Japan's JX Holdings and TonenGeneral signed a memorandum of understanding Thursday to integrate their businesses in April 2017, a move that would create a refiner with around 2 million b/d capacity and give the combined entity a share of more than 50% of the domestic gasoline market.
JX Holdings and TonenGeneral now aim to sign a final agreement on the business integration by August 2016, the companies said in a joint statement.
The companies aim to be "one of the most prominent and internationally competitive comprehensive energy, natural resource, and materials company groups in Asia" through the integration under a holding company, the statement added.
"This integration will be about enhancing competitiveness of our petroleum refining and sales businesses," JX Holdings Chairman Yasushi Kimura told a press conference in Tokyo.
Kimura said the intended integration would also be in line with the government's mid-term energy policy that has called for strengthening the domestic petroleum refining businesses and make forays into midstream and downstream businesses abroad.
JX Holdings is the parent of largest Japanese refiner JX Nippon Oil & Energy, which has an installed refining capacity of 1.426 million b/d in Japan. TonenGeneral is the second-largest refiner in Japan by capacity, with a combined 698,000 b/d at four plants across the country.
REFINERY CONSOLIDATION
Within five years of the business integration, JX Holdings and TonenGeneral aim to achieve a consolidated annual profit in excess of Yen 100 billion ($811.1 million).
They aim to do this by scrapping and integrating refineries, and consolidating "operation of production facilities in the Kawasaki area [in Tokyo Bay]," among other measures, including optimizing refining, distribution and sales, the companies said.
At the press conference, the JX and TonenGeneral chief executives declined to elaborate on how exactly the companies aimed to generate profit from the consolidation.
But on the sidelines of the press conference, JX Nippon Oil & Energy President Tsutomu Sugimori said JX and TonenGeneral would have room for "optimization" as the combined entity would have some "duplications" in Tokyo Bay and western Japan.
"We have some large duplications at refinery locations in the Keihin area [in Tokyo Bay] and Kansai [in the western Japan]," Sugimori told reporters. "Figuring out what to do with this [duplication] will be a big theme in the future."
With JX already having a nationwide supply network with its seven refineries, Sugimori said the integrated entity would be in a strong position because of TonenGeneral's efficient management and supply systems.
"We will also be a strong [crude] buyer with a combined 2 million b/d refining capacity," said Sugimori, adding that the integrated company would have "bargaining power" for its crude procurements.
"We should have a scale merit or be able to draw better conditions [from suppliers] such as changing destinations [of cargoes]," Sugimori added.
ANALYST COMMENT
In a report issued Thursday, Hidetoshi Shioda, senior analyst at Japan's SMBC Nikko Securities said JX Holdings and TonenGeneral's move will likely help improve oil products margins in the domestic refining sector by reducing "excessive competition" in sales and boost the demand-supply balance.
Specifically, Shioda said that the companies' earnings would improve from downsizing JX's 270,000 b/d Negishi refinery in Tokyo Bay and 115,000 b/d Osaka refinery in western Japan and increase runs at TonenGeneral's 258,000 b/d Kawasaki refinery in Tokyo Bay and 156,000 b/d Sakai refinery in the west, among other optimizations in distributions.
FTC SCRUTINY
Asked about the prospects of securing approvals on the integration from the Japan Fair Trade Commission, Sugimori said: "We are unsure. We might be asked to take corrective actions."
The FTC would look at the individual companies' market share of refined products by prefectures when scrutinizing JX and TonenGeneral's proposed integration.
The gasoline demand accounts for roughly 30% of domestic oil products demand. In fiscal year 2014 (January-December), TonenGeneral's domestic market share for gasoline stood at around 20%, while JX Nippon Oil & Energy's market share stood at 33% in fiscal year 2014-15 (April-March).
The Ministry of Economy, Trade and Industry, meanwhile, welcomes JX Holdings and TonenGeneral's move for integration.
"In the face of continuous severe business environment resulting from decreasing domestic demand, the petroleum industry, which is responsible for stable oil products supply in the country, will need to reorganize businesses, including [those] from business integration," a METI official said in an emailed statement to Platts. "We hope to see improvements in competitiveness through such efforts."
