Nippon Oil Company, Limited Business Information, Profile, and History

History of Nippon Oil Company, Limited

Nippon Oil Company, Limited is Japan's largest petroleum-products distributor. The company imports and distributes petroleum products, and it also operates a refinery. Through its subsidiaries, Nippon is engaged in a number of related activities that include the manufacture of petrochemicals and petroleum gas, as well as oil transport, oil stockpiling, and oil exploration.

Nippon Oil was founded in 1888 during the Meiji restoration, which lasted from 1867 to 1912. This was a time of extraordinary changes in Japan. The government transformed Japan into a world power and sought to model the country's development on that of the West. Western technology, especially that of the United States, was used to modernize the Japanese economy. A parliamentary system of government was introduced in 1885, modeled on that of Germany.

While the Japanese oil industry was itself in its infancy, many entrepreneurs--yamashi--capitalized on the growing demand for oil created by Japanese industrialization. In 1888, 21 yamashi founded Nippon Oil. All were wealthy landowners at a time when most Japanese were landless peasants. Control of Nippon Oil rested with these shareholders, who owned 66% of the stock. Yet most decisions were made by two men, Gonzaburo Yamaguchi and the man who became the first company president, Hisahiro Natio. Almost immediately after the company was formed, successful drilling for crude oil began at Amaze, north of Tokyo. Within a year drilling also took place off the Japanese coast, and Nippon became the first Japanese company to drill offshore for oil.

A key to the company's initial success was its willingness to obtain technology from abroad. In particular, Nippon Oil looked to the United States, which had already pioneered technological innovations in the oil industry. In 1889, Gonzaburo Yamaguchi visited the United States to obtain information on the latest advances in oil drilling. Impressed by the sophistication of United States technology, Yamaguchi, on his return, persuaded his colleagues to purchase an advanced drilling machine from the Pierce company of New York. Yamaguchi hired a Texan to instruct Nippon Oil employees in the operation of the new equipment. Profits in the infant oil company were small. The salary of the American drilling-equipment expert amounted to 12% of total company expense; yet Nippon Oil was determined to master Western technology. The financial depression of 1897, which led to the collapse of many of Japan's smaller oil companies, left Nippon Oil with an ever-increasing share of Japanese oil production and refining.

In 1900 Nippon Oil experienced stiff competition from the newly arrived International Petroleum. This company had been founded in Japan but was operated by the American Standard Oil Company. In 1907 Nippon Oil overcame this domestic competition by purchasing all the Japanese assets of International Petroleum. By so doing, Nippon Oil became one of the largest oil companies in Japan. Its major competitor was now another Japanese company, Hoden Oil.

From 1908 onward, Nippon Oil's output of oil gradually decreased as wells became exhausted. Nippon Oil, again relying on U.S. technology, introduced a rotary drill that enabled existing wells to be deepened. Other Japanese companies soon followed Nippon Oil's example, leading to increased oil production throughout Japan.

In World War I, Japan concentrated its activities against the German colonial empire in the Far East. Following Germany's defeat, Japan not only acquired former German colonial possessions in the Pacific but also gained important commercial concessions in China. The war too led to the rapid development of Japanese industry as well as an increase in the demand for oil. In 1921, three years after the end of the war, Nippon Oil merged with its former competitor, Hoden Oil, and controlled 80% of domestic crude oil production.

The interwar period in Japan witnessed not only industrial expansion but also an increase in living standards. As the number of automobiles on Japanese roads grew, Nippon Oil established a network of gasoline-storage depots throughout the country. In 1919, the company set up its first hand-pump gasoline service station with an underground storage tank, in Tokyo. By the late 1920s more than 160 stations were in operation.

By the late 1920s also Japan's oil reserves were insufficient to meet the needs of a growing industrialized economy. Imported oil, therefore, became vital for the continued growth of the Japanese economy, and Nippon Oil, like most other Japanese oil refineries, increasingly relied on imported oil. In 1923, Nippon Oil imported only 170,000 kiloliters of oil. The ratio of domestic oil to imported oil was 63% to 23%. By 1937 only 20% of Nippon Oil's crude oil supply came from domestic sources. The remaining 80% had to be imported, mainly from the United States. As domestic oil production lessened, importing and refining gradually became Nippon Oil's principal business activity.

During the 1930s, Japan, like other industrialized countries, suffered the effects of the worldwide Depression. The Japanese government, under pressure from its army and navy chiefs, sought new markets on the Chinese mainland through military aggression. In 1931, the Japanese military seized Manchuria, forcing Chinese troops to withdraw from the area. In 1937 war had broken out with China. By this time, the military had gained control of the Japanese government and had begun to regulate the Japanese economy to the needs of the war effort. All important industries came under state control. In 1937, Nippon Oil lost all of its independence, coming under the control of a state-run monopolistic organization known as Oil Co-operative Sales.

Japan's role in World War II had a devastating impact on the economy. Japan's reliance on imported oil and other raw materials meant that the country was vulnerable to an Allied blockade. U.S. submarines operating close to the Japanese coast inflicted heavy losses on Japanese oil tankers carrying supplies to the mainland. Slowly the Japanese economy ground to a halt.

