Japan s refining environment Platts Asian Refining Summit 3 March 2016, Singapore Yoshi Kobayashi The Institute of Energy Economics, Japan (IEEJ)
Oil in Japan 2 Oil is the largest energy source for Japan although its demand and share have continued to decline. Transportation is the major sector to use oil while petrochemical, household & commercial, and industry sectors uses a large volume of oil. Total primary energy supply in Japan Oil product demand balance (2013) (U: '000kl) Transportation Agriculture & Fisheries Industry City gas* Power generation Household & Commercial Chemical feedstock Sub total Gasoline 55,330 88 55,418 Naphtha 45,748 45,748 Jet fuel 5,053 5,053 Kerosene 1,660 3,284 12,949 17,893 Diesel 33,088 552 22 212 205 34,079 Fuel oil 3,652 2,960 10,130 14,630 3,956 35,328 Crude oil 11,293 439 11,732 LPG 2,140 5,522 1,987 1,187 12,056 5,358 28,250 Sub total 99,263 5,172 19,046 1,987 27,322 28,961 51,750 233,501 *Used to adjust calorific value. Source : METI, IEEJ
Japanese oil demand 3 Domestic oil demand has been declining since 1995 Improvement of energy efficiency, particularly in transportation sector, and population decline are structural factors of the demand decline. Japanese government (METI) forecasts that demand of major products will decline by 2% per year until 2020. Historical product demand by product Demand outlook for major products 4.5 million b/d 3.5 million b/d 4.0 3.5 Lube Fuel oil 3.0 Fuel oil 3.0 Diesel 2.5 Diesel 2.5 2.0 1.5 1.0 0.5 Jet / Kerosene Naphtha Gasoline 2.0 1.5 1.0 0.5 Jet / Kerosene Naphtha Gasoline 0.0 1991 1994 1997 2000 2003 2006 2009 2012 0.0 2013 2014 2015 2016 2017 2018 2019. Source : METI
Recent developments in Japanese oil market 4 Gasoline demand performs better than expected in recent months. Price effect might work favorably for gasoline demand. Fuel oil decreases due to lower utilization of oil fired power generation. Kerosene decreases due to fuel switch to city gas / electricity and warm weather. Oil demand by product Oil demand growth/decline (m-o-m) 4.5 million b/d 0.3 million b/d 4.0 3.5 0.2 3.0 2.5 2.0 1.5 1.0 Fuel oil Diesel Kerosene Jet Naphtha Gasoline 0.1 0.0 (0.1) (0.2) Fuel oil Diesel Kerosene Jet Naphtha Gasoline Total 0.5 (0.3) 0.0 2013 2014 2015 (0.4) 2013 2014 2015 Source : METI, IEEJ
Japanese crude oil import 5 Non-Middle Eastern crude oil has crept in increased in the last decade. But Latest market developments (price differentials among benchmarks, competition among OPEC producers) may lead to a return of Middle Eastern crude oil. Crude oil import by country Non-Middle East crude import since 2012
Product import 6 Middle East will continue to be a major import source of naphtha to Japan although its ethylene cracking capacity is expected to shrink. Because refining capacity will continue to be long, and domestic market is likely to remain competitive even after the industrial consolidation. Import of other products will remain low. Product import by source Import by product 900 '000 b/d Other 900 '000 b/d 800 700 US 800 700 Other 600 Russia 600 Naphtha 500 400 300 200 Middle East India Indonesia 500 400 300 200 Fuel oil Diesel Jet/ Kerosene Gasoline 100 Malaysia 100 0 2013 2014 2015 Korea 0 2013 2014 2015
Product export 7 Singapore and Australia will continue to be major directions for Japanese refiners. Export to South America revives in recent months Supported by favorable margin environment, gasoline export is growing while diesel export is decreasing. Product exports* by direction Export by product 500 '000 b/d Other 700 '000 b/d 400 South America 600 US 500 300 Other Australia 400 Jet Fuel oil 200 Singapore 300 Diesel Kerosene 100 Hong Kong 200 Gasoline China 100 0 2013 2014 2015 Korea 0 2013 2014 2015 *Exclude bond products
Reorganization of Japanese oil industry 8 Two majors are emerging in the Japanese oil industry. JX Holdings Sales: 10,882 billion yen CDU capacity: 1.43 million b/d Marketing outlet: 10,783 SS Idemitsu Kosan Sales: 4,630 billion yen CDU capacity: 540 thousand b/d Marketing outlet: 3,725 SS Merger plan - Final agreement for merger (Aug 2016) - Approval by shareholders (Dec 2016) - Corporate merger (Apr 2017) TonenGeneral Sales: 3,295 billion yen CDU capacity: 700 thousand b/d Marketing outlet: 3,481 SS Major shareholder: Mitsui (6%), ExxonMobil (5%) Merger plan - Final agreement for merger, and approval by shareholders (~ Oct 2016) - Corporate merger (Oct 2016 ~ Apr 2017) Showa Shell Sales: 2,790 billion yen CDU capacity: 450 thousand b/d Marketing outlet: 3,317 SS Major shareholder: RD/Shell (35%), Saudi Aramco (15%) - Refinery integration in Chiba Cosmo Holdings Sales: 3,036 billion yen CDU capacity: 450 thousand b/d Marketing outlet: 3,133 SS Major shareholder: IPIC (21%) - Refinery integration in Yokkaichi
