UPDATE 2-Nippon Oil, Nippon Mining announce CDU capacity cuts

* Capacity to be cut by 400,000 bpd to 1.39 mln bpd by 2011

* Several CDUs to be shut down, including Oita, Negishi CDUs (Adds details, Nippon Oil January refining plans)

By James Topham and Osamu Tsukimori

TOKYO, Dec 25 (Reuters) - Nippon Oil Corp 5001.T, Japan's top refiner, and merger partner Nippon Mining Holdings Inc 5016.T said they will shut down several crude distillation units to cut refining capacity in the face of declines in domestic oil demand.

Domestic oil demand has been steadily falling for years, a trend that accelerated this year in the face of Japan's worst recession in decades, leaving the country with one million barrels per day of excess refining capacity, according to some analysts.

The two firms, which are due to merge in April, have said they will cut oil refining capacity by 400,000 bpd to 1.392 million bpd by March 2011 and aim to cut an extra 200,000 bpd by the end of March 2015. [ID:nT41262]

They said on Friday that Nippon Oil will close the 110,000 bpd No.2 crude distillation unit (CDU) at the Mizushima plant, as well as mothball the Negishi plant's 70,000 bpd No.2 CDU and the Oita plant's 24,000 bpd No.1 CDU.

Nippon Mining's refiner Kashima Oil will reduce capacity at the No.1 CDU at its Kashima refinery by 21,000 bpd to 189,000 bpd.

This comes of top of Nippon Oil's 60,000 bpd Toyama refinery that was scrapped earlier this year. Nippon Oil is also negotiating to run its 115,000 bpd Osaka refinery through a joint venture with China National Petroleum Corp.

For a table of the capacity cuts click [ID:nTOE5BO03G]

"Taking into account the current demand situation as well as the projections of both of our firms of the future speed of decline, when we agreed (to merge) last year we decided on this order for capacity reduction based on suitability and location," said Shigeo Hirai, chief financial officer for Nippon Oil.

"But before we reach the total reduction of 600,000 bpd, more comprehensive deliberations will be needed," Hirai added.

The capacity cuts would allow the merged firm, to be called JX Group, to be more profitable as it will be able to run several refineries at high utilisation rates, rather than more at low utilisation rates.

"The shutdown of these CDUs was largely expected among oil industry observers, so it won't have much immediate impact, but it could spur other refiners to cut capacity since they now have the detailed refining reduction plans of the JX Group," said Osamu Fujisawa, an oil economist at industry consultants FE Associates.

Earlier this month Idemitsu Kosan Co (5019.T) said it may consider cutting refining capacity, and last month Cosmo Oil Co Ltd (5007.T) idled the 85,000 bpd CDU at its Yokkaichi refinery until at least January, both due to declining Japanese demand. [ID:nTOE5BG05O] [ID:nT270481]

In an indication that poor demand will continue into 2010, Nippon Oil also said on Friday it plans to refine 5.36 million kilolitres of crude oil in January, up 1 percent from a year earlier but 14 percent below the level two years ago. [ID:nTKX006617] (Editing by Michael Watson)