Because of the blockade, Nippon Oil's supply of imported oil almost totally dried up. In 1941, in an attempt to encourage domestic production of oil under embargo conditions, the Japanese government merged Nippon Oil with Ogura Oil. Yet, under the weight of heavy bombing attacks on oil installations, little could be done to remedy Japan's acute oil shortage.

Japanese defeat in 1945 was followed by a lengthy period of reconstruction under the Allied occupation authority, the objective of which was the re-establishment of a peacetime industrial economy. The old state monopolies were broken up and competition between smaller economic units was encouraged. Nippon Oil Company was re-established as a wholesaler in 1949 and occupied a much smaller role in the Japanese postwar economy than it had had for decades. Its main activity coninued to be the importing and refining of mostly imported oil.

The Korean War, which broke out in 1950, transformed Japan into an important ally of the United States in the Far East and led to closer economic ties between the two countries. In 1951, recognizing the importance of the U.S. connection, Nippon Oil established Nippon Petroleum Refining Company, Limited, as a joint venture with Caltex Petroleum Corporation of the United States. Most of Nippon's crude oil supply was subsequently purchased from Caltex and refined by Nippon Petroleum. Also in 1951, a further subsidiary, Tokyo Tanker Co., Ltd. was established to transport oil to Japan. In 1955 Nippon Oil entered the petrochemical and gas industry through the establishment of two subsidiaries, Nippon Petrochemicals Company, Limited and Nippon Petroleum Gas Company, Limited.

In 1960, Nippon Oil established an overseas office in the United States, incorporated in Delaware. The 1960s witnessed a period of sustained growth at Nippon Oil. In 1961 operating profits for the year stood at ¥2.13 billion. For 1970 Nippon Oil declared a profit of ¥10.76 billion. This trend of increased profitability was interrupted by events in the Middle East early in the 1970s. Since the end of World War II, Japan had increasingly relied on Middle East oil. The Yom Kippur War of 1973 between Israel and its Arab neighbors interrupted the oil supply. The Arab-dominated Organization of Petroleum Exporting Countries (OPEC) cut production and raised prices. Within a year of the war, prices had quadrupled. These increases might have been passed on to the Japanese consumer but in 1974, the Japanese government froze retail gas prices. After-tax profit fell at Nippon Oil to ¥902 million, less than one-tenth of what it had been in 1970.

By 1977 Nippon had recovered from the energy crisis through the growing strength of the Japanese economy and the high appreciation of the yen on world money markets. In 1980 profits reached an all-time high of ¥45.67 billion. The early 1980s, however, witnessed a slump in the oil industry because of an abundance of supply and too much refining capacity. The Japanese Ministry of International Trade and Industry sought to rationalize the oil industry by encouraging cooperation among the large companies. In 1984 Nippon Oil and Mitsubishi Oil Co., Ltd., itself 50% owned by the U.S. Getty Oil Company, reached an accord on the sharing of marketing and facilities. This pact gave both companies joint command of 25% of Japan's oil market. Under the agreement, the two companies cooperated in wholesale and retail operations and use of tanker and storage facilities.

Under the leadership of its chairman, Yasuoki Takeuchi, Nippon Oil during the 1980s took steps to reduce its dependence on Middle East oil. In 1985 alone, Nippon Oil set aside US$100 million for the development of oil fields in the United States, and in 1986, Nippon Oil found promising oil fields in North Dakota. The company also reached an agreement with Texaco of the United States for joint development of Alaskan oil fields. Another joint exploration deal with Chevron led to the discovery of two gas fields in the Gulf of Mexico.

This policy of developing alternative sources of supply somewhat reduced dependence on Arab oil. In 1989 while 56.6% of Nippon Oil imports came from the Middle East, 37% came from Southeast Asia, and the remaining 6.4% from other regions, mainly Mexico. As political turmoil in the Middle East, in the early 1990s, made the security of further supplies from this region even more uncertain, Nippon Oil's efforts to develop its own crude oil sources seems likely to continue.

Principal Subsidiaries: Nippon Petroleum Refining Company, Limited (50%); Nippon Petrochemicals Company, Limited; Nippon Petroleum Gas Company, Limited; Nippon Oil (U.K.) Public Limited Company; Nisseki Real Estate Company, Limited; Nippon Oil (Delaware) Limited (U.S.A.); Nippon Oil (Asia) Pte. Ltd. (Singapore); The Nisseki Plastic Chemical Co., Ltd. (15%); Nihonkai Oil Co., Ltd. (66%); Nippon Hodo Co., Ltd. (57.7%); Nippon Oil Exploration Company, Limited; Nippon Oil Overseas Exploration Company, Limited; Nippon Oil Engineering and Construction Co., Ltd.; Nippon Petroleum Processing Company, Limited; Nisseki Shoji Company, Limited; Nippon Oil Information Systems Company, Limited; Nisseki Tourist Co., Ltd.; Nisseki Office Service Co., Ltd.; Nippon Oil (Australia) Pty. Limited; Nipon Oil Finance (Netherlands) B.V.; Taiwan Nisseki Co. Ltd.; Nippon Auto Parking Company, Limited; Nippon Oil Staging Terminal Company, Limited (50%); Koa Oil Company, Limited (5.8%); Tokyo Tanker Co., Ltd. (4%).