Nippon Oil shifts to exploration to secure crude

TOKYO (Reuters) - Japan's top refiner Nippon Oil Corp. (5001.T) will shift to investing in exploration and development to secure crude after high oil prices and cut-throat competition have boosted the costs of acquiring producing fields.

The company will invest at least 260 billion yen ($2.13 billion) in upstream oil and gas projects for three years to March 2011, its top executive told Reuters.

As part of its strategy change, Nippon Oil will reduce the number of retail stations and increase oil product exports, President Shinji Nishio said, adding that weakening domestic demand would trigger consolidation of Japan's refining industry.

Nishio said the company's upstream investments in three years to March 2008 have jumped to 263 billion yen from its original plan of 200 billion yen.

"We will actively continue to invest in upstream projects at least at that increased level. However, we will shift our focus to exploration and development from producing fields," Nishio said in a recent interview as part of the Reuters Energy Summit.

The revised investment includes Nippon Oil's recent acquisition of the K2 oil and gas field in the Gulf of Mexico from U.S. firm Anadarko Petroleum Corp (APC.N).

Nippon Oil, along with Mitsubishi Corp. (8058.T), paid $1.2 billion for a 23.2 percent stake in the field, which produces 40,000 barrels per day (bpd) of oil equivalent.

"Because of increased competition to secure natural resources and high oil prices... the value of many producing upstream projects reached levels which do not make economic sense and we have lost many recent bidding rounds," Nishio said.

Geographically Nippon Oil, which aims to double its oil and gas output to 300,000 bpd by 2015 from now, will focus on the Gulf of Mexico and Vietnam, where the company will start commercial production at the Phuong Dong field in September 2008.

"We see areas around this field as potential," Nishio said.

He also pointed to Europe's well-explored North Sea, where output is declining but niche players are looking to pick up smaller fields, as well as Oceania.

"Political risks in these areas are almost zero," Nishio said. "Many nationalizations of resource assets by central governments have happened... This energy nationalism is quite a concern."

Earlier this year, South American oil producer Venezuela sent troops to take over installations in the country valued more than $30 billion from foreign energy companies.

Bolivia has also nationalized its energy sector and Russia's state-backed Gazprom took over control of the world's largest liquefied natural gas project in far east Sakhalin from Royal Dutch Shell (RDSa.L).

DOMESTIC SALES TO FALL

Nishio said since Japan's oil demand will be dampened by a declining population and a surge in energy-efficient cars, Nippon Oil will continue to reduce its retail gas stations, though not to completely exit from the retail sector.

Nippon Oil had 14,000 petrol stations in 1999, when it merged with Mitsubishi Oil, but has since cut them to 10,500, around one quarter of Japan's total number and about the same proportion as its 1.2 million-bpd of refining capacity. The company would not say how much savings it would get from the cuts.

Other Japanese refiners have also reduced their retail stations, with the overall number in the country falling to 45,792 as of March 2007 from the peak of 60,421 in 1994, according to industry group Petroleum Association of Japan.

Nishio said gasoline demand would fall 1.0 percent this business year, following a 1.5 percent drop in the previous year (April 2006-March 2007). On a calendar-year basis, demand fell 1.1 percent for the first time since the 1974 oil shock.

"Nobody can do much about the fall. It is impossible to raise demand given the current (social) structure in Japan," he said.

"Consolidation of the industry will be unavoidable. It will be quite difficult for all to survive as demand is falling," he said, adding that acquisitions are "something you should keep a close eye on".

Nippon Oil, which has supply contracts with Chinaoil and is in alliance with South Korea's SK Corp. (003600.KS), hopes to seal long-term product supply deals with other companies in Asia as well as in the West Coast of the United States, Nishio said.

"Exporting products has to be one very important sales outlet."

Nippon Oil will boost its export capacity by 15 percent to 230,000 bpd by end-March 2008 from the year before.

(Additional reporting by Ritsuko Shimizu)