Recurring oil supply instability whenever international conflicts erupt
Japanese government shares private-sector investment risks through public funding
Stable feedstock supplies and price competitiveness key to commercialization

Japan, seeking to diversify an oil procurement network heavily concentrated in the Middle East, is moving to build an integrated supply chain by investing public funds in overseas biofuel ventures and supporting domestic production facilities. Drawing on decades of expertise in microalgae cultivation and refining infrastructure, the country aims to establish a system led by Japanese companies across the entire value chain, from feedstock procurement to refining, processing, and end demand. However, with global oil majors scaling back their operations amid feedstock shortages and high production costs, the success of Japan’s biofuel strategy will hinge on securing stable supplies and achieving price competitiveness.

JOGMEC Investment Mandate to Strengthen Biofuel Supply Chain

According to the Nikkei on September 11, Japan’s Ministry of Economy, Trade and Industry plans to amend relevant legislation to allow the state-backed Japan Organization for Metals and Energy Security (JOGMEC) to invest in Japanese companies’ overseas biofuel ventures. By taking equity stakes in these projects, the government intends to reduce the investment risks borne by domestic private-sector companies and strengthen their bargaining power in feedstock procurement. The Japanese government will also support domestic production infrastructure for bio-based products such as bioplastics and ethanol.

Government investment is designed to alleviate the private sector’s exposure to the substantial upfront capital required for such projects. Until now, JOGMEC has been permitted to provide equity investment and debt guarantees only for overseas critical-mineral mines, liquefied natural gas (LNG), and oil exploration and development projects, while direct investment in biofuels remained legally restricted. Once the legislation is amended, Japanese trading houses and refiners investing in overseas biomass companies or local agricultural joint ventures will be able to share the considerable initial investment risk with the government.

Securing equity stakes and management participation rights in joint ventures would also give Japanese companies considerable influence over buyers, volume allocations, and pricing for locally produced ethanol, sustainable aviation fuel (SAF), and biodiesel. This is expected to reduce the risk of unilateral price increases or export restrictions by local operators while providing Japan with a safeguard for securing priority supplies during periods of severe energy-market disruption.

Billions of Dollars in Subsidies for Mass Production of Bio-Based Materials

Efforts to secure overseas feedstock interests will proceed in tandem with an expansion of Japan’s domestic production base. The Japanese government plans to provide several billion dollars in capital-investment subsidies to approximately 20 projects through 2036 to reduce manufacturing costs for bio-based materials such as bioplastics and ethanol. Production costs for bio-based products are currently about three times those of petroleum-derived alternatives, making it difficult for private companies to establish mass-production facilities independently. The government intends to offset initial capital expenditure and encourage greater production volumes, progressively narrowing the price gap with petroleum-based products.

The envisaged supply chain will integrate overseas feedstock production with refining and processing in Japan. If Japanese companies participate in operating overseas farms and biomass production facilities and convert the procured feedstocks into ethanol, bioplastics, and aviation and marine fuels at domestic plants, they will be able to exercise consistent control from procurement through end demand. The system could also reduce the exposure of Japanese manufacturers to fluctuations in Middle Eastern crude oil and naphtha prices while securing stable supplies of alternative feedstocks for the aviation, automotive, and chemical industries. It also reflects a broader policy ambition to cultivate an industrial ecosystem spanning synthetic biology, refining technology, and materials production, positioning biotechnology as a new engine of growth.

Table 1. Japan’s Biofuel and Bio-Based Materials Supply Chain Support Strategy

From Microalgae Research to a National Growth Strategy

Japan began laying the groundwork for a biofuel supply chain more than a decade ago. Japanese industrial conglomerate IHI established a joint venture with a Kobe University-affiliated startup and other partners in 2011 and began developing technology for the mass cultivation of oil-producing microalgae. By 2013, the company had achieved stable outdoor cultivation and reduced production costs to approximately $3.24 per liter, subsequently conducting cultivation trials in Kagoshima and Thailand. In 2020, it obtained ASTM D7566 certification, the international standard for aviation turbine fuels, for biojet fuel extracted from microalgae, establishing a foundation for supplying commercial aircraft.

