, oil and gas are found pooled in softer rocks such as sandstone.

Scientists have also been employing new techniques at Japan's largest natural-gas field, Minami Nagaoka on the Japan Sea coast. Teikoku Oil Co., which operates the field, extracts the gas from a reservoir of a hard volcanic rock, another unusual procedure. At some wells, highly pressurized water is injected to a depth of more than 16,000 feet to force the gas out of the ground.

Success at these fields has encouraged Japanese geologists to explore in new locations, particularly in extremely deep areas both on land and offshore.

"If we move away from our conventional way of thinking and keep looking in new types of areas, I am confident we'll find a lot more," says Yuzuru Ashida, a Kyoto University professor and a leading expert on oil exploration in Japan.

Yufutsu churns out 3,800 barrels a day of crude oil, and 900,000 cubic meters of natural gas. At the current production rate, the supply is expected to last at least for the next two decades, Japex executives say.

Yufutsu's gas is shipped via a 46-mile pipeline to Sapporo, a nearby city of 1.8 million people. Earlier this year, Hokkaido Gas Co., the local gas utility, finished switching all of its 450,000 household customers to Yufutsu's natural gas from imported liquefied petroleum gas. The native gas is also used by manufacturing plants along the pipeline, including a Toyota Motor /zigman2/quotes/200537742/composite TM -0.59% Co. auto-parts factory in Tomakomai and a Kikkoman /zigman2/quotes/200008494/delayed JP:2801 -0.56% Corp. soy-sauce plant.

Customers say they prefer local gas mostly because it's relatively clean and because it's convenient, since it doesn't need to be stored like imported fuels. Recently, it's also been less volatile in price than imported fuel.

"Now we aren't affected by foreign exchange or oil prices," says Shinichi Nakagawa, the manager of Sapporo's city energy authority, which supplies power and heat to a giant office complex at the city's central station.

Despite the hefty investment costs, domestic gas is competitive with imported gas because of savings in delivery costs. It can be shipped straight from the gas field to consumers' homes or factories. Imported gas, on the other hand, needs to be liquefied and shipped in a refrigerated tanker, both expensive processes.

Russell Gold in Austin, Texas, contributed to this article.

Write to Yuka Hayashi at yuka.hayashi@wsj.com

/zigman2/quotes/201212147/delayed
JP : Japan: Tokyo
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Volume: 111,300
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P/E Ratio
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Dividend Yield
2.69%
Market Cap
¥104.33 billion
Rev. per Employee
¥134.88M
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/zigman2/quotes/200537742/composite
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Volume: 152,679
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P/E Ratio
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Market Cap
$249.14 billion
Rev. per Employee
$700,558
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/zigman2/quotes/200008494/delayed
JP : Japan: Tokyo
¥ 7,090.00
-40.00 -0.56%
Volume: 268,800
July 27, 2021 3:00p
P/E Ratio
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