Oil woes force Japanese refinery giants to merge

Japan's two largest oil refiners JX Holdings Inc and TonenGeneral Sekiyu KK have agreed to integrate their operations in an all-share transaction to counter the oil industry downturn in the domestic market.

The combination will create Japan's biggest oil refiner with a capacity of around 2 million barrels per day (bpd) and combined sales of over 14 trillion ($114 billion) and more than half of the domestic gasoline market share.

In a memorandum of understanding (MOU) signed yesterday, JX and TonenGeneral have set a target date of April 2017 for the merger. A final agreement on the deal is expected in August 2016.

Financial details of the transaction have not been disclosed. It is believed that TonenGeneral shareholders will be issued JX shares at a ratio to be determined based on the valuations of the companies.

The move is ''to maximise their enterprise value in an environment in which demand for oil in Japan is decreasing.'' the companies said in a joint statement.

"This integration will be about enhancing competitiveness of our petroleum refining and sales businesses," JX chairman Yasushi Kimura told a press conference in Tokyo.

He said the plan was in line with government's mid-term policy that had called for reorganising the petroleum sector to improve competitiveness and make forays into midstream and downstream businesses abroad.

The combination of the two petroleum giants will result in annual profit increase of over 100 billion ($816 billion) within five years of the consolidation, according to the statement.

This will be achieved through integration of refineries and terminals, integrated operation of production facilities in the Kawasaki area, streamlining of the organisation and optimisation of refining, supply, distribution and sales operations.

Tokyo-based JXHD is the parent company of Japan's biggest oil refiner JX Nippon Oil & Energy, which has a capacity of 1.4 million bpd from its seven plants across the country. TonenGeneral, also Tokyo-headquartered, has a total capacity of nearly 700,000 bpd from its four operations.

JXHD has a workforce of over 26,400, while TonenGeneral employs 3,450 people.

For the fiscal year ended March 2015, JXHD's total sales were 10.88 trillion while TonenGeneral's revenue for the year ended December 2014 was 3.45 trillion.

The partners will form a new holding company for the merger. Post merger, JX and TonenGeneral will continue using their own brands.

Crude oil prices have nose-dived around 60 per cent from their June 2014 highs of around $112 for a barrel of Brent, to around $44 a barrel in yesterday's trading, due to supply glut from US shale oil, and strong production from OPEC countries and Russia.

Demand for oil has been on a decline in the country due to its growing old age population and increasing popularity of more fuel efficient vehicles.

A few months ago, two other Japanese petroleum majors Idemitsu Kosan and Showa Shell Sekiyu KK, a subsidiary of petroleum giant Royal Dutch Shell Plc also announced a tie-up. Shell will sell its 33.2-per cent stake in Showa Shell for approximately $1.4 billion, retaining a nominal 1.8 per cent holding in the company.