Japanese refining sector reform is not particularly new. However, next month, a government directive will come into effect, forcing refiners to further boost efficiency, whilst enhancing output of higher value clean products, such as diesel and jet fuel.
This directive is not the first introduced by the government and nor would it appear to be the last in the industry’s restructuring, with further announcements possible later this year, Gibson Research said in a report.
Domestic consumption of petroleum products has been falling in recent years, in part due to a contraction of industrial output, more fuel-efficient vehicles and the introduction of a mandatory blending of ethanol into transport fuels.
The Petroleum Association of Japan said that crude oil refining capacity reached 3.8 mill barrels per day at the end of 2016, with production spread across 22 facilities. However, over the coming years, this figure is expected to fall.
In an attempt to streamline the industry, a merger between JX Holdings and TonenGeneral, Japan’s largest and third-ranked refiners, respectively, has been approved for April, 2017, creating a new company - JXTG Holdings.
TonenGeneral has also announced production cuts at four refineries this year totalling 71,500 barrels per day. Capacity has already been reduced at the company’s Kawasaki plant. Furthermore, Idemitsu Kosan, the country’s second-biggest refiner, had been in talks with Showa Shell about a possible merger. However, this deal appears to be off the table, as it has not won approval from the Idemitsu founding family, Gibson said.
Overall, the March directive is expected to reduce refining capacity to close to 3.57 mill barrels per day, according to Reuters data. The introduction of a third directive, possibly later this year, will further reduce capacity and could also reduce the number of major refiners in the country from five to four by 2020 or 2021, although this has yet to be confirmed.
Japan’s shrinking refinery capacity has had implications for the crude tanker market. According to IEA data, crude imports into the country have been falling for five years, down by 300,000 barrels per day since 2012.
Although this represents a notable drop in trade volumes, the decrease had been more than offset by increases in China’s crude buying. Some support to crude tanker demand was also found in a temporary surge in fuel oil imports, on the back of the Fukushima Nuclear disaster in 2011.
With further restructuring directives expected later this year, it would appear that Japan is braced for more reductions in crude oil imports. However, as was the case in the past, oil demand in other parts of Asia continues to grow, most notably in non-OECD countries.
As such, Japan’s falling demand will most likely will be absorbed by gains in other markets. However, what this highlights is the declining importance of Japan in the regional crude tanker market and a growing involvement of a large Japanese fleet in international trades, Gibson concluded.