The Ambassador in Japan (Grew) to the Secretary of State

No. 2347

Sir: [Here follows a report on developments in the situation affecting American and foreign oil interests under the Japanese Petroleum Industry Law of 1934.]

Future Position of the Foreign Oil Companies in Japan

As was reported in despatch No. 2337, dated April 1, 1937,33 the Japanese Government is apparently determined to proceed with its grandiose scheme to render Japan fairly self-sufficient in liquid fuel through the hydrogenation of coal, oil synthesis by the Fischer method, low temperature carbonization of coal, and the mixing of absolute alcohol with gasoline. The project, which contemplates the investment of about Yen 750,000,000, will establish the Imperial Fuel Company, which will act as the financing and administrative organ of all the synthetic gasoline plants to be established in Japan, Korea and presumably Manchuria. The plan contemplates the use of about 9,000,000 metric tons of coal per annum and, it is estimated, will render Japan about 60 per cent self-sufficient in gasoline and about 45 per cent self-sufficient in heavy oil (fuel and diesel oil) at the end of [Page 727]seven years. Government subsidies amounting to about Yen 114,000,000 will be necessary to attain this end, in addition to the Government’s investment in the Imperial Fuel Company.

In view of the fact that coal hydrogenation industries in other countries have not been commercially feasible because of the high cost, as compared with the cost of petroleum gasoline, of the gasoline produced by such hydrogenation industries, it might be thought that the Japanese scheme is impractical. Foreign experts who have studied the question in Japan, however, are of the opinion that the project is feasible, largely because of the low cost of labor and coal in Japan, although it is improbable that the object can be attained in seven years (ten years being a more likely period) or that the scheme will cost only Yen 750,000,000. It is considered more probable that the total cost of the project will be about Yen 1,200,000,000. However, if the military authorities are determined to proceed with the plan and render Japan reasonably self-sufficient in liquid fuel, there is every reason to believe that they will eventually accomplish their object, regardless of the cost to the nation. The plans have been delayed for a time by the dissolution of the Lower House of the Diet before the Imperial Fuel Company bill and the bill providing for subsidies for the hydrogenation industries could be approved, but the bills will undoubtedly be reintroduced into the next session of the Diet and there is no reason to believe that they will not be approved.

This scheme of the Government is of great importance to the foreign oil interests in Japan, principally because it will, if carried out, deprive them of their market here for gasoline and kerosene, although it is probable that they could continue to do some business in other petroleum products. As was stated before, the plan contemplates the production of 60 per cent of Japan’s requirements of gasoline by the 1943–44 fiscal year. This production does not include the gasoline refined in Japan from imported crude oil. The existing Japanese oil refineries, plus those already sanctioned, will be able to produce the remaining 40 per cent of Japan’s requirements. In regard to kerosene, the authorities are already in a position to dispense with imports from foreign sources at any time. The position therefore is that, by 1944, or a year or two later, there will be no room in the Japanese trade for imports of so-called “white products”.

The assurances recently received from the Japanese Government concerning the future position of the foreign oil companies in Japan do not protect the companies against reduction of quotas caused by increase of indigenous production of gasoline substitutes. The assurances only specify that “consideration will be given that the decrease is apportioned fairly in the light of actual conditions at the time”. It may therefore reasonably be assumed that the decrease in the demand for petroleum gasoline caused by the increase in production [Page 728]of gasoline from coal will fall upon the foreign gasoline importing companies, and that the domestic refineries will be authorized to care for the entire amount of gasoline which cannot be supplied by the hydrogenation plants. In regard to fuel and diesel oils, the foreign oil companies will be in a somewhat better position, as the hydrogenation plants, according to the estimate, will be able to supply only about 45 per cent of the demand, but the foreign companies estimate that most of the demand will be given to Japanese importers, unless and until the foreign companies lay in the six months’ stocks required by law. As the foreign companies cannot store such stocks under present conditions in Japan, it appears that all or almost all of the fuel and diesel oil trade will go to Japanese importers. The same conditions apply to the lubricating oil and grease trade.

Recent circumstances tend to indicate that the Japanese authorities have in mind the forcing out of Japan of the two foreign oil importing companies by the gradual reduction of their quotas as products from the hydrogenation of coal come into the market. This is, of course, implied in the whole scheme of obtaining oil from coal, but recently a new circumstance lends strength to this opinion. For months previous to last November the Government had been pressing both the foreign oil companies and the Mitsui interests, with whom the oil companies then were trying to reach an agreement in regard to the storage of non-commercial stocks of oil, to proceed with the laying in of six months’ stocks as required by law. Since November, 1936, however, the foreign oil companies have heard nothing further, either from the Government or from the Mitsui interests, in regard to the matter, and the supposition is that the Government prefers that the oil companies remain in the position of law-breakers (not having stored six months’ stocks as required by law), in order that they will have no claim to rights or privileges and that their quotas may be cut at any time to make room for the products of the projected hydrogenation plants.

The above forecast of the situation is predicated upon the supposition that (1) the Japanese will be able to accomplish their program for the hydrogenation of coal and (2) that they will be able to obtain supplies of crude oil for their oil refineries. There is nothing now to indicate that they will not succeed in fulfilling both of these conditions. Of course, many things may occur between now and the year 1944 which will completely change the aspect of the case, such as a volte face in regard to Japan’s policy of nationalistic economy, or trade agreements which would require the maintenance of the status quo as regards foreign investments in Japan. At the present time, however, it can only be said that conditions in Japan do not appear at all hopeful for the future of the foreign oil companies.

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The foreign oil interests, therefore, are confronted with the problem of deciding whether to sell out at once to Japanese interests (who undoubtedly would be protected by the Government in their trade) or to wait for two or three years longer in order to ascertain the probability of success of the Japanese venture in the production of artificial gasoline. The only other alternative, if the Japanese venture is successful, will be for the companies to stay in the market, selling what they are permitted to, and eventually withdrawing and selling their properties at such prices as may be obtainable under the conditions then prevailing.

Under these circumstances, the Embassy believes that it would be most useful if the headquarters of the Standard and Shell interests could formulate a definitive policy in regard to their trade in Japan, based on the latest developments and trends, as well as upon their past experiences in this market. The time appears to have passed for the oil companies to be concerning themselves with minor details of their trade in the Japanese Empire, and it would appear to be the part of wisdom for them to consider with the utmost seriousness the question of their future in Japan in the light of the Japanese Government’s apparent determination to acquire a degree of self-sufficiency in liquid fuels. If and when the oil interests reach a decision in regard to this matter, their respective diplomatic agencies will be able to adopt an intelligent policy of assistance to them.

Respectfully yours,

Joseph C. Grew
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