Cooperation Needed For Securing Japan's Imports Of Refined Products From Neighbors

Yasuo Koyama, Economist
Yoshike Ogawa, Research Coordinator/Chief Economist
Oil Industry Group, Institute of Energy Economics,
Japan

• South Korea's Changing Products Export/Import Outlook [33635 bytes]
• Singapore's Growing Refined Products Export Trade [18772 bytes]

As of April 1996, Japan repealed the Provisional Law on Importation of Specified Petroleum Products (Plispp), thus further freeing imports from regulation.

Since the dawn of the 1990s, Asia has suffered an imbalance of soaring oil demand and lack of refining capacity. In addition to intraregional trade, product imports from outside the region, such as the the U.S. West Coast and the Mediterranean Sea, have expanded.

Given such conditions in Asia, as well as Japan's stringent product specifications for environmental reasons, potential exporters of the three specified products (gasoline, diesel, and kerosine) in Asia should virtually be limited to the Republic of Korea (ROK), Taiwan, and Singapore.

This study is designed to make an in-depth examination of the current and future supply/demand and trade for refined products of the three countries with respect to Japan's potential import needs.

Three export sources

In the ROK, petroleum product imports and exports play the role of adjusting overs and shorts of domestic supply/demand for oil.

Given its domestic demand growth, refining capacity expansion, introduction of tougher environmental standards, etc., sharp fluctuations in ROK's product imports/exports are very likely.

While the country plans to deregulate its oil industry by 1999, the deregulation can pose an additional element to further complicate such fluctuations.

On the other hand, the basic strategy taken by the Singaporean oil industry is to keep new equipment investment to a minimum and realize greater earnings from existing less-fixed-cost-shackled refineries by keeping them running at full capacity.

Without placing an emphasis much on capacity upgrading to better meet environmental needs, Singapore concentrates its effort on the security of promising markets in the future, such as China, Viet Nam, and India.

The ROK's and Taiwan's orientation toward higher quality products is playing a vital role in the formation of an environmental premium on petroleum product trade and is likely to lead to establishment of a petroleum product trade different from what Singapore is headed for.

Major findings

To some extent, the ROK, Singapore, and Taiwan have the potential to export high quality products that Japan needs.

But in view of the peculiar circumstances of each country, none of them can be considered a stable supply source of constant size:

• With refining capacity expansion under way now, the ROK will have spare capacity to export high quality products briefly after a peak in 1997-98, including 50,000 b/d of gasoline and 40,000 b/d of low sulfur (LS) diesel (sulfur content 0.05 wt %). But, depending on domestic supply/demand situations, the surplus capacity can fluctuate sharply.

• From about 2000 onward, Taiwan also will have a surplus export capacity of about 100,000 b/d. with diesel as the centerpiece. The key to Japan-bound exports is if Taiwan is willing to install deep distillate desulfurization and other upgrading units.

• Singapore is able to produce exportable high quality products, including as much as 30,000-50,000 b/d of gasoline and as much as 60,000-80,000 b/d of 0.05 wt % LS diesel. But Singapore is more oriented toward developing countries and exports products that just meet present specifications in the developing world in the hope to secure promising markets in the future.

The ROK and Taiwan both can boost their LS product imports (resid, diesel) once tougher environmental standards are introduced. Combined with deregulation of their oil industries, such moves in the ROK and Taiwan are bringing about structural shifts in East Asian product trade that are tilting toward high quality products as the axis.

From this point on, it will be an important task for Japan to endeavor, hand in hand with the ROK and Taiwan, to establish globally common product specifications and strengthen the activity of exporting environmentally benign products by putting existing capacity to effective use.

Plispp removal

Japan further advanced the liberalization of product imports by lifting Plispp in April 1996.

Any business operators are qualified to import petroleum products as long as they can satisfy environment/safety related product specifications and stockpiling requirements.

Whether or not Japan's oil product imports, particularly from within Asia, will expand is drawing attention now.

Entangled with such factors as ever-strong oil demand, insufficient refining capacity, and toughened environmental standards, Asia's oil product trade has swollen and is spurring mounting product imports from outside the region, notably the U.S. West Coast and the Mediterranean Sea.

Given the product qualities required in Japan, potential sources of Japan's product imports from within Asia are virtually limited to the ROK, Taiwan, and Singapore (Fig. 1 [55000 bytes]).

ROK surplus export capacity

The ROK's oil demand kept soaring at a rate of 24%/year in the high economic growth years following the 1988 Seoul Olympics.

ROK demand growth is expected to slow down to 5-6%/year in the years to 2000 and further to 2-3% thereafter.

However, unexpected demand increases cannot be ruled out, if the country's still limited gasoline use starts to rise and if surging electricity demand boosts residual oil needs.

