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Nippon Oil agrees merger with rival

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By Jonathan Soble in Tokyo

Published: December 5 2008 02:00 | Last updated: December 5 2008 02:00

Japan’s bloated oil refining industry is set to shrink after Nippon Oil, the country’s largest refiner, agreed yesterday to merge with its rival Nippon Mining.

The combined group is expected to rank among the world’s 10 largest private sector oil companies by revenues, although it will lag far behind global oil majors such as ExxonMobil in terms of profits and market value.

The group would be worth just under Y750bn ($8.1bn) at yesterday’s closing share prices.

The decision to merge comes amid a plunge in oil prices that has battered Japanese refiners’ small exploration businesses and slashed the value of their inventories.

Nippon Oil said in October that it expected to fall into a net loss this year.

Japan’s oil companies have as much as 30 per cent more refining capacity than they need, analysts say, because of slumping demand and the lifting of import restrictions in the 1990s. Recent small-scale export deals with China have failed to take up the slack.

Worldwide, more than four out of five refinery construction projects face cancellation because of the collapse in demand, according to a report by Wood Mackenzie, the oil industry analysts.

Takashi Enomoto, analyst at Merrill Lynch, said the proposed merger could induce Japan’s four other big refiners, which include arms of ExxonMobil and Royal Dutch Shell, to seek tie-ups of their own.

Nippon Oil and Nippon Mining, Japan’s sixth biggest refiner, together distribute one-third of Japan’s petrol and other oil products.

Shinji Nishio, Nippon Oil chief executive, said the combined entity would cut its refining capacity by 400,000 barrels per day, or 20 per cent, within two years. Cost savings were projected at Y60bn annually within three years.

Mr Nishio hoped the new company’s larger scale would allow it to increase its investments in upstream oil and gas production.

These businesses generated just 3 per cent of Nippon Oil’s revenues last year, although high oil prices and razor-thin refining margins meant they accounted for 40 per cent of recurring profits.

Mitsunori Takahagi, Nippon Mining chief executive, said the minerals business would help drive expansion into alternative energy technologies such as solar power and fuel cells.

Nippon Mining earns about a quarter of its revenues from mining and three quarters from oil.

Shares in both companies jumped more than 15 per cent yesterday before giving back some of the gains. Nippon Oil closed up 3.4 per cent at Y331 and Nippon Mining ended 11.3 per cent higher at Y285.

Nippon Oil and Nippon Mining said they expected to sign a final merger agreement by next March. Details, including the ratio of each company’s stock in the new entity, have yet to be decided.

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