After proving to be a thorn in the side of the planned merger between Japanese refiners Idemitsu and Showa Shell Sekiyu since 2016, the family of Idemitsu’s founder Sazo Idemitsu has now acquiesced to the wishes of Idemitsu’s board and dropped its opposition to the merger. This paves the way for the latest merger in the Japanese refining business, as the industry – once a global titan – prepares for a future of shrinking domestic demand.
The merger was first announced in 2016, the first planned merger in Japanese refining since an initial wave of consolidation in the 2000s. But opposition from the Idemitsu founding family – which hold a considerable stake in the company – meant that the merger remains uncompleted, while the Nippon Oil and Mitsubishi Oil and the JX Holdings and TonenGeneral mergers sped ahead, even though they were announced later. The completion of the Idemitsu-Showa Shell Sekiyu merger will slash the number of Japanese refiners from six to three, a trend backed by the Japanese government, which sees consolidation as the only way forward to optimise the industry. Although Idemitsu – Japan’s second-largest refiner – claims that no refineries will be closed post-merger, it seems inevitable; Japanese fuel demand peaked in the late 2000s and its decline is accelerating. From a peak of 4.6 mmb/d in refining capacity, consolidation means that Japanese capacity could halve to 2.3 mmb/d by 2030 – mainly by shuttering the country’s aging simple refineries. While this will increase Japan’s fuel product import bill, the Japanese government seems fine with this, given that the downstream companies will merely be swapping crude imports for product imports.
But back to the Idemitsu-Showa Shell Sekiyu merger. There were legitimate concerns from the Idemitsu family regarding the logic of the merger. They argued that cultural differences between the management of both companies and geopolitical factors – Idemitsu is a major importer of Iranian crude, while Saudi Aramco owns part of Showa Shell – were insurmountable. With the US now re-imposing sanctions on Iran crude, the latter has once again come into prominence. But even when Iranian crude returned to the world market in 2016, the Idemitsu family went as far as to increase its stake in the firm – in response to a strategic share dilution designed to reduce their veto power – to derail the merger. But the show went on despite their opposition – Idemitsu bought a 33% stake in Showa Shell in 2016, and since 2017 deepened ties through an exchange of directors and combining operations. A merger was always inevitable, and now even the Idemitsu clan has seen that. Even the family’s most strident voice, Shosuke Idemitsu, has fallen, agreeing on the condition that the new company ‘respect the values and principles that have guided Idemitsu since 1917.’ Two seats for the family on the board of the combined company have also been demanded.
The new merged company could be formed as early as the end of 2018. Since both firms are operating on a level just short of a full-merger, it seems almost a formality. But it is necessary. The JX-TonenGeneral merger was completed last April, now the country’s dominant player. Idemitsu-Showa Shell may form 30% of the domestic fuels market, but that is 30% of a shrinking market. As its rivals speed ahead, Idemitsu-Showa Shell can now begin to catch up.
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Brent’s spectacular dive on July 11 wiped $5.46 oﬀ the price of the front-month ICE futures contract — the biggest single-day loss in seven years — and led some to ask if it was the start of an oil price “correction.” We don’t think it was.
While crude was justifiably spooked by the prospect of the US-China trade war spiralling out of control with a new threat from Washington the previous day to levy a 10% tariﬀ on $200 billion worth of annual imports from the Asian giant, it is not enough to upturn the oil market’s tightening supply fundamentals.
The limited spare capacity available with Saudi Arabia, its Gulf OPEC neighbours and Russia looks likely to be stretched thin compensating for the continuing sharp declines in Venezuela, Angola and Mexico in the coming months. That leaves the market vulnerable to the unforeseen but routine major outages in Libya and Nigeria, not to mention unexpected and prolonged shutdowns due to technical glitches and union actions, as happened with the 360,000 Syncrude project in Canada, or could be about to unfold in the oil fields of the Norwegian North Sea.
More importantly, that small spare capacity leaves the market fully exposed to a supply shock on account of Iran if the US adopts a scorched-earth policy of trying to squash the Islamic Republic’s oil revenues to zero.
Yes, major trade wars hurt economic growth, which is a negative for the world’s oil consumption. But it is impossible at this stage to quantify the impact of the US- China tariﬀs battle on oil consumption. Besides, there is a possibility that the two sides return to the negotiating table and the additional tariﬀ threats are set aside.
There is, however, one bearish scenario for oil. It’s a wildcard for now but one to keep an eye on: the US and Iran might agree to talk. If a compromise is found on moving Iranian and Hezbollah troops away from Syria’s border with Israel during the Trump-Putin summit next week, it could pave the way for talks between Washington and Tehran. Trump this week again indicated he was open to the idea.
But if the US sanctions proceed as planned and the trade tensions subside, the OPEC/non-OPEC combine might be struggling to keep the world supplied by the end of 2018, the polar opposite of where the producers began the year.
MOSCOW (Bloomberg) -- Iran said Russia is ready to invest as much as $50 billion in its oil industry even as Western majors are pulling out of deals with the republic amid the threat of U.S. sanctions.
President Vladimir Putin has confirmed the spending plan, with at least three deals worth some $15 billion already on the table, Ali Akbar Velayati, foreign policy adviser to Iran’s supreme leader, said in Moscow Friday. Russia is ready to invest in crude exploration and production, as well as refining, he said.
MOSCOW (Bloomberg) -- OPEC and its allies could boost oil production by more than the 1 MMbpd agreed last month if needed, Russia’s Energy Minister Alexander Novak said.
“I can’t rule out that if there is a need for more than 1 MMbbl we will be able to quickly discuss it all together and make all necessary decisions,” Novak told reporters in Moscow on Friday. The producers have “all needed tools,” if necessary, he said.