* CDU capacity could be cut by as much as 400,000 bpd
* New goals to demand further streamlining by March 2017
* Proposed rules to foster industry reorganisation (Adds details)
By Osamu Tsukimori
TOKYO, June 30 Japan may cut crude refining capacity by as much as 10 percent, or 400,000 barrels per day (bpd), by March 2017, under a new round of reductions set to be forced on the country's refiners amid forecasts for declining demand for oil products.
Cuts mandated by the government in 2010 pushed refineries to axe nearly 1 million bpd of capacity by March this year, but the industry ministry sees demand for oil products falling further by 2018, due to population decline and fuel efficiencies.
The ministry outlined proposals on Monday that would mandate more cuts. The plan will be released for public comment on Tuesday and refiners would have until Oct. 31 to say how they would meet the proposed cuts.
Japan's refining capacity stood at 3.95 million bpd as of April 1 this year, down nearly 20 percent from 2008.
The industry ministry said it was important to make the industry more efficient to strengthen its competitiveness, given razor thin profit margins and the difficulty of passing on rising costs to wholesale prices.
The move is similar to the previous plan that required refineries to either scrap older crude units or invest in heavy residue crackers to produce more higher-end, light products such as diesel and jet fuel. The new plan would also allow refiners to partner with rivals.
Yasushi Kimura, head of the Petroleum Association of Japan and chairman of the nation's biggest refiner JX Holdings , said he welcomed that the proposals would allow each firm to make voluntary decisions on reorganisation and boosting competitiveness.
The proposal calls for improving the overall ratio of residue cracking capacity to crude distillation unit (CDU) capacity from 45 percent at present to 50 percent, closer to the world's best of about 55 percent.
If refiners simply cut crude refining capacity, CDU capacity will fall by as much as 400,000 bpd, the ministry said. The plan would mean a rise in Japan's refinery run rate to nearly 90 percent, it said.
The previous mandate only counted cokers, residue fluid catalytic cracking (RFCC) units and residue hydrocracking units (RHCU), but the new goals would also include fluid catalytic cracking unit (FCC), solvent de-asphalting unit (SDA) and residue desulphurisation unit as residue cracking units.
Under the proposal, refiners with the worst ratio would need to make the most improvement, based on current ratio of residue cracking units to crude refining capacity.
Refineries with a ratio of less than 45 percent would need to improve by 13 percent, refineries with a ratio of 45-55 percent would need to improve by 11 percent and refineries with a ratio of 55 percent and above would need to boost their performance by 9 percent.
If two refiners decide to combine operations of their plants in the same industrial area and scrap one of the CDUs at the complex, both firms can share credit for scrapping the CDU.
Ministry officials said they expect to finalise the goals after seeking feedback via public comment.
(Reporting by Osamu Tsukimori; Editing by Aaron Sheldrick and Richard Pullin)