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

History of Mitsubishi Oil Co., Ltd.

Mitsubishi Oil Co., Ltd. is one of Japan's leading oil importers and refiners. Associated with the Mitsubishi industrial conglomerate, the company has had a turbulent history, suffering first the effects of war and subsequently the fluctuations and uncertainties of the world petroleum trade.

The roots of Mitsubishi Oil go back to 1924, when the fuel department of the Mitsubishi Trading Company, a zaibatsu, or large industrial group, first secured the exclusive right to sell in the Far East a broad range of crude and refined petroleum products made by the Associated Oil Company of California. In April 1928, Mitsubishi entered into an exclusive Far East marketing and sales agreement with Tidewater Oil Company of New York, which was subsequently taken over by J. Paul Getty in the early 1930s. In February 1931, the Mitsubishi Oil Company was founded, as Mitsubishi Trading expanded its interest in the petroleum industry. In December 1931, a 20-acre refinery complex was opened in Kawasaki, Japan, to manufacture a wide variety of oil products, including gasoline, kerosene, and machine oil, from crude petroleum supplied by Associated Oil. The latter company also contributed technical expertise. The joint venture between the two companies as equal partners was capitalized at ¥5 million, and its products were sold exclusively by the fuel department of Mitsubishi Trading. The company was capable of refining 3,000 barrels per day of light crude oil or a third of that amount of heavy crude oil.

Throughout the early 1930s, Japan was seized by nationalistic and militaristic fervor. Oil, a natural resource in which Japan is almost entirely lacking, played only a small part in the Japanese economy at that time, accounting for a mere 7% of the country's energy usage, of which 80% was imported from the United States. However, the many military applications of petroleum made it a strategic commodity essential to the effort to expand the boundaries and influence of the Japanese empire. Accordingly, the Japanese government, in an effort to control the oil industry so that it could better serve national aims, passed the Petroleum Industry Law in 1934, which was designed to strengthen Japanese refiners such as Mitsubishi, and weaken the two dominant wholly foreign-owned firms, Rising Sun, the Japanese affiliate of Royal Dutch/Shell, and Standard-Vacuum, the joint Far Eastern operation of Standard Oil of New Jersey and Standard Oil of New York. By 1935, Mitsubishi Oil had been capitalized with an additional ¥2 million. Its refinery had grown by 16 acres and an additional capacity of 1,000 barrels per day of light crude oil, and it had added new refining capacity.

In 1937, Japan entered into full-scale war with China, and the Japanese economy was put on a wartime footing. Oil was essential to the military campaign, and Mitsubishi's output hit an all-time high that year, as distribution of all oil products was redirected to the war effort. Despite U.S. opposition to Japanese military aggression, in an effort to avoid or postpone war in the Far East, the United States continued to supply Japan with oil up until the start of August 1941, when a virtual embargo was imposed. In December 1941, Japan formally entered war with the United States with Japan's bombing of Pearl Harbor, and a four-year contest that would conclude with the near-total destruction of Japanese industry began.

Mitsubishi Oil continued to operate throughout the war, although at a somewhat slower rate, as the Japanese replaced lost U.S. crude oil supplies with resources from captured oil fields in the East Indies. Imports from these sources peaked in 1943. Two years later, U.S. submarines were torpedoing Japanese oil tankers in the Pacific with such regularity and thoroughness that oil supplies had virtually dried up. From 1942 to 1944, average output of the Mitsubishi refinery was less than half of the prewar peak. By early 1945, Japanese refineries were almost out of oil, and domestic use had virtually ceased. In the latter phases of the war, as U.S. forces came within bombing distance of the Japanese home islands, the Kawasaki refinery of Mitsubishi suffered heavy damage.

Japan formally surrended in August 1945, its fuel tanks dry, and the Allied occupation began. In the wake of victory, the Allied powers set out to restructure the entire Japanese economy, and the dissolution of the zaibatsu, including Mitsubishi, was an essential part of the plan. Mitsubishi was split into 139 entities. Activity between the companies was severely restricted, and refinement of petroleum products was forbidden altogether. Mitsubishi Oil was in dire straits.

