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

Company Perspectives:

As we are welcoming in the 21st century, our new theme is to "create new values." By adopting this theme, we will work on participating in new crude oil development projects, making research and development of new sources of fuel, further re-engineering our operations across all of our departments (including ambitious alliances with other companies), developing new marketing strategies, gaining more active access to Internet businesses, and developing new technologies for global environmentalism. We will continue to implement our mission of stable supply of energy, while grasping needs in changing times to take on new challenges of the future.

History of Cosmo Oil Co., Ltd.

Cosmo Oil Co., Ltd. operates as Japan's third-largest oil refiner and distributor with four refineries--Sakaide, Sakai, Chiba, and Yokkaichi--and a network of over 380 dealers and 5,300 gas stations. Competition brought on by deregulation in the 1990s has taken its toll on Cosmo's income, forcing the company to cut jobs, control costs, and pare back the number of its gas stations. In 1999, Cosmo Oil and Nippon Mitsubishi Oil Corp. began teaming up in various joint ventures. By 2003, the pair's distribution and refining venture controlled nearly 40 percent of the oil refining market in Japan.

Cosmo's Predecessors

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 a 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 relatively close proximity of Japan to the Middle East oil fields, compared to that of the United States and much of 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 percent of Japan's oil was imported, and oil was supplying 70 percent 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.

New Government Policies Affect Japanese Oil Industry

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.

The Formation of Cosmo: Mid- to Late 1980s

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 in 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, declining by more than half during 1986 alone. Despite this rapid decrease in cost, oil consumption in Japan in physical units fell by nearly 8 percent in 1985 and 2 percent 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 began to be phased out, along with laws restricting 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, enabling the company to better withstand the competitive pressures being brought about by deregulation and decontrol.

At the start of 1990, Cosmo Oil had a network of more than 7,300 gasoline stations, about 14 percent 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 percent gasoline and naphtha, 34 percent kerosene and gas oil, 33 percent heavy fuel oil, and 9 percent lubricant and other products. Cosmo Oil purchased almost 69 million barrels of product from Japanese sources and imported about 60 million barrels.

During this time, Cosmo maintained 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 was blended with engine oil used in automobiles or marine engines and improved 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 was 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, were often at prices higher than those gotten by the major oil companies. These higher prices were not a disadvantage during periods of tight supply, but during a worldwide glut, Japanese companies often canceled these direct deals temporarily, disrupting the relationship between buyer and seller.

Japan's Oil Industry Faces Problems: 1990s and Beyond

During 1990, as the price of crude oil increased and the yen fluctuated against the dollar, Cosmo struggled with a cost squeeze and a decline in profits. 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 was been able to protect itself from some of the harsher features of deregulation. Along with others in the industry, Cosmo, however, was hampered by an excessive number of service stations. During the early 1990s, about 40 percent of all service stations in Japan operated at a loss--that number increased to nearly 70 percent by the late 1990s. 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.

In 1996, Japan lifted its ban on the import of refined oil products, making way for increased competition. Cosmo and its domestic peers faced other problems as well. With 50 refineries and nearly 60,000 gas stations, Japan's overcapacity was a major issue. Industry analysts claimed that Japan's oil sector was producing 50 percent more than what it needed. Japanese oil concerns were also plagued by high operating costs and large amounts of debt. In 1997, Cosmo's profits fell by nearly 40 percent. In response, Cosmo launched a round of job cuts and began a cost reduction program.

Cosmo entered the new millennium determined to restore positive sales and earnings. In 2000, the company teamed up with Nippon Mitsubishi Oil Corp. to create Nippon Global Tanker Co. Ltd. That venture, along with other refining and distribution partnerships, left the pair in control of nearly 40 percent of Japan's oil refining market. Cosmo's restructuring and streamlining efforts appeared to pay off in 2000 and 2001, when net income began an upward climb. Sales also increasing during that time period, bolstered mainly by higher oil prices.

