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Japan refiners urged to promptly cut nameplate capacity in line with regulation

Tokyo (Platts)--5 Nov 2014 452 am EST/952 GMT


Japan's Ministry of Economy, Trade and Industry has urged Japanese refiners to cut their nameplate capacities as quickly as possible in response to regulations implemented July 31.

"We hope to see reductions in nameplate capacity as quickly as possible," a ministry official told Platts on Tuesday, November 4, pointing to the country's shrinking domestic oil demand.

On October 31, METI received regulatory response plans from refiners JX Nippon Oil & Energy, Idemitsu Kosan, Cosmo Oil, Showa Shell, TonenGeneral, Fuji Oil and Taiyo Oil.

Refiner Nansei Sekiyu was exempted from the previous regulation for annual crude processing volume of less than 3 million kl, or 52,000 b/d, at its sole 100,000 b/d Nishihara refinery in Okinawa. It is also exempt from the new regulations, the official said.

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The official said the refiners' plans reflected "various pictures" of the industry but a common "sense of crisis" given the country's declining oil demand. He said the plans had a range of timelines, declining to elaborate further.

Seven months on, the new government regulations have once again pushed Japanese refiners to make decisions on capacity cuts on crude distillation units, just after they slashed capacity to 3.95 million b/d at the end of March.

The policy is designed to boost the industry's efficiency and competitiveness.

Total refining capacity is expected to shrink about 400,000 b/d or 10% of the current installed capacity to 3.55 million b/d by the end of March 2017 if local refiners decide to respond to the policy by cutting their crude distillation capacities.

Unlike previous regulations, the new policy considers local refiners' nameplate CDU capacity cuts as well as more efficient use of residue at adjacent refineries by building new pipelines.

Under the new regulation, Japanese refiners are expected to increase their residue cracking capacity to 50% by the end of March 2017, up from 45% on March 31, under a revised definition of the capacity.

The revision counts the capacity of units such as fluid catalytic cracking, residue direct-desulfurizing and solvent deasphalting units in addition to previously been considered units -- cokers, residue fluid catalytic crackers and residue hydrocrackers -- for the residual cracking capacity of local refiners.

By March 31, 2017, Japanese refiners with residue cracking capacity of less than 45%, 45%-55% and more than 55% as of March 31 this year would be required to show improvements of more than 13%, 11% and 9%, respectively, according to the regulatory targets.

For the first time Tuesday, METI released residue cracking targets for the seven Japanese refiners based on their residual cracking capacities at the end of March.

NEW TARGETS FOR EACH REFINER

Under the new targets, refiners Cosmo Oil, TonenGeneral and Taiyo Oil will be required to improve their residual cracking capacities by 13% from their current capacities of less than 45%, according to METI.

JX Nippon Oil & Energy, Idemitsu Kosan, Fuji Oil and Showa Shell will be required to increase their residual cracking capacities by 11%, 11%, 11% and 9%, respectively, from their respective current residual cracking capacities of 46%, 52%, 48% and 59%, according to METI.

The METI regulation counts JX Nippon Oil & Energy as having an installed capacity of 1.426 million b/d, including the 115,000 b/d Osaka export refinery jointly operated with PetroChina International (Japan) as well as a Kashima 63,500 b/d condensate splitter and a 35,000 b/d Mizushima-B condensate splitter.

That is despite JX Nippon Oil & Energy's own official refining capacity of 1.212 million b/d, which excludes the Osaka refinery and the Kashima and Mizushima-B condensate splitters.

Taiyo Oil -- which was exempt from the previous round of cuts because it operates a single refinery, its 118,000 b/d plant in Shikoku island -- might also avoid the new regulation after the company submits its response plan to METI, according to sources.

The same exemption might apply to Fuji Oil, which operates its sole 143,000 b/d Sodegaura refinery in Tokyo Bay.

COSMO OIL TO CUT ONE OF TWO CDUS AT CHIBA

In the case of Cosmo Oil, which has not met the previous regulatory target for the end of March, will have to cut one of its two crude distillation units at its 240,000 b/d Chiba refinery as part of its interim response for the previous regulation, the METI official said.

In March, Cosmo Oil said it cut its Yokkaichi refining capacity by a combined 43,000 b/d or 28% to 112,000 b/d on March 31 as part of its "temporary measure" in response to the government regulations. But Cosmo Oil did not discuss other options being considered to comply the regulations at the time.

Cosmo Oil and TonenGeneral have agreed to consolidate their refining operations in Chiba, Tokyo Bay, by building a pipeline to connect their two refineries under a joint operating company, which the companies aim to launch in January 2015.

TonenGeneral is the majority stakeholder in Kyokuto Petroleum Industries, which operates the 152,000 b/d Ichihara refinery in Chiba.

--Takeo Kumagai, takeo.kumagai@platts.com
--Edited by Meghan Gordon, meghan.gordon@platts.com

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