Analysis: Japan Refining Merger to Regulate Product Supplies More Efficiently
04.05.2019 - NEWS

April 5, 2019 [S&P Global Platts] – The merger of Idemitsu Kosan and Showa Shell will likely help to regulate supply of oil products more efficiently in the domestic market, which would potentially limit the need for imports of oil products into Japan.

 

Idemitsu Kosan and Showa Shell merged under a share exchange on Monday, becoming Japan’s second-largest refiner, with a combined capacity of 945,000 b/d covering six refineries in the country. The combined entity now accounts for roughly a third of the domestic oil products market.

Previously, some imported gasoline was supplied in areas where there was no refinery [owned by one of the two merged entities],” a Japanese trader said. “But after the merger that would likely not be needed because the new entity should be self-sufficient, with refineries across the country.”

Together with JXTG Nippon Oil & Energy, which supplies roughly half of Japan’s supplies, Idemitsu and JXTG account for more than 80% of around 3 million b/d of the domestic oil products market.

The Idemitsu-Showa Shell merger may prompt the merged entity to trim supplies into the domestic spot rack oil product market. As a result, their need to import cargoes from overseas would be relatively lower, according to market participants.

Rack oil products are those that are transported by refiners and other independent suppliers over land by tank lorry — loaded from either refinery tanks or secondary tanks outside of refinery compounds. Japan’s spot waterborne oil products supply is believed to have dropped more than 80% since the establishment of JXTG Nippon Oil & Energy in April 2017, according to market participants.

Market participants said Japanese refiners’ weekly wholesale pricing of the main clean products — gasoline, kerosene, gasoil and A-fuel oil, a blend of gasoil and fuel oil in a 90:10 ratio — would likely be more aligned following the latest merger.

The Japanese refiners’ weekly wholesale price differentials for JXTG Nippon Oil & Energy, Idemitsu Kosan and Cosmo Oil have already generally been following the same weekly difference over April 2018-March 2019. But during that period, Showa Shell was the only major refiner whose prices were not moving in tandem, according to market information compiled by S&P Global Platts.

Storage Capacity

The Idemitsu-Showa Shell merger might also reduce Japan’s oil products storage tank capacity available for imports, according to market sources. “The merger will likely not be positive for imports, because when Idemitsu and Showa Shell combine their production, sales, and tank storage network, it will reduce the need for traders and will also lead to reduced opportunities to bring imports into Japan as well,” a South Korean exporter targeting the Japanese market said.

Because Japan’s geographic shape is very long and stretched, you cannot just bring in imports into one location and move it from there across the country by tank lorry, which can be easily done in South Korea as the country is geographically more compact,” the source said.

Showa Shell, which has a 49% stake in the Japan Oil Network, has a combined oil products storage capacity of more than 350,000 kl, or 2.2 million barrels, over nine locations in Japan, according to industry estimates.

Japan was a net oil product importer in 2018 for the second consecutive year, with imports of gasoline and gasoil both more than doubling, according to the Ministry of Economy, Trade and Industry data. The country imported an average of 622,246 b/d of oil products in 2018, while product exports averaged 523,141 b/d.

Naphtha accounted for the vast majority of Japan’s product imports, with volumes more or less unchanged year on year at 488,178 b/d. But imports of gasoline doubled year on year to 35,947 b/d last year, while gasoil imports averaged at 12,499 b/d, up from 5,564 b/d.

The business integration of Showa Shell and Idemitsu took effect Monday through a share exchange, but the transfer of Showa Shell’s assets, liabilities, and rights and obligations to Idemitsu Kosan will only be effective from July 1.

This will also include Showa Shell’s 6.57% stake in Fuji Oil, which operates the sole 143,000 b/d Sodegaura refinery in Tokyo Bay. Showa Shell also has an oil products supply contract with Fuji Oil.

Idemitsu Kosan is now scheduled to hold a board of directors meeting in late April to decide on the execution of agreement, including Showa Shell’s assets and contracts beyond July 1. Following the merger, Idemitsu Kosan sells roughly 54 million kiloliters/year (930,546 b/d) of oil products in the domestic market and about 14 million kl/year abroad.

Japan’s other refiners are JXTG Nippon Oil & Energy, with a combined 1.93 million b/d capacity across 11 refineries in Japan; Cosmo Oil, with 363,000 b/d over three refineries; and Taiyo Oil, with the sole 138,000 b/d refinery.

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