Taking Long View, Japanese Hunt for Oil in America

The news from North Dakota on Aug. 12 wasn’t that unusual in itself: another oil discovery in the Williston Basin, a prime oil region in the westernmost part of the state.

But the success at the L. M. Stenehjem No. 2 well stands out because much of it was paid for by the Japanese government.

Japan National Oil Co. (JNOC), in support of Nippon Oil, one of that nation’s major oil companies, provided a big chunk of the financing for the North Dakota well in a joint exploration and drilling venture launched earlier this year with Texaco.

That the Japanese were rooting around 14,000 feet below ground in McKenzie County, N.D., in the summer of 1986, at the apparent nadir of the most precipitous oil price collapse in modern times, seems a particularly vivid example of Japan’s long view of things.

This year’s collapse in the price of crude oil has prompted the major U.S. oil companies to slash exploration budgets and eliminate tens of thousands of jobs here and abroad. And the tax reform package expected to be signed by President Reagan modestly trims the financial incentives to explore for oil.

Meanwhile, Uncle Sam has begun to nibble away at such 1970s-vintage energy conservation measures as the 55 m.p.h. speed limit and auto fuel economy requirements.

But in Japan, a panel of the government-appointed Petroleum Council warned in August that prices will rise again and oil supplies will grow short. The committee set a 1995 goal of nearly tripling the paltry 11% share of the nation’s oil needs that now come through its own oil companies. Thus, the Japanese are stepping up their pace of overseas oil exploration to as many as 20 projects from 10 last year and 3 the year before.

In the process, two Japanese companies have undertaken major ventures in the U.S. Oil Patch this year for the first time: Nippon Oil in a $100-million deal with Texaco to drill up to 50 wells in six states, and Nippon Mining in a $135-million joint venture with Conoco that contemplates 20 wells in five states.

“The Japanese simply are willing to take the longer view. It’s quite a contrast to our own situation, where we have a combination of government and investor complacency,” said G. Henry M. Schuler, energy security expert at the Georgetown Center for Strategic and International Studies and a one-time oil executive in the Middle East.

“Here, the government is so complacent it’s actually creating barriers to exploration. There’s a recognition in Japan that U.S. oil properties are depressed because we have such a short horizon. The largest U.S. oil companies are tragically unable to look beyond the next quarterly financial report.”

The apparent contrast between Japanese and U.S. attitudes on oil rings a bell heard earlier in the automotive, electronics and other industries: Japan’s central planning effort and direct government support of key industries have driven that nation’s postwar economy ahead.

But in the case of the commodity oil, the parallels are limited because the two nations’ resources are so different.

While the United States has thousands of large and small oil companies, which pump 60% to 70% of the nation’s oil needs from U.S. lands, Japan gets virtually all of its oil from other nations, and nearly 90% of it is pumped and processed by foreign-based companies.

Thus, while President Jimmy Carter didn’t strike much of a nerve with his 1977 declaration of the “moral equivalent of war” to seek energy independence, Japan has an obsession with energy security that dates to the late 19th Century, when foreign oil firms set up shop there.

Embargo Triggered War

In 1941, it was an American oil embargo of Japan--intended by President Franklin D. Roosevelt to halt Japan’s war with China’s Chiang Kai-shek--that led ultimately to the bombing of Pearl Harbor. In 1973, the Arab oil embargo not only touched off panic buying by Japanese consumers but subjected the nation to diplomatic blackmail when the Arabs pressured Japan to break off ties with Israel.

This oil history led to the creation of a national oil company, JNOC, which has been backing its own oil companies--principally refiners of other nations’ products--in searches for oil around the world. The effort, in which the government has spent $400 million to $500 million a year in the 1980s, has so far done little to reduce Japan’s energy vulnerability.

Now, the same climate that has idled hundreds of drilling rigs and slowed seismic work to a crawl around the world has proved a boon to the forward-looking Japanese: Their oil companies are flush with cash, the cost of exploration and drilling rights has fallen sharply and the strengthened yen goes nearly twice as far in the United States as it did a year ago.

Because Japan’s oil companies are mainly refiners, they benefit from lower-priced crude. So, in contrast to such multinational producers as Texaco and Conoco, the seven biggest Japanese petroleum companies are expected to record a 250% surge in pretax profits this year.

