Japanese oil refiners are keen to sign deals to process crude for Chinese oil companies over the next few years, to help them offset declining domestic sales of refined products, according to an oil analyst in Japan.

Robust growth in China’s demand for oil, particularly heavy fuel oil and gasoil, has already lured Japanese oil refiners to boost exports to industrial areas of China, Hidetoshi Shioda, an oil analyst with Nomura Securities Co, told Dow Jones Newswires.
Under the crude processing deals, Chinese oil companies would ship crude to Japanese refiners and receive an equivalent volume of refined products in return.
These deals would help Japanese oil companies use their excess refining capacity and increase their utilisation rates. The increased utilisation rates would then contribute to rationalising operations, and ultimately lower operating costs, Shioda said.
“Nippon Oil Corp and Idemitsu Kosan Co are two Japanese oil companies which may enter talks with local refiners in China some time in the near term for crude processing deals,” Shioda said.
He said the two refiners have already tapped into the lubricant production and sales business in China, jointly with local refiners.
In stark contrast to the expected long-term growth in China’s oil demand, Japan’s heavy fuel oil and gasoil demand is set to decline sharply over the next two decades.
Some Japanese corporations including automakers have begun transferring their plants to China because of cheaper labour costs and the growing economy there. But this is hurting Japanese oil refiners because of falling local demand for heavy fuel, which is typically burned at in-house power generators at plants and factories, said Shioda.
Also, power utilities are increasingly using more natural gas and less oil for burning at their thermal power plants for environmental reasons.
Shioda expects crude processing deals between the two sides will materialise in the next few years, as Chinese oil firms will likely need more refined products to meet fast-paced demand growth.
Over the past several years, Japanese oil refiners have been under pressure to further restructure their refinery operations - trimming operating capacity, mothballing low-profitable refineries, and closing some of their service stations.
Idemitsu Kosan Co has closed two of its six refineries in the last two years, while Cosmo Oil Co will this year cut the capacity of some of its refineries.
“Increasing exports of refined products to China through crude processing contracts may play a significant role (for Japanese refiners) to make up for their declining domestic sales volumes,” said Shioda.
For their part, Chinese oil companies will likely rely heavily on imports of refined products to supplement their supplies until new refineries are built and start operations.