Gradually, however, conditions improved, and in 1949 oil refining was again permitted on Japan's Pacific coast. In August 1950, the company resumed activity at its repaired Kawasaki plant, and took up for the first time the sales and marketing of its products, formerly handled by its zaibatsu partner, the Mitsubishi Trading Company. Mitsubishi Oil again formed an equal arrangement with its former U.S. partner, Associated Oil, gaining in return a secure supply of crude oil and the technological expertise needed to modernize its plant. Associated Oil had merged with Mitsubishi's other former U.S. partner, Tidewater Oil Company, to become the Tidewater Associated Oil Company. By 1953, J. Paul Getty had completed his lengthy takeover of Tidewater.

Mitsubishi took up activity in the postwar period and restored refining operations to their prewar condition. In 1952 rationing of fuel was abolished, and by 1953 Mitsubishi and other domestic refiners were able to provide 65% of the oil consumed in Japan. Japan had begun its great postwar period of industrial growth. Much of this boom was fueled by coal, which Japan possessed in good quantities, but it soon became clear that petroleum was a cheaper fuel to rely on. Japan's coal industry declined quickly as oil took over. By the end of the first decade of Japan's reconstruction, it was clear that oil would play an essential role in the country's continued development.

In response to the growing importance of petroleum, Japan's government sought, as it had in the past, to regulate the oil industry for the country's benefit. Such regulation meant reducing the importance and market share of foreign oil suppliers in favor of an increased role for partially Japanese-owned companies such as Mitsubishi. In 1962 the government passed a law giving the Ministry of International Trade and Industry the right to control the oil industry. Resultant ministry actions fostered competition and vigorous price-cutting, making petroleum an even more attractive source of energy. By the late 1960s petroleum products supplied 70% of the energy needs of a burgeoning and modern Japan; with 99.5% coming from imported crude oil. By 1970, Japan had regained control over its refining industry, but remained dependent on foreign sources for its raw materials; for instance, Mitsubishi relied on Getty.

In an effort to reduce this reliance on foreign sources, Japanese oil companies began to seek their own sources of crude oil in 1968. Mitsubishi established a petroleum development arm, and stepped up exploration. In 1972, in a move coordinated by the government-run Japan Petroleum Development Corporation, Mitsubishi Oil joined with 13 other Japanese companies and a U.S. company to explore for oil in Peru. Four years later the unsuccessful attempt was abandoned. Despite such efforts more than half of Japan's energy supply could still be traced to the Middle East at the time of the oil crisis in 1973. The sharp rise in crude oil prices during this time accelerated Japan's search for a reliable and direct supply of raw materials. In the Japanese economy as a whole, the price increase encouraged movement away from such heavy dependence on petroleum. Actions taken by Mitsubishi Oil during the oil crisis, in concert with other oil companies, eventually resulted in the company's conviction for illegal monopolistic pricing practices. The conviction was upheld, and the company was fined by Japan's supreme court in 1984.

In December 1974, Mitsubishi Oil suffered a grave financial blow when a massive oil spill from a tank at its second refinery at Mizushima caused the most severe oil pollution ever seen in Japan. Contamination of marine wildlife and fisheries led to lawsuits against Mitsubishi and cost the company more than US$100 million for cleanup and restitution to fishermen, and caused the shutdown of the refinery. The facility was not reopened until August 1975. This loss, added to general industry woes, caused the company's financial situation to deteriorate, increasing its deficit. It was not until March 1978 that the company was again able to pay a dividend on its stock.

As part of its ongoing effort to develop independent sources of crude oil, Mitsubishi entered into a partnership with a French firm to develop an oil field off the coast of Indonesia in 1975. In the first agreement of its kind, the company arranged to receive seven million barrels of crude oil from the site over a two-and-a-half year period in return for an investment of US$17 million.

By 1976, Mitsubishi was starting to recover from the financial woes induced by the Mizushima oil spill. Later that year, the company allied itself with the five other leading Japanese oil companies in a buyers' union, in an attempt to exert some control over the price of the raw materials they purchased. When Iraq raised the price of its product 10% and Saudi Arabia only raised its price 5%, the Japanese companies announced that they would buy more Saudi oil and less Iraqi oil.

In 1977, Mitsubishi again profited from the split in pricing between crude oil producers that had been established at the December 1976 OPEC general meeting. A high percentage of its crude imports originated in countries that had raised their prices 5% instead of 10%. However, the firm's large deficit still remaining from the costs of the oil spill continued to hold down its profitability. In the first half of 1978, the company was able to overcome a slump in the petroleum market because of profits on the exchange rate of the yen, and this factor along with large compensation payments by two other firms partly responsible for the 1974 oil spill, helped Mitsubishi to offset further the financial damage from the spill. A new oil tax, imposed in June 1978, along with reduced foreign exchange and a continuing slide in oil product price, led to a drop in profits in the latter part of the year to half their previous levels.

