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* Eyes refinery closures in Japan in few years

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Japan's JX Holdings and TonenGeneral inked a final agreement Wednesday to integrate their businesses under JXTG Holdings in April 2017, a move that will create a refiner with around 2 million b/d capacity and give the combined entity a share of more than 50% of the domestic gasoline market.

The latest agreement follows their signing of a memorandum of understanding on the business integration in December 2015 and takes it a step closer to establishing a group having a competitive refining edge in Asia.

"We intend to complete a company focused in midstream to downstream businesses with a high earning capability," JX Holdings Chairman Yasushi Kimura told a joint press conference in Tokyo.

Article Continues below...



"We will consider ways to expand our midstream to downstream businesses overseas," he added, while highlighting the company's strategy against the backdrop of declining domestic demand.

The companies will first look at the Asia-Pacific region for potential areas for developing and expanding midstream to downstream businesses, TonenGeneral President Jun Mutoh said.

JX is already looking at a possibility of building a refinery in the Van Phong economic zone in Vietnam's central Khanh Hoa province, while TonenGeneral is studying the construction of a fuel storage facility at Port Kembla on Australia's east coast.

EYING REFINERY CLOSURES

But the companies will first look at ways of increasing their annual earnings in excess of Yen 100 billion ($969.12 million) in three years by optimizing their operations in areas including supply, distribution, manufacturing and procurement.

From the supply, distribution and sales segment alone, the integrated company expects to raise its annual profit by Yen 28 billion.

"For example, we are currently processing about 1.5 million b/d of crude oil," Mutoh said. "If we can cut 10 cents (a barrel) during [crude] purchases by optimizing both companies' procurement, we can save more than Yen 5 billion a year alone."

Mutoh also said there is also room for consolidating the two companies' 57 oil terminals in Japan, where there are some overlaps, as well as reduce costs by jointly operating a crude fleet of around 30 VLCCs.

While declining to specify the expected rise in profit from refinery closures in three years, Mutoh said the companies would start considering the closures on completing business integration.

"We have found a pressing need for refinery consolidation and closures," Mutoh said. "We have a common view between the management of both companies for the necessity to cut fixed costs," Mutoh said.

The companies will aim to announce the refinery closures in a "few years," Mutoh added.

JX Holdings is the parent of Japan's largest refiner JX Nippon Oil & Energy, which has an installed refining capacity of 1.426 million b/d in Japan.

TonenGeneral is the second-largest refiner in Japan by capacity, with a combined 698,000 b/d at four plants across the country.

The companies, however, said their business integration was still subject to securing approvals from the relevant government authorities as well as at the companies' shareholders meetings.

The gasoline demand accounts for roughly 30% of domestic oil products demand.

In fiscal year 2014 (January-December), TonenGeneral's domestic market share for gasoline was around 20%, while JX Nippon Oil & Energy's market share stood at 33% in fiscal year 2014-15 (April-March).

At a joint press conference in Tokyo, JX Holdings President Yukio Uchida declined to comment on the status of securing approvals from the Japan Fair Trade Commission on its intended business integration with TonenGeneral.

Upon securing regulatory and shareholder approvals, JXTG Holdings will be launched and will include the merged energy arm, JXTG Nippon Oil & Energy, upstream arm JX Nippon Oil & Gas Exploration and JX Nippon Mining & Metals on April 1, 2017.

--Takeo Kumagai, takeo.kumagai@spglobal.com
--Edited by Jonathan Dart, jonathan.dart@spglobal.com