Lawmakers Invoking Abenomics to Push Cuts at Japan Oil Refiners

Photographer: Kiyoshi Ota/Bloomberg

People fish near the Negishi Maru crude oil tanker moored at JX Nippon Oil & Energy Corp.'s Negishi refinery in Yokohama City. Close

People fish near the Negishi Maru crude oil tanker moored at JX Nippon Oil & Energy... Read More

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Photographer: Kiyoshi Ota/Bloomberg

People fish near the Negishi Maru crude oil tanker moored at JX Nippon Oil & Energy Corp.'s Negishi refinery in Yokohama City.

JX Nippon Oil & Energy Corp. and competing refiners will be under pressure to cut more capacity as Prime Minister Shinzo Abe’s ruling party targets bloated industries as a way to promote economic growth.

A group of 126 lawmakers is asking the Ministry of Economy, Trade and Industry to come up with measures to spur refiners to merge and shrink capacity, Takeshi Noda, the chairman of the group discussing oil-product distribution, said in an interview.

Abe, who took office in December, seeks to speed up restructuring of industries with overcapacity and too much competition as part of a growth strategy announced in June to revive the world’s third-biggest economy. Japan should use a “carrot and stick” approach with refiners as demand for gasoline is forecast to keep falling, Noda said.

“The essence of the problem is excess supply capacity,” Noda said in an interview last week at his office near the parliament. “An oversupply forces refiners to sell their products cheaply. The government needs to actively work harder than ever on measures to improve the production system, including integration among refineries.”

The Ministry of Economy, Trade and Industry, known as Meti, set rules in 2010 that required refiners to increase their residue cracking ratios by March 2014. The rules force the refiners to choose between building new cracking units or reducing refining capacity.

Japanese refiners cut daily refining capacity to 4.47 million barrels as of March 2013 from 5.35 million barrels in March 2000, the Petroleum Association of Japan said in an April report. An additional 550,000 barrels a day of capacity is expected to be cut to comply with the Meti rules, the group said.

Biggest Refiner

JX, the country’s biggest refiner, plans to shut its 180,000 barrel-a-day Muroran refinery in northern Japan in March 2014 while Idemitsu Kosan Co. (5019) will close its 120,000 barrel-a-day Tokuyama plant. TonenGeneral Sekiyu KK (5012) permanently shut two crude distillation units with a combined capacity of 105,000 barrels a day in the January-March quarter and Cosmo Oil Co. (5007) closed its 140,000 Sakaide refinery in July.

JX lowered its first-half profit forecast on July 31 to 65 billion yen ($670 million) from 90 billion yen. Profit margins for gasoline and middle distillates fell to “the worst levels” since Nippon Oil Corp. and Nippon Mining Holdings Inc. merged to form JX in 2010, Senior Vice President Akira Omachi said.

Even so, Japanese refiners’ excess capacity will start rising again as domestic demand for oil products falls by an average of 1.5 percent annually over two decades through 2030, Mizuho Bank Ltd. estimated in a May report.

Aging Facilities

The Japanese refiners should seek to merge and reorganize, following the lead of the banking and steel industries, Noda said. That would help refiners replace aging facilities and compete against South Korean and other Asian rivals, he said.

Japan has five major refiners, whereas the domestic banking and steel sectors have only three major companies. The biggest refiners are JX Energy, Idemitsu, TonenGeneral, Cosmo Oil and Showa Shell Sekiyu KK. (5002)

Noda’s comments invoke the “third arrow” of Prime Minister Abe’s economic policies, dubbed Abenomics, which also includes monetary and fiscal stimulus. A growth strategy, or the third arrow, announced in June includes plans to encourage replacement of aging facilities and speed up restructuring of industries.

“The government will establish guidelines on areas where an oversupply and excessive competition have been ignored for a long time, and will build a framework to promote initiatives for correcting the issue,” the government said in the growth strategy.

The government may also revise the 2010 rules with tougher targets to prompt refiners to cut more capacity if there is still excess capacity, Noda said.

“We need both a carrot and a stick,” he said. “Why does a growth strategy have to be always about deregulation? In some cases, we need to tighten regulations.”

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

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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