Japanese oil firms face difficult times

Dec 24, 1997 01:00 AM

Faced with deep deregulation, Japan's shell-shocked oil sector has little reason to cheer the coming new year.
Analysts say the prospects of heightened competition and slack domestic demand portend gloomy tidings for an industry that already weathered a brutal round of rationalisation in 1997.
Spurred by regulatory changes in April 1996 that allowed non-oil companies to import oil - a development that shrank margins at the retail level and sparked price wars at the pump - oil companies have implemented voluntary retirement programmes and struck up alliances with other producers.
But even those developments won't be enough to improve the industry's prospects, analysts say.
"The rationalisation efforts Japan oil companies have made over the past year have largely only scratched the surface,'' said Craig Pennington, head of oil and gas in Asia for Union Bank of Switzerland. "Further consolidation is inevitable... To survive in the long-run, they will have to merge.''
That process may already be in its infancy. Many Japanese oil companies have already stepped up moves to strengthen business ties and reduce costs. These moves, analysts say, may be a precursor to future mergers.
Cutting the number of companies, however, is only part of the solution. As important, industry watchers say, is having fewer pumps.
Without slashing in half the number of gasoline stations, currently estimated at about 59,000, the industry won't see an improvement in market conditions, they say.
Toshinori Ito, Daiwa Institute of Research senior analyst, says Japan suffers from excess refining capacity. The overcapacity, he says, weighs heavily on the industry's profitability.
"(Oil companies) could dramatically cut costs...if the upgrading facilities at some refineries were halted,'' he said. Upgrading facilities are secondary processing units which prepare lighter oil products for end-use.
Ito said Japanese oil companies that were wholly or partly owned by foreign oil companies had taken broader and more radical measures to streamline, and were ahead of purely Japanese companies in improving profitability. Apart from operating their own Japanese units, Exxon and Mobil also have equity stakes in other Japanese companies.
Ito said foreign companies have traditionally been quicker to take drastic measures, such as layoffs, when necessary. "Mobil has announced that it will cut staff by 30 percent. That's a step that Japanese companies would find hard to follow,'' he said. But Japanese firms will eventually be forced to take similar steps, he said.
Currently, Japanese companies achieve lower staffing levels by offering early retirement plans. While that brings down the number of employees, it is relatively expensive.
"The thing with early retirement is that you have to pay for those schemes. Sooner or later companies are going to have to do what their western counterparts have done and actually achieve involuntary redundancies,'' UBS's Pennington said.
Some foreign oil company executives also warn that Japanese oil companies are doing too little to try to improve the retail market for gasoline - one of the main causes of the industry's weak performance.
That was clearly evident when oil companies announced earnings this autumn.
Mitsubishi Oil Co Ltd, for example, announced a current loss of 11 bn yen for the 6 months to September 30, compared with a current profit of 2.6 bn yen a year earlier.
Other leading Japanese oil companies reported year-on-year declines in current profits.
If the news wasn't bad enough for Japanese oil companies struggling to keep themselves afloat, they may now face pressure from foreign oil companies, which are stepping up their drive into the Japanese market.
BP launched its first petrol station in Japan last week. The venture is undertaken jointly with a Japanese supermarket chain operator.
BP also wants to set up another 5 or 6 service stations by the end of 1998.

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