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Japan proposes oil refiners must raise fuel oil processing capacity at plants: Meti

[TOKYO] Japan is proposing its oil refineries increase the amount of residual fuel oil processed at the plants in a third round of directives to streamline the nation's refining sector.

Japan's refiners want the overall nationwide average volume of residual fuel oil processed to 7.5 per cent of the volume of crude oil that they refine in the year starting in April 2021, according to documents released by the Ministry of Economy, Trade and Industry (Meti) on Aug 29 for public review.

The ratio is currently about 7 per cent, a senior Meti official told Reuters on Tuesday.

Japan, the world's fourth-largest oil user, has cut back its refining capacity since 2015 as falling domestic fuel demand created idled capacity.

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The government wants to increase efficiency in the industry to help them compete against regional refiners.

The latest directive will push the refiners to increase their so-called upgrading capacity, which uses fuel oil, the residue oil left over after crude oil is initially processed, to manufacture fuels including gasoline and diesel.

"The refiners would be facing difficulty unless they can beat off cheap oil product imports," the Meti official said.

"From the energy security point of view, it is necessary to increase the industry's global competitiveness."

There are six refining companies subject to the targets, including JXTG Nippon Oil & Energy, Idemitsu Kosan and Showa Shell Sekiyu, the official said.

Refiners could meet the new directive by building new residue cracking units. However, with costs of hundreds of millions of dollars, the companies are reluctant to make investments in the units as domestic demand has dropped by about 30 per cent since 1999 to 2015.

Meti is offering more than US$100 million per year to the companies to subsidize the upgrading investments, the ministry official said.

Japan has cut its refining capacity to 3.52 million barrels per day (bpd) from 4.89 million bpd in 2009, and improved the ratio of residue cracking capacity to crude distillation unit capacity to 50.5 per cent.

For individual refiners, companies with an average ratio of fuel oil volumes to crude oil volumes of below 7.5 per cent over the past three business year must improve the ratio by 5 per cent, the document said.

If the ratio is between 7.5 per cent and 14.7 per cent, the company must raise the ratio by 3.5 per cent.

If the ratio is already above 14.7 per cent, the refiner must improve by two per cent.

The proposals are set to take effect in early October, following a one-month public comment period, the official added.