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Japanese oil refiners awash in excess crude supplies - and red ink

By Geoffrey MurraySpecial to The Christian Science Monitor / November 19, 1981



Tokyo

It wasn't so long ago that Japan was having apocalyptic nightmares about the oil tap being turned off. But after surviving successive global oil crises better than anyone else, the Japanese now have a new concern: how to prevent their refining industry from drowning in a sea of unwanted oil.

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Considering that it is handling the nation's No. 1 import - a commodity on which Japan's continued economic success still depends to a large extent - the industry is in terrible shape.

''If they were horses, some of the companies would have been taken out long ago and shot,'' says a business analyst bluntly.

The crisis for the current 35 enterprises grouped into 13 major refining and distribution cartels is obvious from figures just released.

According to the Industrial Bank of Japan, the industry as a whole in the six-month period from April to September recorded staggering losses of more than

One of the biggest companies, Maruzen oil, reported a loss of almost $321 million, a record for a half-year business term by any major company listed on the Tokyo stock market.

Even the largest refiner-distributor, Nippon Oil, recorded a $57 billion loss.

The problem is that there are simply too many companies with too large a refining capacity competing for a shrinking market, aggravated by unpredictable, wild swings in the yen-dollar exchange rate.

The companies built up their refining capacity at a time when Japan's appetite for oil to feed its booming industries seemed insatiable. OPEC took care of that illusion, and now the stampede is on to cut oil consumption and get into coal, nuclear power, and other alternative energy sources.

In the first half of the current fiscal year, Japan's oil demand fell 10 percent, while the decline was even higher for certain petrochemical products refined from crude oil.

As a result, Japan is importing an average of 3.6 million barrels of oil a day, the lowest level for the past decade, including a 12 percent decline from the same period last year and a solid 28 percent less than the peak of 5 million barrels a day before the first oil crisis in 1973.

But while domestic demand is in the doldrums, the refiners are still committed by long-term contracts signed in happier days to import a certain level of oil from their OPEC suppliers.

Wild exchange-rate fluctuations have also inflicted horrendous damage to company balance sheets.

An advisory group of the Ministry of International Trade and Industry estimates that the oil companies had combined exchange losses in the April-September period of some $1.1 billion.

The group is trying to find ways to provide some protection against such exchange risks, and recently proposed, for example, paying for oil in yen rather than dollars.

But the biggest thorn for the refiners is undoubtedly the excess producing capacity. The industry as a whole is capable of handling 6 million barrels of oil daily. Experts reckon a minimum of 30 percent of the oil refining capacity has to be scrapped.

The only controversy is the method. No one argues with the need for regrouping, but this will inevitably mean the disappearance of a number of small , outdated refineries, with possible social damage to local communities deprived of vital tax income and jobs.

Another approach is reorganization of the grossly inefficient distribution field, where there are no winners in the frequent price-cutting wars that erupt in the nation's streets every time demand goes soft.

But the biggest threat to the refiners may come from without, not within - namely the desire of oil-producing nations to handle their own refining.

In this regard, OPEC estimates that by 1985 its members will have a total capacity of 9 million barrels a day, against the present 5.4 million, and current Western buyers of crude oil will be expected to become customers for the refined products.

Shigeko Koyama, chief researcher of the Middle East Economic Research Institute, warns: ''Japan could be hard pressed on two fronts - securing imports of crude oil and being forced to buy competing and unwanted refined products from the oil producers at the same time.''

Government sources say the Japanese industry is also being badly hurt by a ''flood'' of cheap American petrochemicals, allegedly enjoying a big price advantage because of government price controls on natural gas.

At Tokyo's request, talks on export controls are scheduled in Washington next month, with the prospect that if they fail, Japan may have to take ''forcible measures,'' the sources said.

As to the supply of crude oil, this is the least of Japan's worries. Whichever way it turns it finds itself with more than it can handle.

For instance, a Japanese trading company, under strong Algerian pressure, has just signed a barter deal with the North African nation, which has agreed to buy 15,000 Honda cars in return for crude oil. The deal went through partly because Japanese carmakers are desperate to find new markets to offset cuts in exports to the United States.

For the trading company, the only problem now is what to do with the oil. There are unlikely to be any domestic takers - and even government emergency stockpiles are stuffed to capacity - so the crude may have to be hawked around the world at a bargain price.