Japanese processing companies press ahead with integration


TOKYO�Japan's refining and petrochemical companies are pressing ahead with integration of their production facilities under the Ministry of International Trade and Industry's (MITI) petrochemical industry restructuring program, the so-called Renaissance Project. However, analysts and industry sources warn that the integration will not solve the primary problem facing both refiners and petrochemical producers, namely overcapacity.

The Renaissance Project calls for pipeline connections among the country's five biggest refining-petrochemical complexes to enable greater sharing of feedstock supplies. Under the plan, a single refiner will be designated as the sole supplier to all the petrochemical producers at each manufacturing center, regardless of corporate affiliation.

The aim of the program is to slash production costs for naphtha and petrochemical products.

Renaissance Project
MITI argues that the competitiveness of the country's petrochemical industry has been severely undermined by the cost of crude oil refining, which, it points out, is about twice as high as in other countries.

Under the Renaissance scheme, MITI will provide funding for the development of the necessary technology needed for linking the various facilities within the production centers, while the companies themselves will pay for the construction costs.

According to one senior oil company source, MITI is allocating "around �10 billion" for the Renaissance Project. MITI had originally allocated just �5 billion.

To date, five production centers have been chosen for the project: those at Kashima, Mizushima, Kawasaki, Keiyo, and Tokuyama.

Indeed, Mitsubishi Chemical Corp., Asahi Chemical Industry Co. Ltd., Nippon Mitsubishi Oil Corp., and Japan Energy Co. have already reached an accord to improve the efficiency of feedstock supply to ethylene plants at Mizushima. Under the deal, the four companies will jointly invest �6-8 billion to build 10 pipelines linking Nippon Mitsubishi Oil's and Japan Energy's refineries to the crackers operated by Mitsubishi Chemical and Sanyo Petrochemical Co. Ltd. The latter is a joint venture of Asahi Chemical and Japan Energy.

The pipelines, which are slated for completion in 2003, will result in annual savings of �4-5 billion, the companies say. They add that they may also form a joint venture to construct the pipelines.

Meanwhile, Mitsubishi Chemical�which had been holding talks with Kashima Oil Co. Ltd. since 1998 on a possible restructuring of operations at the Kashima complex�is to build a pipeline linking its cracker to Kashima Oil's refinery along similar lines to the project at Mizushima. The project is expected to be completed by 2003 at a cost of more than �1 billion.

At the Kawasaki complex, meanwhile, Showa Shell Sekiyu KK and Toa Oil Co. Ltd. have already agreed to link their refineries next year and are currently in talks over bringing Tonen Corp. into the deal. This would give the companies a combined refining capacity of 480,000 b/d at Kawasaki.

At nearby Keiyo, Nippon Mitsubishi Oil is to link up with Cosmo Oil Co.

These five oil companies between them will eventually feed the various petrochemical units operated in the zone by Mitsui Chemical Inc., Idemitsu Petrochemical Co., Sumitomo Chemical Co., and Maruzen Petrochemical Corp.

Industry response
Observers remain skeptical about the benefits of the Renaissance Project. One chemical industry executive told OGJ Online that only a limited number of complexes are likely to truly benefit from the program�leaving behind a host of other smaller, less-efficient complexes scattered across the country.

In addition, said the source, the program will not lead to the more fundamental restructuring needed in the petrochemical and refining sectors. "The pipelines might allow producers to shift product more easily from one plant to another, but there is almost no chance that the project will lead to any mergers or takeovers."

At the same time, analysts say that the program fails to tackle one of the most basic problems facing Japan's beleaguered oil and petrochemical sectors: how to reduce their massive overcapacity. Japan's refining capacity currently stands at around 5.3 million b/d, and even industry officials concede that this figure needs to be reduced by as much as 20%.

However, although all the oil companies have been aggressively cutting operating costs, to date, the announced reduction in refining capacity has been minimal.

Nippon Mitsubishi Oil says it is considering closing its 75,000 b/d refinery at Kawasaki and has shut down its 26,000 b/d refinery at Niigata, while Showa Shell has closed down its 40,000 b/d Niigata refinery. It also announced that it and its new partner Japan Energy plan to make further cuts to the tune of 150,000 b/d. (Recent reports indicate that Showa Shell will slash a total of 50,000 b/d at its Kawasaki and Yokkaichi refineries, while Japan Energy will cut its production by 100,000 b/d.)

But commentators point out that these cuts are tantamount to "a drop in the ocean" and that the Renaissance Project, rather than helping address this situation, might actually be making it worse.

"Who is going to shut down a refinery after they've just pumped millions of yen into linking it up by pipeline to other refineries or petrochemical units in the complex?" asked one industry analyst.

Petrochemical woes
The situation at the petrochemical end is not much better.

Last year, Mitsubishi Chemical became the first company to announce the closure of an olefins plant. It will shutter its 276,000 tonne/year ethylene cracker at Yokkaichi by the end of this year and concentrate production at Kashima instead.

Showa Denko KK has also announced that it is to scrap its 230,000 tonne/year No. 1 cracker at Oita. To compensate, it will increase output at its Oita No. 2 unit to 600,000 tonnes/year from 524,000 tonnes/year. The moves will result in a net capacity decline of 20% at Oita and save the company an estimated �3 billion/year.

But two cracker closures are not enough, say both analysts and industry officials. Indeed, the president of Sumitomo Chemical, Akio Kosai, has said that as much as 2 million tonnes/year of Japan's ethylene capacity needs to be cut, equivalent to at least 2 or 3 more of the country's 11 crackers.

As one commentator put it, "Undoubtedly there will be substantial cost benefits gained at the sites concerned, but the project still fails to answer the more important question of what is to be done with all that excess capacity."

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