Cosmo Oil Co., Ltd. Business Information, Profile, and History

History of Cosmo Oil Co., Ltd.

Cosmo Oil Co., Ltd. imports crude oil and other petroleum products into Japan and, using its own refineries, produces gasoline, naphtha, kerosene, gas oil, heavy fuel oil, and lubricants. It markets these products under the Cosmo brand name throughout Japan, Cosmo Oil also operates a network of gasoline service stations. In the early 1990s Cosmo Oil ranked third in size among petroleum-distribution companies in Japan. Because more than 99% of Japan's oil is from foreign sources, Cosmo's position in the economy of that country depends greatly on circumstances in the Middle East.

Cosmo Oil was formed on April 1, 1986, with the merger of Maruzen Oil Co., Ltd. and Daikyo Oil Co., Ltd. Maruzen Oil began its operations as a producer of lubricating oil and in 1933 incorporated and underwent extensive reorganization to expand its existing refinery and to build a new one. Maruzen further increased in size in 1942 by amalgamating with several smaller companies, Toyo Oil Company, Toho Oil Company, Yamabun Oil Company, and Kyusha Refining Company. During World War II Maruzen built a refinery and several storage facilities in China. Because Maruzen relied exclusively on crude oil imports during its early years, by the end of World War II its operations were curtailed.

Daikyo Oil was established in 1939 with the merger of eight refinery operators and the later merger with Edogawa Oil Company. Near the start of World War II Daikyo began operation of a refinery in Yokkaichi that in 1943 processed crude oil brought in from the Netherlands East Indies. In 1946 it started operation of a refinery to process pine-root oil, a raw material readily available in Japan.

In the era immediately after World War II, the reconstruction of the Japanese economy required the establishment of an energy policy. At that time, coal was the primary source of energy in the country, and the importation of crude oil was viewed as a supplement to coal. In the 1950s, as new oil sources were discovered in the Middle East, Japan began importing more oil; the proximity of Japan to the Middle East oil fields, compared to those of the United States and Europe, gave the Middle East's oil a cost advantage in Japan. Firms in the Japanese oil industry built refineries along the coast to process this cheap oil.

By the 1970s, 99.8% of Japan's oil was imported, and oil was supplying 70% of the country's energy needs. A large portion of the oil imports was handled by international oil companies, Standard Oil Company (California), Texaco, Exxon, Mobil, and Shell, acting jointly with Japanese oil companies. Maruzen was not a partner with any of these large companies.

The shift to oil as the major energy source had an adverse impact on the coal industry. To lessen this impact, the Japanese government enacted the Petroleum Industry Law, which restricted the total amount of oil that could be imported. The Ministry of International Trade and Industry (MITI) set policies that had an impact on Maruzen and Daikyo. These laws came into play in the 1950s, when Maruzen had a contract with Union Oil Company of California to provide Maruzen's needs for crude oil. After the closing of the Suez Canal in 1956, Maruzen's president, Wada Kanji, negotiated shipping contracts for a fixed term and price. In the recession of 1962, however, these contracts became a financial burden. Wada contemplated a loan from Union Oil. Under the Foreign Capital Law, however, approval of the loan by MITI was required. MITI at first refused approval, but later agreed to it with the stipulation that MITI negotiate directly with Union Oil to secure the loan and that a new president be installed at Maruzen. While Maruzen was saved as a company by this action, members of the business community of Osaka, site of the company's home office, voiced disapproval of the treatment of Maruzen's president by MITI.

Despite this unfavorable reaction to its policies, MITI continued to play an important part in Japan's oil industry. When the first oil-supply shock was brought about in 1973 by the Organization of Petroleum Exporting Countries (OPEC), the energy situation in Japan became one of severe shortage. To offset this shortage, in December 1973 MITI placed limits on the use of oil in generating electricity. At the same time, the Japanese Diet passed the Petroleum Supply and Demand Normalization Law, and the Emergency Measures Law for the Stabilization of the People's Livelihood to further reduce the need for oil. Investigations into price fixing by oil companies were undertaken by the Fair Trade Commission.