As private-sector technology development progressed, the Japanese government incorporated the bioindustry into its national growth strategy. After establishing its Bio Strategy in 2019, the government recast it as the Bioeconomy Strategy in 2024 and set a target of expanding the biomanufacturing and bio-derived products market to approximately $345.4 billion by 2030. It also allocated a total budget of approximately $1.94 billion to the Bio-Manufacturing Revolution Promotion Project, scheduled to run from 2022 through 2032. The initiative constitutes a long-term industrial policy that provides integrated support for microbial engineering, mass cultivation, separation and refining technologies, and supply chains capable of converting waste and biomass into industrial feedstocks.

Japanese Refiners Turn to HEFA for Early Biofuel Mass Production

As policy support accumulated, Japanese refiners expanded their ambitions from research and development (R&D) to commercial production. Saffaire Sky Energy, a joint venture established by Cosmo Oil, JGC Holdings, and Revo International, began producing domestically sourced SAF last year at the Sakai refinery in Osaka Prefecture, with annual capacity of 30,000 kiloliters. Eneos, Japan’s largest refiner, is considering converting its idled Wakayama refinery in partnership with Mitsubishi Corporation to produce 400,000 kiloliters of biofuel annually from fiscal 2028 onward. While IHI has focused on next-generation microalgae-based processes, refiners have prioritized early mass production using the hydroprocessed esters and fatty acids (HEFA) method, which relies on feedstocks such as used cooking oil and animal fats.

Competition for feedstocks has also extended into South Korea’s mergers and acquisitions (M&A) market. In March, Eneos joined the bidding for Daekyung O&T, South Korea’s largest biodiesel feedstock supplier, assembling an advisory team comprising Kim & Chang, the country’s largest law firm, a major accounting firm, and a global consultancy before proceeding to on-site due diligence. Daekyung O&T was regarded as a pivotal company in the SAF and biodiesel supply chain because it handles more than half of South Korea’s used cooking oil and animal-fat production. Although a consortium comprising HD Hyundai Oilbank and Tenet Equity Partners ultimately prevailed with an offer of approximately $371.8 million, Eneos’s participation demonstrated that Japanese refiners’ competition for biofuel feedstocks had expanded beyond domestic collection networks and overseas production ventures into bids for South Korean companies.

High Commercialization Barriers Despite Energy-Security Benefits

Despite the energy-security advantages of biofuels, attaining commercial viability remains difficult. Feedstocks with substantial carbon-reduction potential, such as used cooking oil and animal fats, are limited in supply and therefore susceptible to sharp price increases when demand from aviation, shipping, and road transport converges. Collection, pretreatment, hydrogenation, international certification, and separate storage and transportation costs further ensure that finished-product prices remain well above those of fossil fuels. The International Energy Agency (IEA) has projected that demand for used cooking oil and animal fats could absorb nearly the entire estimated supply by around 2027, while placing advanced biofuel production costs at two to three times those of fossil fuels.

High production costs and unstable demand have prompted even well-capitalized global oil companies to retreat. Chevron indefinitely suspended operations at two biodiesel plants in the US states of Iowa and Wisconsin in 2024. Although the facilities had combined annual capacity of 50 million gallons, rising supply and declining renewable-fuel credit prices severely eroded their profitability. That same year, British oil company BP deferred plans for new biofuel projects in the United States and Germany, while UK energy company Shell halted construction of an 820,000-ton-per-year plant in Rotterdam, the Netherlands, and recognized losses of up to $1 billion. Following a review of the project’s commercial viability, Shell permanently abandoned it last year. The episode demonstrated that even large-scale facilities capable of achieving economies of scale can incur mounting losses if they fail to bridge the gap between production costs, including feedstock expenses, and selling prices.