Government mandate for refining capacity rationalization 9 Government mandate requires oil refiners to raise the share of conversion capacity over CDU capacity. Act for Sophisticated Energy Supply System, the legal base of the government mandate, provides energy industry has to utilize fossil fuel more efficiently. Higher conversion target, in reality, encourage refiners to reduce CDU capacity (denominator) instead of expanding conversion capacity (numerator). Refiners are required to report the progress to meet the mandate every three months. In the current round of mandate whose deadline is March 2017, joint reduction within the same industrial area is allowed, which may trigger further industrial consolidation. Actions by each refiners Company 1 st round (~March 2014) 2 nd round (~March 2017) JX Transformed Muroran refinery to a petrochemical plant Install PDA plant. Idemitsu Closed Tokuyama refinery Reduce CDU capacity in Chiba Showa Shell Closed Kawasaki refinery Rationalize CDU capacity in Yokkaichi jointly with Cosmo Cosmo Closed Sakaide refinery Rationalize CDU capacity in Chiba with TonenGeneral Rationalize CDU capacity in Yokkaichi with Showa Shell TonenGeneral Expanded H-Oil capacity Reduced CDU capacities in Kawasaki and Wakayama Rationalize CDU capacity in Chiba with Cosmo Reduce its CDU capacity Source: Company announcements, IEEJ
Location of refineries 10 Japan has 23 refineries with total capacity at 3.917 million b/d as of June 2015. Average refinery size is 170 kb/d Utilization has been around 80%. 6 million b/d 90% 5 4 80% 70% 60% 3 2 1 0 Refining capacity Utilization (rhs) 1991 1994 1997 2000 2003 2006 2009 2012 50% 40% 30% 20% 10% 0%
Marketing sector 11 Most of major products such as gasoline and diesel are marketed as branded products of Motouri. Approximately 80% of gasoline was sold as a branded product. Although spot market transactions are not as active as in the US or European markets, the spot market affect the wholesale price of Motouri. Number of retail stations continues to decline reflecting shrinking demand. Japan s marketing supply chain Number of retail stations Source: PAJ Source: PAJ
Domestic product price structure 12 Due to high rate of taxation, the impact of lower oil price is not straightforward. Yet gasoline price below JPY100/L should have a certain level of demand boost effect. Japan s oil product price structure Gasoline price 125.8 Yen/L Diesel price 107.8 Yen/L (as of December 2015) 3.97 USD/gal (as of December 2015) 3.40 USD/gal Consumption Tax 9.3 Yen/L Petroleum and Coal Tax 2.3 Yen/L Diesel Provisional rate 17.1 Yen/L Transaction Provisional rate 25.1 Yen/L Tax Base rate 15.0 Yen/L Gasoline Tax Base rate 28.7 Yen/L Consumption Tax 5.6 Yen/L Petroleum and Coal Tax 2.3 Yen/L Gross margin (refining, Gross margin (refining, logistics, and marketing 26.8 Yen/L logistics, and marketing 34.2 Yen/L cost and profit) cost and profit) + Crude oil cost (CIF) 33.6 Yen/L Crude oil cost (CIF) 33.6 Yen/L Source: IEEJ
Non-oil business by Japanese refiners 13 Facing the declining domestic oil demand, Japanese refiners explores non-oil businesses as another source of income. Taking advantage of the ongoing liberalization process in power and gas markets, several Japanese refiners are examining to enter gas and power business. Showa Shell continues its solar panel business to grow it to another pillar of the company s core businesses. Company Power Renewable Energy Non oil business developments by refiners JX - Continues its fuel cell and hydrogen business Idemitsu Plans to construct a coal fired power plant in Chiba with Kyushu Electric Power and Tokyo Gas. Planned capacity is 2GW and expected completion is the mid-2020s. Plants to build a gas fired power plant in Himeji with Kansai Electric Power. Planned capacity is 1.8GW, and expected completion is early 2020s. - Showa Shell - Plans to expand its solar panel business (Solar Frontier Inc.) as another pillar of income TonenGeneral Plans to construct a coal fired power plant in Chiba with Kansai Electric Power. Planned capacity is 1GW and expected completion is 2024. Plants to construct a gas fired power generation in Shizuoka. Planned capacity is 1.7 GW and expected completion is 2021. Source: Company s announcements
Overseas downstream business by Japanese refiners 14 Idemitsu and JX lead the overseas downstream businesses by Japanese refiners. Idemitsu is constructing a new 140 kbd refinery in Nghi Son in Vietman with PetroVietnam, KPC, and Mitsui Chemical. JX started diesel oil import and wholesale business in Indonesia in 2014. JX is discussing with Petrolimex, the largest wholesaler in Vietnam for potential equity investment and construction of a new refinery in Vietnam. TonenGeneral plans to build a tank yard in New South Wales in Australia. Idemitsu acquired Freedom Energy, an Australian wholesaler, to supply diesel oil to mining sites in Queensland, Australia in 2012.
Conclusions 15 Industrial consolidation is expected to create two strong oil companies that have solid profit base in domestic market and develop active overseas businesses. Product import will remain low as it is likely that refining capacity is long. Product export may increase subject to market environment and the degree of capacity rationalization. The third round of government mandate for capacity rationalization after 2017 will be determined after evaluating domestic oil demand trend, refining operations after industrial consolidation, and market environment of Asia pacific oil markets. Effect of business portfolio diversification, particularly to power business, remains to be seen.
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