Exxon, Cosmo Oil May Shut Refineries in Japan, Analysts Say

Exxon Mobil Corp.’s Japanese unit, JX Holdings Inc. and other refiners may cut their capacity by about 30 percent to meet government requirements to modernize facilities or reduce output, three analysts said.

Japanese oil refiners were required to submit proposals by yesterday to meet new rules announced by the trade ministry in July to increase the proportion of gasoline and gasoil they produce from residues, a cheaper way to extract fuel.

Demand for gasoline and other fuels in Japan is forecast to decline by an average of 3.5 percent annually through March 2015 because of a falling population, according to a trade ministry report. Refiners must choose between cutting capacity or upgrades, according to the trade ministry. Upgrades can cost as much as 100 billion yen ($1.2 billion), said Takashi Miyazaki, a Tokyo-based analyst at Citigroup Inc.

“The new regulation is good for the industry as a whole because the 30 percent reduction in capacity will be offset by the decline in fuel demand,” Miyazaki said.

The regulations require refiners to increase the proportion of gasoline and gasoil they produce from residues, which trade at a discount to crude oil.

The rules are meant to compel Japanese refiners to modernize refineries or cut capacity in an oversupplied market so they can compete more effectively with Asian rivals, according to the trade ministry.

Submitting Proposals

About 10 percent of the country’s capacity is dedicated to heavy oil processing, compared with a ratio of 36 percent in China and an average of 19 percent in Asia, the ministry said in April. Japan has refining capacity of nearly 4.6 million barrels per day as of Oct. 23, according to the Petroleum Association of Japan.

“The real objective of this regulation is to reduce capacity,” Hidetoshi Shioda, a senior analyst at Nikko Cordial Securities Inc., wrote in a report on Oct. 25.

Exxon’s TonenGeneral Sekiyu K.K., the country’s second- biggest refiner after JX, submitted a proposal on Oct. 29 that included “rationalization and investment,” spokeswoman Kana Tadokoro said in an e-mailed statement in response to an inquiry from Bloomberg.

TonenGeneral may shut its 156,000 barrel-a-day Sakai plant near Osaka while Cosmo Oil Co. may close the 110,000 barrel-a- day Sakaide refinery, in western Japan, Miyazaki said.

Cosmo Oil has passed its proposal to the ministry, said Cosmo Oil spokesman Katsuhisa Maeda, declining to comment on the details.

Mothballing Plants

JX, Japan’s biggest refiner, submitted its plan on Oct. 29, a JX official said. The company in May announced plans to reduce capacity by 600,000 barrels a day by March 2014 and mothballed a crude distillation unit at its Negishi refinery near Tokyo last week.

JX will probably close its 180,000 barrels-a-day Muroran refinery in Hokkaido in northern Japan and cooperate with Idemitsu, which owns a refinery nearby, on distributing fuel products, Miyazaki said.

Showa Shell Sekiyu K.K., the fifth-biggest refiner in Japan, said in February it will mothball its 120,000 barrel-a- day Ogimachi plant in the summer of 2011.

Showa Shell won’t need to cut capacity further to meet the trade ministry’s target, Miyazaki said. The Tokyo-based company has filed a plan with the ministry, spokesman Kenichi Morikawa said by phone today.

Cutting Capacity

Idemitsu Kosan Co., Japan’s third-biggest refiner, has announced plans to cut 100,000 barrels a day of capacity by March 2013. The company submitted its compliance plan on Oct. 29, said spokeswoman Maki Yasunaga.

None of the refineries would comment on the details of their plans.

“The trade ministry and refiners all clam up on this,” Osamu Fujisawa, an independent oil economist in Tokyo who formerly worked at Showa Shell and Saudi Arabian Oil Co. “But oil companies will be eventually forced to tell shareholders about their plans because this is very important for their share price.”

The Topix Oil & Coal Index, which includes most of Japan’s refiners, is up 11 percent this year while the benchmark Nikkei 225 Stock Average has fallen about 13 percent.

To contact the reporters on this story: Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net; Yuji Okada in Tokyo at yokada6@bloomberg.net.

To contact the editor responsible for this story: Amit Prakash in Singapore at aprakash1@bloomberg.net.

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