A 2010 ordinance enacted by Japan’s Ministry of Economy, Trade, and Industry (METI) requiring Japanese refiners to raise their mandatory cracking-to-crude distillation capacity ratio has succeeded in slashing the country’s refining capacity, but further cuts are likely to occur by 2018, says Facts Global Energy (FGE).
In a study issued on May 21, FGE estimates that, as of end-March, compliance with the METI ordinance has reduced Japan’s refining capacity to just below 4 million b/d, a drop of 900,000 b/d from April 2010.
Implemented in July 2010 with the objective of improving the sophistication of Japanese refineries by April, the ordinance stipulated refiners to either upgrade their heavy oil cracking units or reduce their crude distillation unit (CDU) capacities to a ratio of 13% or higher from 10% by March (OGJ Online, Dec. 3, 2012).
Based on METI’s definition, the country’s heavy oil cracking-CDU ratio has increased to 13.1% from 11% in April 2010, according to FGE.
While the ordinance indeed established a deadline to which refineries ultimately adhered, FGE said reductions to CDU capacities likely stemmed from Japanese refiners’ inability to justify the major investments needed to upgrade their cracking units in light of a stagnant oil products demand outlook.
With the exception of a spike in low-sulfur fuel oil demand for electric power generation during 2011-13 following a March 2011 earthquake and subsequent tsunami (OGJ Online, Mar. 18, 2011; Mar. 17, 2011; Mar, 11, 2011), FGE notes Japanese demand for oil products has been waning since 2006 amid a declining and ageing population, structural changes, fuel substitution, and energy conservation and efficiency measures.
While the initial phase of the METI ordinance has just passed, the ministry is now planning a second phase of the ordinance that will seek to further integrate Japan’s refining business with new targets for refiners to meet by end-March 2017, said FGE.
An advisory subcommittee on petroleum and natural gas for METI established earlier in the year has agreed on several key components of the new phase, FGE said.
FGE said these recommendations, soon to be officially presented to METI, could involve a revised definition of heavy oil cracking that likely will include more secondary processing units, such as fluid catalytic cracking units.
FGE also expects a second phase of the ordinance could provide incentives for refineries in close proximity to other refineries and petrochemical plants to merge or integrate.
But further government ordinances or administrative guidance may be unnecessary, and in fact, detrimental to business for Japanese oil companies, particularly those refiners with plans to boost profits by increasing petroleum product exports, FGE said.
Even without additional refining regulations, FGE estimates that declining Japanese product demand alongside challenges to expanding product exports will result in another 330,000 b/d reduction in the country’s refining capacity by 2018.
According to FGE, Japanese refiners already face potentially crippling financial burdens in deciding whether to replace aging the country’s aging refineries as well what to do with excess capacities of secondary units.
Japan’s refiners will make these decisions, FGE says, with or without additional government intervention.