As a result of these actions, the Japanese economy did not suffer as greatly from the 1979 oil crisis as it had from the one of 1973. At the same time, the oil industry had come under increased governmental regulation, which caused problems as oil supplies greatly increased during the 1980s. As world production of oil increased in the mid-1980s, and the value of the yen increased against the dollar, the price of oil fell rapidly in Japan, falling by more than half during 1986 alone. Despite this rapid price decline, oil consumption in Japan in physical units fell by nearly 8% in 1985 and 2% in 1986. Oil companies faced high debt, poor cash flow, and decreased profit levels. To reduce these problems, in 1987 MITI began a five-year program of deregulation in the oil industry, with a goal of creating a stronger oil industry with fewer companies and less regulation. Previously it had restricted imports of oil, placed controls on the refining of crude oil, and established quotas on the production of gasoline. These regulations were phased out, as well as limits on the number of gas stations and where they could be located.

The formation of Cosmo Oil through the merger of Maruzen and Daikyo in 1986 and its subsequent growth through a merger in 1989 with Asia Oil Co., Ltd. was a part of the turbulence of the times. Asia Oil had been an affiliate of Daikyo Oil, but operated independently after the formation of Cosmo Oil. Asia Oil's merger into Cosmo Oil was designed to reduce operating costs and improve operations at Cosmo, so as to better withstand the competitive pressures being brought about by the deregulation and decontrol.

At the start of 1990 Cosmo Oil had a network of more than 7,300 gasoline stations, about 14% of the 54,000 stations in Japan. It operated refineries in Chiba, with a capacity of 220,000 barrels per day; Yokkaichi, with a capacity of 175,000 barrels per day; Sakai, with a capacity of 110,000 barrels per day; and Sakaide, with a capacity of 140,000 barrels per day. Cosmo operated its own fleet of relatively new supertankers, including the Cosmo Galaxy, Cosmo Venus, Cosmo Jupiter, and Cosmo Neptune. An exploration subsidiary sought to develop oil fields throughout the world.

For the fiscal year ending March 31, 1990, Cosmo Oil produced approximately 132 million barrels of petroleum made up of 24% gasoline and naphtha, 34% kerosene and gas oil, 33% heavy fuel oil, and 9% lubricant and other products. Cosmo Oil purchased almost 69 million barrels of product from Japanese sources and imported about 60 million barrels.

Cosmo maintains a strategy of product innovation through research and development. In 1990 its research facility, Cosmo Research Institute, formulated a calcium phenate alkaline detergent additive that was awarded the Japan Petroleum Institute Prize. The additive is blended with engine oil used in automobiles or marine engines and improves the efficiency of that oil. To meet the higher demand for this product, which had been in development since 1971, Cosmo Oil planned to increase the capacity of its additive manufacturing facility.

Cosmo Oil's performance is tied to that of the world energy markets. After the 1979 energy crisis, the major international oil companies reduced their sales of oil to Japan, and other sources of supply were developed through direct purchase from oil-producing nations. Direct deals made by small Japanese oil companies, however, may be at prices higher than those gotten by the major oil companies. These higher prices may not be a disadvantage during periods of tight supply, but during a worldwide glut, Japanese companies often cancel these direct deals temporarily, and this disrupts the relationship between buyer and seller.

During 1990, as the price of crude oil increased and the yen fluctuated against the dollar, Cosmo felt a cost squeeze and saw it on its profit levels. Rumors circulated that Cosmo Oil was a potential takeover target. By using contacts with the government, especially through the large number of former MITI officials among its employees, Cosmo Oil has been able to protect itself from some of the harsher features of deregulation. Along with others in the industry, Cosmo, however, is hampered by an excessive number of service stations. In Japan about 40% of all service stations operate at a loss. Most oil companies, including Cosmo, were upgrading their service facilities by building newer, larger outlets. Cosmo was expanding its stations from sales outlets to full car-care centers. It was also offering higher-octane gasoline and better motor oil, both aimed at owners of high performance automobiles. Despite the upgrading of facilities and plant, Cosmo Oil's future depends on events taking place beyond its control in the Middle East.

Principal Subsidiaries: Cosmo Ventures, Incorporated; Cosmo Matsuyama Oil Co., Ltd.; Cosmo Petroleum Gas Co., Ltd.; Cosmo Asphalt Co., Ltd. (98%); Real Estate Cosmo Co., Ltd. (83.6%); Abu Dhabi Oil Co., Ltd. (51.14%); Maruzen Petrochemical Co., Ltd. (27%); KashimaOil Co., Ltd. (21.6%).