The Japanese refining industry is set for a landslide change as it aims to balance domestic supplies, stabilize its core petroleum business at home, and once that’s settled, expand overseas.
This is a markedly different strategy than before where Japanese refiners, and Japanese industry in general, could count on a stable domestic market and concentrate more on exports for growth. Now with greater export competition, and a shaky domestic market, there’s a need to get their domestic house in order before embarking on an ambitious and more risky overseas growth plan.
On the domestic front, Japanese refiners’ recent moves to integrate their businesses would mean that the local market will likely be dominated by two major refining groups in the next few years.
JX Holdings and TonenGeneral are to integrate by April 2017, while Idemitsu Kosan and Showa Shell are slated to do the same between October 2016 and April 2017.
Once integrated, the two refining groups would have a combined capacity of around 3 million b/d and could dominate roughly 80% of the 920,000 b/d domestic gasoline market. Gasoline accounts for a third of Japan’s 3.1 million b/d oil products demand.
The ultimate aim of these refiners, though, is not to dominate a dwindling domestic oil market, but rather to stabilize their core petroleum business, most of which is currently in Japan, by optimizing production and better controlling their domestic supplies to achieve sustainable growth.
JX and TonenGeneral’s integration would create a refiner with around 2 million b/d capacity and give the combined entity a share of more than 50% of the domestic gasoline market. However, JX and TonenGeneral would look to consolidate to reduce overlap in Tokyo Bay and western Japan.
Meanwhile, Idemitsu and Showa Shell’s merged company would have a capacity of a little over 1 million b/d and would control about 30% of Japan’s gasoline market. Idemitsu and Showa Shell, which do not have much overlap in refinery locations in Japan, have said the companies do not see the need to scrap or immediately integrate refineries.
Regardless of how refinery capacity optimization occurs, it should help restore balance in Japan’s oil fundamentals through greater efficiencies, at least in the short term.
Consolidate at home, expand overseas
In recent years, Japanese refiners have often suffered from cut-throat competition in the products market. The situation was worse in the years leading up to a round of capacity reductions, which were achieved by the end of March 2014. Prior to that, refiners would keep their crude runs propped up to reduce production costs, exacerbating the oversupply.
“Surplus capacity can be an obstacle because refiners tend to increase their output to reduce their costs,” Petroleum Association of Japan President Yasushi Kimura told a press conference in Tokyo on November 19.
Going forward, Kimura said the surplus capacity itself is not necessarily a problem. “It is about how to sell [oil products], essentially speaking.”
Maintaining a tight rein on domestic oil products supply while optimizing production and distribution through various options, including scrapping inefficient refining capacity and consolidating storage terminals, will be key for refiners to improve their earnings.
Growing competition in the international market from bigger and newer refineries elsewhere in Asia and the Middle East, is leaving Japanese refiners with limited options, which is why overseas deals will be a cornerstone of their growth.
In Vietnam, Idemitsu is a stakeholder in Vietnam’s 200,000 b/d Nghi Son refinery, which is expected to start up in the summer of 2017. JX is helping upgrading and expand Indonesia’s Balikpapan refinery to the 360,000 b/d capacity by 2022. JX is also looking to secure a license to retail gasoline in the country.
TonenGeneral is also developing a 230,000 kl (1.45 million barrel) fuel storage facility with a local partner at Port Kembla in the eastern state of New South Wales in Australia, where the facility is expected to be commissioned in the second half of 2017, after final approvals. The partners also entered into an agreement to acquire the fuel marketing and distribution company Petro National in Australia.
Such moves underscore the fact that Japanese refiners are strategically developing their downstream and midstream businesses in the markets where the demand for oil products supplies and imports are growing. This is a stark contrast to before when expanding overseas meant simply exporting more products on a FOB basis.
This is a markedly different strategy than before where Japanese refiners, and Japanese industry in general, could count on a stable domestic market and concentrate more on exports for growth. Now with greater export competition, and a shaky domestic market, there’s a need to get their domestic house in order before embarking on an ambitious and more risky overseas growth plan.
On the domestic front, Japanese refiners’ recent moves to integrate their businesses would mean that the local market will likely be dominated by two major refining groups in the next few years.
JX Holdings and TonenGeneral are to integrate by April 2017, while Idemitsu Kosan and Showa Shell are slated to do the same between October 2016 and April 2017.
Once integrated, the two refining groups would have a combined capacity of around 3 million b/d and could dominate roughly 80% of the 920,000 b/d domestic gasoline market. Gasoline accounts for a third of Japan’s 3.1 million b/d oil products demand.
The ultimate aim of these refiners, though, is not to dominate a dwindling domestic oil market, but rather to stabilize their core petroleum business, most of which is currently in Japan, by optimizing production and better controlling their domestic supplies to achieve sustainable growth.
JX and TonenGeneral’s integration would create a refiner with around 2 million b/d capacity and give the combined entity a share of more than 50% of the domestic gasoline market. However, JX and TonenGeneral would look to consolidate to reduce overlap in Tokyo Bay and western Japan.
Meanwhile, Idemitsu and Showa Shell’s merged company would have a capacity of a little over 1 million b/d and would control about 30% of Japan’s gasoline market. Idemitsu and Showa Shell, which do not have much overlap in refinery locations in Japan, have said the companies do not see the need to scrap or immediately integrate refineries.
Regardless of how refinery capacity optimization occurs, it should help restore balance in Japan’s oil fundamentals through greater efficiencies, at least in the short term.
Consolidate at home, expand overseas
In recent years, Japanese refiners have often suffered from cut-throat competition in the products market. The situation was worse in the years leading up to a round of capacity reductions, which were achieved by the end of March 2014. Prior to that, refiners would keep their crude runs propped up to reduce production costs, exacerbating the oversupply.
“Surplus capacity can be an obstacle because refiners tend to increase their output to reduce their costs,” Petroleum Association of Japan President Yasushi Kimura told a press conference in Tokyo on November 19.
Going forward, Kimura said the surplus capacity itself is not necessarily a problem. “It is about how to sell [oil products], essentially speaking.”
Maintaining a tight rein on domestic oil products supply while optimizing production and distribution through various options, including scrapping inefficient refining capacity and consolidating storage terminals, will be key for refiners to improve their earnings.
Growing competition in the international market from bigger and newer refineries elsewhere in Asia and the Middle East, is leaving Japanese refiners with limited options, which is why overseas deals will be a cornerstone of their growth.
In Vietnam, Idemitsu is a stakeholder in Vietnam’s 200,000 b/d Nghi Son refinery, which is expected to start up in the summer of 2017. JX is helping upgrading and expand Indonesia’s Balikpapan refinery to the 360,000 b/d capacity by 2022. JX is also looking to secure a license to retail gasoline in the country.
TonenGeneral is also developing a 230,000 kl (1.45 million barrel) fuel storage facility with a local partner at Port Kembla in the eastern state of New South Wales in Australia, where the facility is expected to be commissioned in the second half of 2017, after final approvals. The partners also entered into an agreement to acquire the fuel marketing and distribution company Petro National in Australia.
Such moves underscore the fact that Japanese refiners are strategically developing their downstream and midstream businesses in the markets where the demand for oil products supplies and imports are growing. This is a stark contrast to before when expanding overseas meant simply exporting more products on a FOB basis.
— Takeo Kumagai
Relate Threads