The stronger yen, meanwhile, would buy nearly $900 million worth of exploration this year under the current JNOC budget--or more than double last year’s expenditures in dollar terms.

Decided Not to Wait

Texaco says it was near an agreement with Nippon Oil when oil prices collapsed last December. But rather than pull out and await higher prices, Nippon Oil, heavily supported by a government whose priority remains “medium- and long-term oil supplies,” signed the papers in February.

John N. Eke, vice president for exploration in Texaco’s Western region, called it “kind of a gallant decision” to proceed. But he noted that, for example, Nippon Oil was subsequently able to hire an offshore rig near Santa Barbara for $35,000 a day, compared to the $55,000 it would have taken a year earlier, when times were better.

“At depressed prices and with a high-valued yen, why not?” asks Schuler of Japan’s aggressiveness. “They know this (price collapse) is only a blip. For them, this is an energy-security opportunity, plus an investment opportunity.”

The Conoco and Texaco joint ventures now present an ironic situation: On those properties, at least, the Japanese government is doing more than the U.S. government to foster the discovery of U.S. oil. Both domestic firms said they probably wouldn’t be drilling those holes if it weren’t for the Japanese investment. In oil, there isn’t much capital around these days.

Conoco says it sought out Nippon Mining about six months ago.

“We were looking for a way to spread our exploration dollars. This allowed us to drill up several leases on prospects we might not have gotten to without their capital,” a Conoco spokeswoman said.

Will Remain in U.S.

Meanwhile, the ban on exporting most U.S. crude oil assures a nice side benefit for the United States: In both ventures, all the U.S. crude will remain here, and the Japanese will get their share through a swap for oil from Texaco and Conoco overseas reserves, perhaps in Indonesia.

Because each barrel of newly discovered U.S. oil displaces a barrel of foreign oil, this arrangement not only improves the nation’s energy security but nibbles a few dollars off the enormous U.S. deficit in its balance of payments.

The 70 exploratory wells to be drilled over three years by the two ventures won’t exactly turn the domestic industry around. About 45,000 wildcat and exploratory wells were drilled in this country over the previous three years.

Texaco says perhaps 200 U.S. jobs will be created by the venture with Nippon Oil, not counting the subsequent development of whatever oil is found. More than 100,000 oilfield jobs have been lost this year.

In addition to the North Dakota discovery, the venture has drilled two dry holes offshore from California and plans up to three more offshore wells. It also plans to drill in Texas, Colorado, New Mexico and Utah. Fourteen of the Conoco-Nippon Mining wells will be drilled in the Gulf of Mexico and the rest in Texas, Louisiana, Montana, Colorado and Alabama.

None of the principals would divulge many financial details. The Japanese support of drilling and other costs varies from hole to hole, according to Texaco.

In the past, JNOC has paid up to 60% of a Japanese company’s costs in a project and wants to raise this to 70%. The government now proposes to make interest-free loans, recoverable through royalties on whatever oil is found.

Share Production

In the case of a discovery, Japan will get anywhere from 10% to 50% of the production and Texaco the rest, said Eke. The total Japanese contribution will be up to $100 million. Texaco apparently thinks there’s more where that came from.

“In late October, we’ll be going to Tokyo, where we will present some other opportunities,” Eke said.

The only similar U.S. investment is believed to be an $11-million purchase last year by Japan’s Idemitsu Oil Co., in partnership with JNOC, of a 20% interest in six Atlantic Richfield leases offshore California. One well found an undetermined amount of oil, and a second well is planned, Arco says.

Given the vast differences in the energy circumstances of the two nations, few suggest that the U.S. government should be directly funding a search for oil or setting up a national oil company.

John Lichtblau, head of the respected Petroleum Industry Research Foundation, an industry-funded group, credits the Japanese with “courage” for proceeding in today’s depressed oil market. But he says: “It would make absolutely no sense for the U.S. to do this.”

Still, to such oil executives as Texaco’s Eke, Japan’s current government-sponsored initiative illustrates an important difference in posture.

“The Japanese government and their companies are very much tuned into this kind of arrangement,” Eke said. “The U.S., on the other hand, has never had a long-range energy policy. It’s almost a case of not seeming to be too sensitive to the problem.”