Japanese oil sector gets closer to market

Japanese oil sector gets closer to market

SINGAPORE (Dow Jones): A gradual increase in competition -
following deregulation of Japan's oil sector in the nineties -
could eventually result in a challenge to the dominant role of
Singapore-based oil product pricing in Asia, according to
traders.

A competitive 4.7 million barrel-a-day Japanese market -
complete with physical price assessments, product and crude
futures, and rising imports and exports - would provide a better
price discovery environment for many parts of Asia than the
current sub-1 million b/d Singapore market, they said.

Add to this is the gradual tightening of product
specifications by other countries in the region, bringing them
closer to those in Japan, traders said.

As competition has taken hold, inefficient refiners' balance
sheets have worsened. Additionally, retail prices have fallen
dramatically relative to those in other industrialized countries,
making them more competitive at the international level.

This makes them good candidates for use as benchmarks for
deals elsewhere in Asia, particularly northeast of Singapore.

However, the process still has some way to go, and is
complicated by currency issues.

Japanese deregulation is only slowly bringing competition. The
government has deliberately given refiners, which had been
protected from competition and imports until 1996, time to
adjust, partly to avoid major casualties.

But analysts say recent restructuring, including refinery
closures, mergers - notably the Nippon-Mitsubishi tie-up - along
with better access for non-refiners to retail and distribution
infrastructure, is slowly changing the nature of Japan's domestic
market.

The role of international oil majors in Japan is also
significant, with Exxon Mobil Corp. regarded as particularly
aggressive in retail price competition.

"The 100 percent control over prices which Japanese refiners
used to enjoy is no longer the case," said an Asian oil trader.

Prices derived from the Singapore market have long acted as a
benchmark for the majority of trade in Asia. But recent changes
in trade flows and refining capacity additions outside Singapore
have undermined its position, cutting production, exports and
trade.

"Asian markets are a lot more complex than (Singapore
benchmarks) can reflect," said one trader. "The current situation
is far from satisfactory," he added.

"(Singapore's) central (pricing) role is a relic from when
Asian trade was very different... These days, fundamentals in
north Asia bare little resemblance to what's going on in
Singapore," said another trader.

Taiwan's Chinese Petroleum Corp., or CPC, has already switched
some of its export contracts to include a link to domestic
Japanese prices, assessed by Rim Pacific Co. Its new domestic
competitor, Formosa Petrochemicals Co., a unit of Formosa
Plastics Corp., is considering a similar move.

CPC says it is using Rim quotes, "because they are more
representative of the Japanese market, which is where the
customers are from."

Traders were skeptical that the Middle East would change its
relationship to Singapore prices - however inappropriate the link
becomes - due to "an extreme conservative culture."

But another Middle East-based trader reiterated
dissatisfaction with Singapore benchmarks. "It's absurd that a
tiny traded volume there can effect prices of so much product
across such a wide area, particularly when Singapore stocks are
low," he said.

The biggest problem in using Tocom's contracts for hedging is
the currency exposure, according to traders. Tocom's two existing
contracts - for kerosene and gasoline - are both listed in yen
per kiloliter. The planned listing of gasoil next spring, and
Middle East sour crude later this year, will be in the same
units.

A Tocom spokesman said government regulations made it
"technically difficult" to list in dollars-a-barrel, although he
said it wasn't actually prohibited by law.