May 14, 2012:

Japan's top oil refiner, JX Nippon Oil & Energy Corp, may cut its crude refining capacity by more than the 200,000 barrels per day (bpd) planned by the end of March 2014, if the step is needed to meet government rules, the company's president said. The comments signaled for the first time that the firm would not necessarily stick to cuts of 200,000 bpd to meet government policy, aimed at streamlining the overcrowded market and cutting excess capacity amid flagging domestic demand.

Aiming to boost Japan's capacity to handle cheaper, heavier oils, the government introduced new rules in 2010 that forced oil refiners to choose between closing existing crude distillation units (CDUs) and building new secondary units to process heavy oil residue. So far, Idemitsu Kosan Co (5019.T), Showa Shell Sekiyu (5002.T) and AOC Holdings (5017.T) are set to meet the requirements by pledging to shut nearly 30,000 bpd of capacity. Surplus refining capacity was estimated at around 20 percent, or more than 1 million bpd, in 2010. JX had already cut CDU capacity by 400,000 bpd by October 2010, but still needs to cut 220,000 bpd of capacity by March 2014, or 20,000 bpd more than the company's plan, in order to meet a trade ministry directive, a Reuters calculation shows.

The company has not disclosed the exact size of capacity cuts necessary to meet the law. JX said it had not made any decision on which refining capacity to trim, but industry sources said it was considering scrapping a sole 180,000 bpd CDU at its northernmost Muroran refinery, due to high delivered costs of crude and the lack of a lucrative secondary unit to convert residue, or very heavy oil, into more expensive lighter products, such as gasoline. "We would only need to make sure our calculations add up with the upgrading law," JX Nippon Oil President Yasushi Kimura told the Reuters Global Energy & Environment Summit. "We would not necessarily fixate on the 200,000 (bpd cut), and the cuts could be more or less than 200,000 bpd."

The company plans to complete a study of the planned cuts by September and start talking to local governments, among others, he said at the summit, held at the JX headquarters in Tokyo. JX is not looking to advance the schedule for completion of the CDU cuts from the planned March 2014 deadline, he added. JX Nippon Oil, a wholly owned downstream oil subsidiary of JX Holdings Inc (5020.T), operates eight refineries in Japan with total capacity of 1.61 million bpd, including its joint venture export-oriented Osaka refinery with Petrochina.  JX Holdings, created in April 2010 through the merger of Nippon Oil and Nippon Mining Holdings, has a 36 percent market share of domestic oil sales, and operates an upstream oil and gas business and Pan Pacific Copper, the nation's top copper smelter.

IRAN

JX Nippon was not under pressure from the government to further cut contractual imports of Iranian crude oil after it put on hold a renewal of a contract for 10,000 bpd that expired in March, Kimura added.  JX separately has a contract for an estimated 83,000 bpd of crude and condensate from Iran, which was renewed in January.  Japan has already drastically cut loading of Iranian crude since April, as its refiners cannot rely on the European reinsurance market to cover tankers.

The company has already made arrangements to load Iranian oil in April and May despite certain limitations in reinsurance coverage, and is in talks for June lifting, he added. 

By Reuters