Japanese entities are likely to divest most of their non-operated stakes in smaller oil and other non-core assets in an effort to rationalise upstream portfolio, Wood MacKenzie said in a February 2 note.  

“For several companies, beyond existing positions in LNG that are likely to remain intact, everything else may go. This is the sharp end of the energy transition,” WoodMac said. 

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Last week, as Mitsui closed the sale of its BassGas stake in Australia, Sumitomo announced it will no longer participate in new oil projects. Sojitz had already announced a move away from upstream and Marubeni has kickstarted a process to sell off some of its upstream positions, including the UK North Sea.  

“If 2020 was a year for the re-evaluation of future plans, then 2021 looks to be the year of implementation,” WoodMac said, adding that moves by Japan's trading houses to de-risk their upstream portfolios made sense.  

“Faced with falling domestic oil and gas demand and an accelerating energy transition, future E&P investment is far less certain. Strategy reviews are switching focus to new growth areas - covering everything from fintech to pork bellies – with the increasingly diverse businesses of Japan's trading houses challenging upstream for future capital,” WoodMac said.    

WoodMac’s upstream research director for APAC Angus Rodger said that the upstream assets of 'Japan Inc' are valued at over $70bn, producing around 1.6mn 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, he said.  

According to Rodger, Japanese trading houses face challenging longer-term growth outlooks due to mature portfolios, a lack of new development assets, and executive management teams increasingly reluctant to allocate precious capital to upstream investments.  

At the same time, many are also facing an increasing call on cash flow from upstream projects to support new energy investments. “As a part of last week's announcement that it will no longer invest in new oil projects, Sumitomo also revealed it will shift its focus to renewable energy investment. A similar narrative is being heard across the trading houses, referencing solar, wind, hydrogen and other new energy technologies,” he said.  

Despite recent announcements, changing strategies do not necessarily signal a wholesale rush to the exit by Japan's E&P companies, WoodMac said.  

“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, WoodMac said. “There are well-priced opportunities out there, as evidenced this week by PTTEP's 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, it said. 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.  

“But there's no doubt that for all Japanese E&P players, the strategic choices look hard. But Japan Inc won't be disappearing from global upstream anytime soon,” WoodMac said. “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.”