To combat seriously worsening air pollution problems nationwide, the ROK toughened product specifications that in particular required lead phasedown for gasoline and reduction in sulfur content for diesel and residual fuel oil.

Centering on new requirements for inclusion of oxygen, lower aromatics/benzene content, and sulfur reductions in diesel and resid, even more severe product specifications are expected (Table 1 [37771 bytes]).

The ROK plans to increase its oil refining capacity, often running short against rising demand, from the current 1.82 million b/sd to 2.64 million b/sd by 1997 (Fig. 2 [33760 bytes]).

To cope with the recently light-oil-dominated product mix, growing gasoline demand, intensifying low sulfur diesel orientation, etc. already under way is the introduction of secondary capacity including residual fluid catalytic cracking, deep distillate desulfurization, and atmospheric resid desulfurization.

As a result of its capacity expansion to meet expected domestic demand in the future, the ROK is likely to have a surplus product export capacity in the years to 2000 (Fig. 3 [20525 bytes]). The surplus export capacity is expected to peak at about 400,000 b/d in 1997-98. Thereafter, without added capacity expansion, the surplus export capacity should continue to shrink along with rising oil demand. The ROK's surplus export capacity is characterized by sharp fluctuations attributable to domestic oil demand.

Imports/exports of diesel and residual oil in the ROK are deeply affected by strengthened product specifications for environmental reasons, as well as lack of desulfurization capacity. With regard to both diesel and resid, the ROK is now importing LS products and exporting high sulfur (HS) products. Given additional deep distillate hydrodesulfurization capacity under construction, the ROK can temporarily have a surplus export capacity of a little less than 40,000 b/d of LS diesel (sulfur content 0.05 wt %) in 1997-98.

The essential role of product imports/exports expected by the ROK is to adjust overs and shorts of domestic oil supply/demand. The strong likelihood is that the ROK's product exports can sharply fluctuate depending on domestic demand growth, refining capacity expansion, and toughened environmental standards, among others.

Deregulation of the oil industry by 1999 appears to add another element to further complicate such developments.

Taiwan's evolving surplus

Taiwan, where demand for middle distillates, mainly kerosine and diesel, has expanded its product imports, largely gasoline and LS resid needed to meet environmental standards (Fig. 5 [38250 bytes]).

Taiwan has exported virtually no petroleum products except for bunker fuel oil. Due to such problems as aging, the operating rate of refineries can scarcely be increased, and product imports are likely to keep expanding for the present and near future.

If deregulation of the oil industry proceeds as scheduled, and a 450,000 b/sd refinery being built by Taiwan Plastics (Formosa Group) to produce petrochemical feedstocks is completed by about 2000, Taiwan is expected to have a constant surplus capacity to export about 100,000 b/d of products, largely kerosine and diesel (Fig. 5 [38250 bytes]).

Whether or not Taiwan's refiners will be willing to install upgrading capacity-typically deep distillate hydrodesulfurization units-will determine whether Taiwan can be expected to be a source of exports bound for Japan.

Singapore's export shift

Singapore is the only export-oriented refining center in Asia.

In order to meet varying quality needs from various developing countries, Singapore is trying to keep a delicate refining balance while maintaining exports of products, with diesel as the centerpiece.

Lately, Singapore also has strengthened its activity as an oil trader by importing products from all over the world and reexporting them to Asia.

Although a few problems remain with regard to sulfur content and blendingstock composition, it appears Singapore is capable of producing gasoline that fits Japan's standards as much as about 50,000 b/d at maximum (Fig. 7 [42867 bytes]).

But, given the scramble for limited stocks, gasoline production needs to be constrained so long as production of naphtha, both for exports and domestic petrochemical feedstock, is kept at present levels.

Singapore's basic strategy is to curb new equipment investment to a minimum and realize greater savings by running less-fixed-cost-shackled existing refineries at full capacity.

The country does not necessarily emphasize capacity upgrading to meet environmental and higher quality requirements.

Instead, by bolstering oil product exports of current quality, Singapore pours its efforts into the security of promising future markets such as China, India, and Viet Nam.

Environmental, deregulation issues

Although not necessarily constant, the ROK is expected to have a surplus capacity to export high quality products Japan needs.

Singapore is also able to produce high quality products to some extent but is rather eager to secure promising markets in the future by providing developing countries with products that just fit their existing quality standards.

The ROK and Taiwan will need the same product specifications as does Japan in a time lag of 1-2 years.

Toughened environmental standards and continuing deregulation of the oil industries in the two countries have brought about structural shifts in East Asia's oil products trade toward high quality products and are about to bear a trade zone different from Singapore's.

High quality product orientation of the ROK and Taiwan is counted as an important factor in the formation of the environmental premium in products trade.

From now on, it is essential for Japan to commit to the establishment of common product specifications internationally in close partnership with the two countries and also enhance the activity to export environmentally friendly products by putting existing capacity to best use.

The Authors