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Nippon Oil, CNPC to form oil refining JV

(Agencies)
Updated: 2008-05-08 14:15

Japan's biggest oil refiner Nippon Oil Corp said it and China's biggest oil refiner, China National Petroleum Corp (CNPC), will set up an oil refining joint venture in Japan by April next year.

The joint venture will target growing demand in China and the broader Asia-Pacific region, where CNPC has an extensive sales network, utilising Nippon Oil's capacity amid shrinking demand at home, Nippon Oil said.

Nippon Oil's 37 year-old refinery, which is capable of producing 115,000 barrels a day but is pumping out only estimated 98,900 barrels a day recently in response to sluggish local demand, in Osaka will become the basic capital asset of the export-focused joint venture.

The Japanese refiner will have a 51 percent stake in the joint venture, while CNPC will put in an investment equivalent to a 49 percent stake.

The two companies have yet to reach an accord on the value of the stakes, Nippon Oil President Shinji Nishio told a news conference.

The plant, the smallest of Nippon Oil's fully-owned six refineries, currently refines 40,000 barrels a day for sale outside Japan, the highest volume for exports among these refineries, and is best placed among them to increase production for exports, Nishio said.

"We will have excess capacity if we continue depending on domestic demand. A decision to turn the refinery into an export centre was inevitable," he said.

"On the other hand, demand in China is expanding steadily. Securing a refinery in Japan, even if it's only 49 percent of the plant, would be an important asset for CNPC, which seeks to achieve stable supply. CNPC also has an interest in our technology," he said.

Nishio cited projections that Japan's demand for oil may drop by about 3 percent every year and that demand in Asia, excluding Japan, may rise by 4 percent each year in contrast.

"Given the sight of shrinking local demand, excess capacity will always be a challenge that we have to tackle over the long run," he said.

Nippon Oil currently has capacity to refine a total of 1.2 million barrels of crude oil a day in Japan, capitalising on the six refineries and a joint venture refinery in Toyama.

The Toyama plant, which refines 60,000 barrels a day and is held jointly with a power supplier, will end production by March 2009 because of shrinking local demand.

All of the seven refineries were built before 1972 to fuel Japan's hyper economic growth. An estimated 83.5 percent of the capacity was in use in the fiscal year ended March 31.

Under the memorandum of understanding signed between the two parties on Wednesday, Nippon Oil will operate the refinery while CNPC will market the products in China and greater Asia.

They will pay each other commission fees and receive profits from the joint venture according to the shareholding ratios.

This is the first major project under the long-term cooperation pact inked between the two Asian industry counterparts in April 2007 in conjunction with the visit of Chinese premier Wen Jiabao to Japan.

Chinese President Hu Jintao is currently in Japan on a visit.

"The latest deal marks our first step of collaboration. We are not considering forming a capital alliance, as (Nippon Oil) cannot afford a meaningful size of a stake in the giant capital base of CNPC. We will continue collaborating based on the trust formed through the agreement signed last year," Nishio said.

Separately, Nippon Oil said it has also agreed to boost the amount of oil it refines on behalf of China Oil, the unit of CNPC, to 70,000 barrels a day, up from the current 50,000 barrels a day.