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Japan refiners to be stirred, not shaken, by merger


Fri Dec 5, 2008 6:58am EST

By Osamu Tsukimori and James Topham


TOKYO, Dec 5 (Reuters) – The merger of Japan’s biggest and its sixth-largest refiners has resurrected hope that a long-awaited shake-up of the shrinking industry is nigh, but the scope of future activity may disappoint investors.


Hope of an integrated oil major emerging from the sector is likely to be dashed by top oil producer INPEX’s reluctance to get dragged down by the refining business at a time of collapsing global margins; investors betting on more refining deals may be stymied by piecemeal sales or strategic Gulf investors.


And while analysts agree more rationalisation is needed to eliminate costly, loss-making facilities as demand in the world’s No. 3 oil consumer shrinks, they say it’s far from clear who might be next in line after Nippon Oil Corp (5001.T: Quote, Profile, Research, Stock Buzz) unveiled a merger with Nippon Mining Holdings Inc (5016.T: Quote, Profile, Research, Stock Buzz) on Thursday.


One thing seems clear — a combined Nippon Oil/Mining, with one third of the market, can’t get much bigger without drawing unfavourable attention from regulators.


That may rule out tightening existing ties with Idemitsu Kosan Co (5019.T: Quote, Profile, Research, Stock Buzz), a firm that grew into Japan’s third-largest refiner without a single merger in its century-long history.


“Idemitsu has tie-ups with Nippon Oil and Nippon Mining, and it’s active on joint companies,” said UBS analyst Toshinori Ito. “But a merger is unlikely.”


One top candidate for sale is Exxon Mobil’s (XOM.N: Quote, Profile, Research, Stock Buzz) Japanese subsidiary TonenGeneral Sekiyu (5012.T: Quote, Profile, Research, Stock Buzz), which industry sources have said for years is looking for a potential pullout from the Japanese market as part of a global strategy.


But years of quiet searching have turned up few eager buyers, forcing it to sell off the business bit by bit, as it did when it sold a small Okinawa refinery to Brazil’s Petrobras this year.


Two others — Royal Dutch Shell’s (RDSa.L: Quote, Profile, Research, Stock Buzz) Showa Shell Sekiyu KK (5002.T: Quote, Profile, Research, Stock Buzz) and Cosmo Oil Co (5007.T: Quote, Profile, Research, Stock Buzz) — count top producers Saudi Arabia and the United Arab Emirates as cornerstone shareholders who have important strategic reasons for retaining a foothold in Japan, a country that buys more than a fifth of their crude exports.


“Cosmo and Showa Shell’s main shareholders are different, so a merger is unlikely now,” said UBS’ Ito.


Saudi Aramco increased its stake in Showa Shell to 15 percent stake in 2005, while IPIC, the investment arm of the Abu Dhabi government of the United Arab Emirates bought 20 percent in Cosmo last year to become the top shareholder.


Cross-shareholding and strategic ties are common in Japan’s clubby corporate world, but don’t always lead to full-scale mergers.


Nippon Oil agreed a 10-year alliance with Nippon Mining’s wholly owned refining unit Japan Energy in 2006, while Showa Shell took a 6.6 percent stake in a unit of Fuji Oil, the refining unit of AOC Holdings (5017.T: Quote, Profile, Research, Stock Buzz), in 2005.




For a graphic on the Japanese refining sector click: here






Nippon Oil’s merger with Nippon Mining is primarily aimed at revamping the loss-making oil refining business. Japan’s hyper-competitive domestic retail market means that local refiners — many of them running decades-old, inefficient plants — claim some of the lowest margins in the developed world.


Analysts said the new firm’s plan to cut crude refining capacity by 400,000 barrels per day (bpd), or 8 percent of Japan’s total, by April 2012 is the precursor to cut-backs that could ultimately total 1 million bpd — 20 percent of its capacity — after oil consumption began declining in 2003.


“We believe that the sector is 750,000 bpd overcapacity at the moment,” said David Hewitt, an analyst at CLSA Asia Pacific Markets in Tokyo. “That would have a positive affect on the domestic refining margin.”


And despite talk of the creation of a Japanese “oil major” that would both produce and refine crude like BP (BP.L: Quote, Profile, Research, Stock Buzz) or Exxon Mobil (XOM.N: Quote, Profile, Research, Stock Buzz), many analysts are dubious that the new Nippon Oil/Mining could manage such a deal.


Japan’s top oil explorer Inpex Corp (1605.T: Quote, Profile, Research, Stock Buzz) has output of 423,000 bpd of oil equivalent, more than double the new firm’s combined output of 161,000 bpd. Nippon Oil is the fifth-biggest shareholder in Inpex, holding 4.75 percent of its common shares.


The combined company hopes to reach 250,000-300,000 bpd in the future.


“The reason why Inpex doesn’t want a merge with Nippon Oil is because they do not trust downstream business,” Hidetoshi Shioda, senior analyst at Mizuho Securities in Tokyo.


“They don’t want their upstream operations to fall into an abyss due to the worsening profits at downstream.”

(Editing by Jonathan Leff)  


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