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Japanese upstream players accelerate exit plans

© BloombergFlying the flag in Japan. Photographer: Kiyoshi Ota/Bloomberg
Flying the flag in Japan. Photographer: Kiyoshi Ota/Bloomberg

Japanese companies are increasingly focused on upstream portfolio rationalisation, with divestment of non-operated stakes in smaller oil, as well as other non-core assets, expected to accelerate, research from Wood Mackenzie shows.

“For several companies, beyond existing positions in liquefied natural gas (LNG) that are likely to remain intact, everything else may go. This is the sharp end of the energy transition,” the energy research company warned in a note.

“Collectively, and with little fanfare, Japanese companies – from pure-play E&Ps and integrated oil and gas companies, to gas and power utilities and trading houses – have built material upstream portfolios. Today, the upstream assets of ‘Japan Inc’ are valued at over $70 billion, producing around 1.6 million boe/d. Trading houses making up almost 30% of this total. But with domestic oil and gas demand falling, the driver for Japanese firms to go out and secure international resources is weakening,” said Angus Rodger, Asia Pacific upstream research director at Wood Mackenzie.

Indeed, Japan’s trading houses, such as Mitsui, Sumitomo, Sojitz, and Marubeni, have already started moves to de-risk their upstream portfolios. As future exploration and production investment is far from certain with Japanese companies facing the prospect of falling oil and gas demand amid an accelerating energy transition at home.

Underscoring the trend, Mitsui is understood to have closed the sale of its 35% stake in Beach Energy’s BassGas project in Australia’s Bass Strait off the coast of Victoria last month. The company’s other oil and gas projects include a joint venture with Woodside Energy in Western Australia, and the Casino gas project in the Otway Basin off Victoria with its operator Cooper Energy.

Marubeni has also started a process to sell some of its upstream positions, including in the UK North Sea.

Sumitomo has announced it will no longer take part in new oil projects and offloaded the last of its interests in shale development with the sale of oil operations in the Eagle Ford Shale in Texas earlier this month. Still, not all trading houses are shying away from shale. Mitsubishi remains focused on a project to produce and sell LNG from U.S. shale.

Sumitomo also revealed that it will shift its focus to renewable energy investment. Similar sentiment is echoing across the trading houses, with solar, wind, hydrogen and other new energy technologies in favour. As a result, upstream portfolios are feeling the pinch.

Significantly, the upstream businesses of Japanese trading houses have reached a critical juncture. “For some, upstream already looks non-core, seen by management and shareholders as a high-risk and capital-intensive sector, originally pursued in response to Japan’s lack of indigenous resources, but increasingly non-critical to future growth,” said Rodger.

In addition, “Japan’s trading houses typically hold small equity stakes in large, long-life LNG and oil projects. This has created portfolios with longevity, but little control or operator experience and lacking exposure to key global growth themes, such as deep-water and unconventionals,” he added.

Nevertheless, despite recent announcements, it is important to highlight that changing strategies do not necessarily signal a wholesale rush to the exit by Japan’s exploration and production companies, said Wood Mackenzie.

“In many ways, they are getting ahead of the curve. Indeed, many will also be looking to take advantage of a buyer’s market, with numerous geographical and thematic options opening, as IOCs expand divestment campaigns,” added the firm. There are well-priced opportunities out there, as evidenced by PTTEP’s recent deal to buy a stake in BP’s Omani Khazzan field.

“Bigger players like Inpex have ambitious future production targets and will look to leverage a strengthening balance sheet to acquire undervalued upstream assets and diversify growth themes. For those small and medium-sized Japanese players, nimbleness is key as they look to target specialised capabilities, such as JXTG focusing on CO2 and EOR opportunities. And ongoing US shale gas purchases hint at a more counter-cyclical, integrated strategy from LNG players Tokyo Gas and Osaka Gas,” said Wood Mackenzie.

Indeed, Inpex expanded its interest in U.S. Gulf of Mexico fields in early February. It acquired 2.35% in the Lucius and Hadrian North fields; a stake that used to be held by ExxonMobil.

Still, as Wood Mackenzie points out, there is no doubt that for all Japanese exploration and production companies, the strategic choices look hard. But “Japan Inc won’t be disappearing from global upstream anytime soon. The potential for the Japanese government to play a role in facilitating upstream asset swaps or sectoral consolidation, allowing focused players to gain upstream scale while allowing others a route to exit, could hold the key to the future,” added the research firm.

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