In 1979, Mitsubishi continued its efforts to obtain oil more directly from suppliers, and also continued to widen its search for oil outside the Persian Gulf. The company was successful in negotiating a five-year contract to double its purchase of crude oil from the Indonesian government-owned PERTAMINA in an arrangement that was the first of its kind for Indonesia. The company also made a direct deal with Burma for oil, becoming the first Japanese company to purchase oil from this source. In addition, Mitsubishi joined with five other Japanese-owned oil importers to form a council to promote oil imports from Mexico. The company finished the year by obtaining a commitment from Abu Dhabi to expand its direct supplies of crude oil to Mitsubishi, and by proposing steps to increase its previously marginal supply of oil from Kuwait in a direct arrangement. Two years later these steps paid off when the company signed a contract with Kuwait for 30,000 barrels per day of oil. By the end of the 1970s, with the encouragement and sponsorship of the Japanese government, 45% of Japan's oil imports were being obtained through direct deals with producing countries, such as those deals conluded by Mitsubishi during this time.

Mitsubishi undertook further diversification of its fuel sources in 1981, when the company agreed to buy 100,000 tons of coal from its U.S. partner, Getty Oil, for resale to its customers, as part of Japan's overall attempt to reduce its dependence on oil. This move away from petroleum in the Japanese economy as a whole contributed to record poor performance in the crowded oil-refining industry in the second half of 1982. Mitsubishi Oil's pre-tax profits dropped dramatically during this period in response to low demand for its products, high costs for raw materials, and unfavorable conditions in the world's financial market.

In mid-1984, Getty Oil, which had retained a half-ownership in Mitsubishi was purchased by a larger U.S. oil company, Texaco. As part of this deal, Getty sold its interest in Mitsubishi Oil to members of the Mitsubishi group and other Japanese buyers for US$335 million, allowing the company to shed its foreign partner, and become wholly Japanese-owned for the first time.

In the same year, in an atmosphere of growing difficulty for oil refiners caught between rising crude prices and govermnent controls on prices for refined products, Mitsubishi Oil announced that it would combine some operations, including the chartering of tankers, importing of crude oil, refining of petroleum, and marketing of products, with the Nippon Oil Company. The linked companies were to become Japan's largest oil distributor, with an estimated market share of 25%. This move was in keeping with the general trend toward consolidation in the badly fragmented Japanese petroleum industry, which, in accordance with repeated governmental recommendations, had seen 13 other arrangements in the previous seven months.

As the 1980s progressed, Mitsubishi Oil continued to seek new sources of raw materials. Faced with the war between Iran and Iraq in the Persian Gulf, which threatened the stability of crude supplies from that area, the company arranged to import oil from the North Sea off the British Isles to Japan, a distance that necessitated an expensive 50-day tanker trip. By the end of the decade the company's fortunes had improved somewhat, although its financial health remained shaky. Profits were up by 10% in March 1989, despite a drop in sales, but slipped back in the next year, in part as a result of higher costs for crude oil and rising marketing and administration costs.

As it entered the 1990s, Mitsubishi Oil's fate remained uncertain. The company has met successfully its past challenges and in 1991, it dominated the country's oil industry.

Principal Subsidiaries: Tohoku Oil Co., Ltd.(56.9%); Okinawa CTS Corp.(65%); Ryoyu Terminal Co., Ltd.; Ryoyu Tanker Co., Ltd.; Ryoyu Hanbai Co., Ltd.; Sanyu Building Co., Ltd.; Sanseki Corporation; Sanseki Engineering Co., Ltd.; Sanseki Information Systems Co., Ltd.; Mitsubishi Liquefied Petroleum Gas Co., Ltd.(25%); Tozai Oil Terminal Co., Ltd.(50%); Ryojun Engineering Co., Ltd.; Mitsubishi Petroleum Development Co., Ltd.(11 %); Kamigoto Oil Storage Co., Ltd.(10%); Universal Network Service Co., Ltd. (90%); Sanseki Techno Co., Ltd.; Japan Papua New Gunina Petroleum Co., Ltd.(33.9%); Mitsubishi Oil, (Delaware), Ltd.(U.S.A., 95%); Techmocisco, Inc.(U.S.A.); Mitsubishi Oil (U.K.) PLC; MIPETRO (Netherlands) B.V..