PetroChina approved to buy stake in Japanese refinery

China’s National Development and Reform Commission has approved a long-standing request by PetroChina International Co., a wholly owned unit of China National Petroleum Corp., to purchase a 49% stake in Nippon Oil’s 115,000-b/d Osaka refinery.

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, July 10 -- China’s National Development and Reform Commission has approved a long-standing request by PetroChina International Co., a wholly owned unit of China National Petroleum Corp., to purchase a 49% stake in Nippon Oil’s 115,000-b/d Osaka refinery.

The Osaka facility, equipped with a 27,000 b/d catalytic cracker and a 17,000 b/d catalytic reformer, can export 40,000 b/d of middle distillates. It also has a crude storage capacity of 570,000 kl, as well as 831,000 kl of combined storage for finished and unfinished oil products.

Nippon Oil first announced in May 2008 that it had agreed with CNPC to turn the Osaka refinery into a joint venture operation, with Nippon Oil holding a 51% stake and CNPC the remaining stake.

Nippon Oil said the joint venture would refine oil at the Osaka refinery and would also sell crude in the Asia Pacific market. It said other details, including the name of the company and when it would be established, would be decided after negotiations between the firms.

"The deal wipes out part of Japan's excess capacity and tightens supply and demand,” said Toshinori Ito, senior analyst at UBS Securities Japan Ltd.

“The deal is desirable not only for the two firms, but also the Japanese oil industry as a whole."

Nippon Oil said that oil demand in Asia Pacific was due to increase, while Japan’s domestic oil demand was expected to decrease sharply due to surging crude oil prices and the decision by industries to shift away from oil to other fuels, reflecting tightening environmental regulations.

As a result, Nippon Oil hoped to turn the Osaka refinery into an export-orientated refinery to Asia, instead of a refinery concentrating on the domestic market. It said the two firms would benefit from Nippon Oil group's refining management and CNPC group's marketing know-how.

At the time, Nippon Oil also said it signed a contract to boost refining for the CNPC group to 70,000 b/d starting in April from the then-current volume of 50,000 b/d under an agreement originally signed in 2004.

However, in February Nippon Oil Senior Vice-Pres. Shigeo Hirai announced that the two firms had decided to postpone the start of the planned Osaka joint operation to the second half of the year instead of in April.

"Economic conditions have worsened much more than had been expected," Hirai said. "In that sense, we are in talks to work more on cost cuts and improve efficiency (at the Osaka refinery). Each of us is intently trying to finish the deal as soon as possible."

Then, in April, Nippon Oil said that the two firms did not renew their term contract—which had began in 2004 and expired on Mar. 31—under which the Japanese refiner produced petroleum products, mainly C-fuel oil, for CNPC. The contracted volume had been 50,000 b/d day since April 2007.

“Until the joint venture starts, we'll sell oil products on spot basis, according to CNPC's requests,” said a Nippon Oil spokesman, who did not specify any new schedule for establishing the joint venture refinery project.

"The Asian oil markets are not tight now due to the economic slowdown, and that means our two firms are not in a hurry to complete the procedures," said Hidetoshi Shioda, senior analyst at Mizuho Securities in Tokyo.

Meanwhile, CNPC pursued other refinery agreements, in May completing the purchase for $1 billion of a 45.51% stake in Singapore Petroleum Co., which has a 50% interest in Singapore Refining Co., owner of a 285,000-b/d refinery and one of three major refiners in Singapore (OGJ Online, May 26, 2009).

PetroChina Co. also is said to be in talks with Ineos PLC on the possibility of investing in a Scottish refinery, a move that could mark the Chinese company's first venture into European refining.

Contact Eric Watkins at hippalus@yahoo.com.

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