Japan decarbonisation plans add to refining challenges

Japanese refiners have weathered the short-term impacts of the Covid-19 pandemic but are now faced with a fresh challenge, as the government's focus on decarbonising the economy gives added urgency to capacity rationalisation efforts.

The coronavirus pandemic cut Japan's oil product demand by 10pc on the year to 2.3mn b/d in April-September. But demand for gasoline and middle distillates has now almost totally recovered, refiners say, although a full bounce-back in jet fuel still looks months away at least.

Japan's domestic oil product demand is likely to hit 2.6mn b/d over the full April 2020 to March 2021 fiscal year, a drop of 4pc from 2019-20, and then recover slightly to 2.7mn b/d in 2021-22, according to energy think-tank the IEEJ.

Japanese oil firms have been relatively unscathed by the pandemic and even reported a considerable increase in refining profits in April-September, as they took advantage of firmer refining margins.

Eneos, the country's biggest refiner by capacity, increased its refining profit excluding inventory losses by 11pc on the year to ¥46bn ($450mn) in the period. This was despite being hit by losses of ¥42bn on domestic oil product sales and ¥28bn in refinery restructuring costs associated with the scrapping of the 115,000 b/d Osaka refinery in October.

Idemitsu, Japan's second biggest refiner, boosted refining profits by 77pc to ¥27bn in April-September thanks to ¥23bn of cost synergies under its continuing post-merger integration efforts.

Refiners also took advantage of the added upgrading capacity installed under government-led refining reforms and moves to optimise output to rein in pandemic-driven volatility in refining margins. The third-stage rationalisation plans overseen by the industry ministry (Meti) require Japanese refiners to raise oil products upgrading capacity further over the five years to March 2022.

Smaller producer Cosmo Energy more than tripled its April-September refining profit to ¥18bn, shrugging off ¥10bn in pandemic-related losses. The 340,000 b/d refiner was able to maintain steady domestic sales of oil products, supported by a 60,000 b/d supply deal with retail affiliate Kygnus Oil and a ready market provided by its gasoline station network. It also maximised production of more lucrative very-low sulphur fuel oil (VLSFO) and is targeting to boost bonded VLSFO sales by 63pc on the year.

Carbon curbs

But the Japanese government's focus on decarbonisation is weighing on the country's long-term oil demand outlook, adding to existing pressure from a shrinking, ageing population.

The IEEJ expects crude processing to dive by 16pc to 2.5mn b/d this fiscal year, compared with 3mn b/d in 2019-20. Throughputs are unlikely to recover much in 2021-22, edging up to just 2.6mn b/d against the country's 3.5mn b/d refining capacity. Japan's April-September crude imports fell by 20pc on the year to 2.3mn b/d.

Tokyo is speeding up its discussions of decarbonisation policies following premier Yoshihide Suga's announcement of 2050 climate targets. The government said this week it is planning to ban sales of gasoline-only cars by 2035 in favour of electric vehicles (EVs), including hybrids and fuel-cell powered EVs.

This brings forward the shift to EVs significantly from a previous end-2050 target. Meti previously projected that Japanese gasoline demand would decline by 11pc to around 780,000 b/d over the five years to 2023-24, assuming that each shift of a gasoline-fuelled car to an EV would cut gasoline use by 5 bl/yr.

Car manufacturing industry lobby Jama's chairman Akio Toyoda, who is also president of Japan's biggest carmaker Toyota Motor, has questioned the hasty EV shift in Japan — where electricity is largely generated by burning fuels — and called for a transition to revolutionary energy policies. Thermal fuels accounted for 76pc of Japan's power generation in 2019-20, followed by renewables at 18pc and nuclear at 6pc.

Meti has provisionally indicated a reference target for 2050 to generate 50-60pc of power output from renewable sources, 30-40pc from nuclear and thermal fuels coupled with carbon capture and storage, and 10pc from hydrogen and ammonia. This reference will be used as the basis for continuing discussions on Japan's official energy policy, which is due for a revision next year.