Singapore/Tokyo: The answer to the billion-dollar question of whether the world is building too many oil refineries may lie in the least expected of places: Japan.
Amid a swift decline in domestic oil demand and a number of modest but important refinery investments, Japan will develop a sizeable chunk of high-quality, export-ready capacity within several years, analysts say.
If world oil demand remains in check, Japan’s new capacity could deepen a drop in profit margins that analysts expect around 2010 as India’s Reliance, the US Conoco and Europe’s Total and others launch new plants.
But if demand growth quickens, or new plants are delayed by soaring construction costs or fears of another cyclical downturn, Japan’s fuel could help limit another surge in oil prices, which have trebled in four years.
“Everyone’s focusing on the Middle East expanding capacity, of India expanding, and say the market may be oversupplied,” said Jeff Brown, managing director of FACTS Global Energy, which advises oil companies on the industry’s outlook.
“They forget about Japan, and that’s another part of the story. It’s interesting because it’s a bit below the radar.”
Japan’s exports are rising as firms explore new markets to offset a shrinking domestic base and build units to convert excess heavy fuel to light products. Exports of products, excluding bunker fuel, rose to a record above 2,00,000 barrels per day (bpd) last year, double levels three years earlier.
If oil demand in the world’s third-largest consumer falls by just 1.5% a year from now until 2020, more modest than some expect, Japan’s excess capacity would rise by over one million bpd, bigger than the world’s largest refinery.
Some of Japan’s older capacity is likely to be shut as demand shrinks. But some will be redeployed for the export market, as refiners take heart in forecasts from analysts such as Merrill Lynch, which expects margins to ease about $2 to $5.50 at the end of this decade, well above historical norms for the industry.
The balance for margins is precarious. The International Energy Agency forecasts world refining capacity to grow 11.6 million bpd by 2011, with oil demand up nearly nine million bpd.
Until lately, any excess capacity in Japan’s refining system mattered little for world markets.
Refiners facing logistical constraints and higher costs than regional rivals only shipped out gasoline, diesel or jet fuel when stocks bulged. Tokyo frowned on anything that would risk local energy supplies or widen its expanding trade surplus.
Recent evidence shows that is changing.
Top refiner Nippon Oil doubled its export-capable capacity to over 1,00,000 bpd and aims for 2,30,000 bpd, with an investment of only $9 million last year. It agreed to an alliance in January with South Korea’s export-savvy SK Corp.
Some refiners are making investments to address bottlenecks. “We’re talking minor reconstruction of a berth or tanks, the capex of export expansion is not so great for them,” said Hidetoshi Shioda, a senior energy analyst at Mizuho Securities.
Others are upgrading to convert excess heavy fuel, expected to grow as utilities favour nuclear or gas, into export fuels.
Number-four refiner Cosmo Oil aims to spend $850 million in the biggest such investment, and plans a US marketing operation as it seeks to raise exports five-fold.
Exports should also rise if Brazil’s Petrobras concludes talks to buy a 100,000-bpd refinery on Okinawa island, to process Brazilian crude into exports for China.
And global greener fuel policies are in Japan’s favour. Its ultra-high quality diesel and gasoline are increasingly in demand as other countries catch up with Tokyo’s strict standards.
Analysts say Japanese refiners are also repositioning themselves as their domestic demand base is fast eroding.
Much of the retreat is part of structural shifts that may accelerate, including a trend toward ultra-efficient cars and natural gas for power to cut back on carbon emissions.
Japan’s ministry of economy, trade and industry may give a view of demand later this month even more bearish than its 2006 forecast of demand contracting 1.9% a year through 2010.
“That was a big shock to oil refiners,” said Shioda.
Japan’s population is set to fall by 30% in 50 years, also pushing down transport demand. One-fifth is 65 or older, the highest such ratio worldwide and is expected to double by 2055.
Those factors are offsetting any extra demand from the resumption of economic growth after a decade of stagnation.
“It is quite possible that the new outlook will be below the one we did last year,” a ministry official told Reuters.