* Japanese refiners shut 1 mln bpd capacity since 2010 Tokyo
* Refining capacity to fall to around 4 mln bpd in 2014
* To import less crude from Saudi Arabia, UAE, Kuwait and
* Japan may import oil products during peak demand
By Florence Tan and James Topham
SINGAPORE/TOKYO, Aug 19 Japanese oil refiners
will cut their capacity to the lowest in four decades next year
to meet a government deadline, slashing the country's Middle
East imports and tightening regional fuel supplies.
Imports of crude by the world's No. 3 oil consumer could
fall by up to 320,000 barrels per day (bpd) -- down nearly 9
percent on last year -- with Saudi Arabia, the United Arab
Emirates, Kuwait and Qatar bearing the brunt of the cuts.
The contraction in one of the world's biggest oil markets
adds to falling demand from the United States as shale oil
output booms, and from the ailing European economy. As import
demand elsewhere falls, top oil exporters are competing more
intensely for the biggest growth market -- China.
The combination of a declining, ageing population and
improved efficiency have cut deeply into Japan's fuel
consumption. The decline in 2014 demand is almost as much as the
380,000 bpd by which China's appetite for oil is expected to
grow next year.
By March 2014, Japan's total refining capacity will fall to
its lowest level since 1970 or just below 4 million bpd,
dropping about 1 million bpd -- or 20 percent -- from 2010, when
Tokyo issued a mandate to slim down the bloated sector with
falling domestic demand.
Japan's refiners will benefit by increasing throughput at
remaining facilities, but less spare capacity could lead to a
growing dependence on imports of oil products such as kerosene
and gas oil to meet peak seasonal demand.
Japan has already cut about 700,000 bpd of refining capacity
since 2010, Thomson Reuters data shows. Still to come, two major
producers are due to close one refinery each by next March.
JX Holdings will shut the 180,000-bpd crude
distillation unit (CDU) at Muroran in Hokkaido, while Idemitsu
Kosan Co is scrapping its oldest 120,000-bpd unit in
Tokuyama, Yamaguchi Prefecture.
The cuts follow a 2010 directive from Japan's Ministry of
Economy, Trade and Industry (METI) aimed at boosting the
efficiency of Japan's refiners, many of which were operating
below capacity in an overcrowded market.
The directive mandated an increase in the ratio of residue
cracking units to CDUs by the end of March 2014. This would
allow refiners to use cheaper, heavier oils, which they could
process further and export. Alternatively, refiners could meet
the target by closing old, inefficient facilities.
Most refiners chose to shut inefficient units rather than
invest in upgrades.
"The refiners as a group have found new cracking units
difficult to justify due to falling market demand," said
independent oil analyst John Vautrain, pointing to a declining
population and higher fuel efficiency.
Refiners instead are targeting higher crude throughputs to
boost returns, with JX and Idemitsu, for example, aiming for 90
percent to 95 percent of capacity utilisation, company sources
"That's the name of the game. Reducing surplus capacity will
allow local refineries to maintain higher throughput," a
Tokyo-based trader said. "It's looking more positive than two to
three years ago when the Japanese refining sector was looking
The shutdowns mean Japan could cut crude imports by close to
320,000 bpd next year if JX and Idemitsu maintain current
refinery utilisation rates at 80 percent, Reuters calculations
show. If the two refiners raise run rates to 90 percent, imports
would fall by about 140,000 bpd.
Most of the cuts will come from Saudi Arabia, the United
Arab Emirates, Kuwait and Qatar, who provide the high sulphur
crude used by the refineries to be shut down, although this
could be offset in the near-term by lower supply from
Japan's crude diet is also likely to shift to lighter grades
such as Abu Dhabi's Murban which produce more valuable middle
distillates and less fuel oil, traders and analysts said. Fuel
oil demand is expected to fall in Japan when more nuclear
reactors restart and as the power sector uses more coal and
RAISING RUN RATES
How much refiners will be able to increase crude runs will
depend on factors such as the strength of domestic oil demand,
whether or not it will be cheaper to import oil products than to
produce, and if Japanese oil exports can be competitive.
Japan's refineries have been traditionally higher-cost than
peers in South Korea and Singapore given greater labour and
operating costs, while some producers are not equipped to load
large product cargoes for export.
The latest closures may not improve the competitiveness of
Japan's industry as it has chosen not to pay for upgraded
facilities to use cheaper crude, said Vautain.
"Reducing fixed costs would make the refiners more
profitable, but has less impact on the incremental refining
costs that govern international competitiveness," he said.
Domestic demand is expected to be weak, but exporters could
get a boost from the weaker yen.
Oil product demand in Japan is expected to fall 1.8 percent
a year on average over the next five years through 2017/18,
according to government estimates.
But as Japan's spare refining capacity shrinks, the supply
of oil products could tighten during peak maintenance and demand
seasons, leading to more imports.
This could provide opportunities for South Korean and
Singaporean refineries to export oil products to Japan.