TOKYO -- Idemitsu Kosan and Showa Shell Sekiyu are forming a new organization next spring to manage their key operations under one roof, getting one step closer to a complete consolidation that has been in the making for some time.
A full merger of the two leading Japanese oil wholesalers has been hung up due to objections by Idemitsu's founding family. So the companies are pursuing an alternative route first, combining operations to enjoy cost savings.
The new entity will be launched next spring with some 300 personnel from both sides to manage procurement, refining and logistics together, Idemitsu CEO Takashi Tsukioka and Showa Shell President and CEO Tsuyoshi Kameoka have told The Nikkei. This will help slash costs by at least 30 billion yen ($265 million) over three years, or 20% more than the 25 billion yen expected, they said.
The Idemitsu founding clan, which once had one-third veto power, has bought additional shares and increased its stake to around 28%, it was learned Monday. The move is a clear sign that the family wants to keep fighting the deal. Tsukioka brushed off this prospect, however, saying that "the merger with Showa Shell is the best option for us. Our policy won't change."
Since the companies have been unable to realize the merger, they have been joining forces in oil refining and logistics since May. Such a tie-up is expected to yield some 8 billion yen in cost savings in the first year. "The partnership is moving as planned," Showa Shell's Kameoka said, but the companies have decided to "further deepen the tie-up ahead of our merger," Tsukioka noted.
The planned organization will combine the business plans that Idemitsu and Showa Shell had crafted separately, and consolidate personnel for crude oil procurement, refining and distribution for efficiency. The companies have seven refineries and some 7,000 gas stations between them in Japan.
They will also work to enhance cost competitiveness in basic chemical products used for resins and fiber while unifying efforts in oil product exports to other Asian markets and elsewhere. Showa Shell will participate in Idemitsu's oil products trading operations in Singapore as well.
Their joint efforts will also cover compliance with the latest set of Japan's refining regulations aimed at efficiency and the new International Maritime Organization rules set to take effect in 2020.
They will also pursue overseas operations together. "We can combine our expertise, such as in renewable energy and fossil fuel power stations, to bring out the best from our strengths," Kameoka said.
Oil demand has been dwindling in Japan by 1-2% a year as more drivers ride environmentally friendly vehicles. The nationwide tally of gas stations has more than halved from the peak, to 31,000 locations. These developments prompted oil wholesalers to slash their aggregate crude oil refining capacity by around 10% by the end of March. Players have been responding to shrinking demand by realigning themselves, with JX Holdings and TonenGeneral Sekiyu merging in April to create JXTG Holdings.