During 2001, the company published its first Environmental Report, signaling its focus on energy conservation and research and development related to environmentally-friendly fuel. Cosmo's Sakaide Refinery received the Director General's National Resources and Energy Award that year and the company also developed a Tropical Rainforest Project. In early 2002, the firm launched an Eco card that allowed its customers to participate in the company's environmental activities, it established solar powered generation systems in various gas stations, and it also set plans in motion to develop a hydrogen supply station that would act as a research center for fuel cell-powered vehicles. In May 2002, Cosmo was given a Green Reporting Award for its 2001 Environmental Report.

Meanwhile, conditions in the Japanese oil sector remained turbulent, due in part to over-supply and intense price competition. During 2002, crude oil prices began falling again and demand for petroleum products weakened. Sales fell and the company posted a net loss of $39 million, its first net loss since its creation in 1986. A November 2002 Nikkei Weekly article pointed to Cosmo's problems, claiming that "Cosmo Oil has actively pursued its cost reduction program, but has already gained nearly all of the benefits to be had through rationalization. It is currently engaged in various value-creation-targeted sales promotions. However, severe market deterioration outweighs the effect and the company's earnings potential is flagging." Indeed, it appeared that Cosmo Oil's future success hinged on a market turnaround along with its ability to overcome the industry's nagging pricing and capacity issues.

Principal Subsidiaries: Abu Dhabi Oil Co. Ltd.; Qatar Petroleum Development Co. Ltd.; Cosmo Oil Ashmore Ltd.; United Petroleum Development Co. Ltd.; Mubarraz Oil Co Ltd.; Toyo Oil Development Co. Ltd.; Cosmo Tanker Co. Ltd.; Cosmo Kaiun Co. Ltd.; Okinawa CTS Corp.; Shirashima Oil Storage Co. Ltd.; Ogijima Oil Terminal Co. Ltd.; Cosmo Petroleum Gas Co. Ltd.; Sakailpg Oil Terminal Co. Ltd.; Yokkaichi LPG Terminal Co. Ltd.; Hokuto Gas Service Co. Ltd.; Tozai Oil Terminal Co. Ltd.; Hokuto Kogyo Co. Ltd.; Sakaide Cosmo Kosan Co. Ltd.; Tokyo Cosmo Logistics Co. Ltd.; Kansai Cosmo Logistics Co.; Cosmo Oil Lubricants Co. Ltd.; Cosmo Matsuyama Oil Co. Ltd.; Kashima Oil Co. Ltd.; Maruzen Petrochemical Co. Ltd.; Cosmo Oil Service Co. Ltd.; Cosmo Asphalt Co. Ltd.; Cosmo Computer Center Co. Ltd.; Cosmo Research Institute; Cosmo Engineering Co. Ltd.; Cosmo Trade and Service Co. Ltd.; Cosmo Ventures Inc.; Cosmo Sea Farming Inc.; Cosmo Oil of U.S.A Inc.; Cosmo Oil UK Plc; Cosmo Oil International Pte Ltd. (Singapore); Cosmo Lubricants Taiwan Co. Ltd.

Principal Competitors: Idemitsu Kosan Co. Ltd.; Nippon Mining Holdings Inc.; Showa Shell Sekiyu K.K.

Chronology

• Key Dates:
• 1933: Maruzen Oil Co. incorporates.
• 1939: Daikyo Oil Co. Ltd. is established with the merger of eight refinery operators.
• 1942: Maruzen expands by amalgamating with smaller companies.
• 1986: Cosmo Oil is formed by the merger of Maruzen Oil and Daikyo Oil.
• 1989: The company merges with Asian Oil Co. Ltd.
• 1996: Japan opens its market to competition by lifting its ban on the import of refined oil products.
• 1997: Company profits fall due to increased competition, a drop in prices, and overcapacity.
• 1999: Cosmo and Nippon Mitsubishi Oil Corp. begin forming joint ventures.
• 2002: The company reports a net loss for the first time in its history.