Osaka Gas Company, Ltd.

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Osaka Gas Company, Ltd.

4-1-2 Hiranomachi
Chuo-ku
Osaka 541-0046
Japan
Telephone: (06) 6202-2221
Fax: (06) 6227-0745
Web site: http://www.osakagas.co.jp

Public Company
Incorporated: 1897
Employees: 15,020
Sales: ¥947.9 billion ($7.88 billion, 2003)
Stock Exchanges: Tokyo Osaka Nagoya
Ticker Symbol: 9532
NAIC: 221210 Natural Gas Distribution; 486210 Pipeline Transportation of Natural Gas

Osaka Gas Company, Ltd. (Osaka Gas) is Japan's second largest supplier of gas, after Tokyo Gas. The company supplies over 6.56 million customers in the Kansai region with liquefied natural gas (LNG). Through a network of 56 subsidiaries, Osaka Gas is involved in the manufacture, supply, and sale of gas, gas appliances, and liquified petroleum gas (LPG) and natural gas, as well as house pipe installation, real estate leasing, and a host of other activities including engineering and information processing. The company's service area includes 69 cities and 41 towns in six prefectures. Deregulation of Japan's gas industry began in the late 1990s, forcing Osaka Gas to cut costs, restructure, and diversify into such areas as the independent power producer and retail electricity markets.

Osaka's Gas Industry Gets Its Start in 1871

Osaka's gas industry originated in 1871 when Japan's first gas-powered lamp was unveiled, providing lighting for the city mint. This came just 18 years after the United States Navy, under Admiral Perry, had forced Japan to open up her doors to the Western world and restore the power of the emperor for the first time since the 17th century. What followed was a remarkable and rapid period of industrial development that originated from the major cities of Tokyo and Osaka.

The introduction of gas lighting to Osaka was soon repeated in Japan's other major cities. At the same time, kerosene lamps were also imported from the West. For a time, the latter became more popular than gas, being easy to use, but widespread fires caused by these lamps convinced authorities that gas was the best source of city lighting. Consequently, Osaka Gas was formed in 1897 with capital provided by the municipal authorities and also by overseas investors. Osaka Gas's foreign patron was the Edison Power Company in the United States. An Osaka businessman, Taro Asano, had met the president of Edison, Anthony Brady, while in New York, and the two became friends. Brady was impressed with Asano and sent an Edison representative, Alexander Chizon, to Osaka to arrange financing and aid the fledgling operation in technical matters. Along with Asano, in 1902 the Edison Company became a large shareholder in Osaka Gas, with a 50 percent stake that it later sold to Japanese investors. Asano and other Japanese investors held the remaining 50 percent.

Masagi Kataoka was chosen as the company's first president, and his first task was to prepare the infrastructure for the production and distribution of gas in Osaka. In the 19th century, all city gas was produced using coal as the raw material; the technology required to tap and transport natural gas had yet to be developed. In the Iwazaki area of Osaka, a factory was constructed consisting of eight gas-producing retorts imported from the United States. Using coal, this factory could produce 4,000 cubic meters of gas per day. Underground piping was installed to transport this gas to various parts of the city. In the relatively short space of two years, from 1902 to 1904, 80 kilometers of piping were laid by manual laborers and animal power. A steel gas storage tank was constructed with a capacity of 10,000 cubic meters of gas. At the time, it was hailed as the largest gas tank east of the Suez canal. In 1905, after Kataoka had traveled to New York to finalize arrangements for financing from the United States, gas supplies finally commenced. Initially, 3,350 homes were connected and supplied with gas, which was monitored with installed meters. The price was ¥0.08 per square meter, which meant that only the affluent could afford this new source of lighting.

Early Growth: 1900–30s

Byproducts of the gas production process included coke, tar, and benzene and were sold to industry. An agreement was signed with Sakamitsu Industries, a local metal-casting firm, to supply coke for Sakamitsu's metal reduction needs. Osaka Gas also began refining and selling coal tar that was, among other things, used to pave roads. By 1908, the success and expansion of the company seemed assured, with four branch offices opening throughout the city. The factory was now operating at full capacity. Due to the comparatively high price and unreliability of electricity, the alternative source of power to city gas, demand for gas was high. In the rapidly expanding Japanese economy, gas-powered engines became popular. This trend began to change during the early 1900s, however, with the advent of hydroelectric power and the tungsten lamp replacing gas as a source of lighting energy. From this time onward, gas would be used for the more high-power function of heat production. For consumers, this meant the use of gas for heating and cooking and for industry in furnaces and engines.

Japan's victory in the Sino-Japanese War of 1897 and the Russo-Japanese War of 1904 made the country a major world power in both industrial and military terms, and the following 20 years were a period of intense economic growth. Although this growth brought rapid inflation, the price of gas rose by only 50 percent between 1905 and 1925. This compared with a rise of 250 percent in coal and rice prices and showed how heavily the industry was subsidized and regulated by the government. After World War I and the ensuing depression in Japan, Osaka Gas was allowed to regulate its prices. The management of the company under Kataoka set the long-term strategy of dropping gas prices. This had the twofold effect of preventing customers from being forced to give up their gas supply and winning the company new customers, as firewood became scarcer and more expensive as a source of heating. The results were dramatic. In 1927, the number of households supplied by Osaka Gas doubled to 110,000 and rose to 300,000 by 1933.

During the late 1920s and early 1930s, the company conducted market research, sending employees out on door-to-door surveys of households in Osaka. A campaign was initiated to promote gas use in Osaka, utilizing billboards and exhibitions. In 1928, Kataoka and 20 of his executives traveled to the United States and Europe to witness the applications of city gas in the West. At an exhibition of gas appliances in Europe they saw gas-powered refrigerators manufactured by Electrolux of Sweden. The result of the visit was the promotion in Osaka of an array of gas-powered appliances, including refrigerators, irons, and rice cookers. The ensuing demand for gas prompted the construction of a second factory unit at the Iwazaki site in 1928, followed by a third in 1935.

In the 1930s, the use of gas for home cooking spread throughout the major cities in Japan, including Osaka. In 1937, Osaka Gas decided to invest heavily in a major new project—the construction of a huge gas works on Yujima Island in Osaka Bay. The facility, completed in 1940, was capable of producing 35,000 tons of gas per day and also manufactured tar, pitch, naphthalene, and benzene as byproducts for industrial use. A second coke burner was added in 1942. During this time, the Japanese government was steering the economy toward warrelated production, and Osaka Gas, as a key industry, was in close contact with the military government regarding its production plans. The Japanese invasion of Manchuria and China in 1931 gave Japan a plentiful and virtually free source of coal that greatly aided the war machine. Consumer and industrial demand for gas soared during the war years.

During 1944, however, the tide turned against Japan, and its cities were increasingly the targets of bomber attacks by the B-29s of the United States Air Force. Although less publicized than the atomic bomb attacks, these raids resulted in far greater damage and casualties. Indeed, on August 14, 1945, the day Nagasaki was destroyed by an atomic bomb, Osaka was attacked by 180 B-29s resulting in widespread fires in the city, the destruction of 40,000 homes, and more than 80,000 casualties. This and similar raids caused severe damage to Osaka Gas's production and pipeline distribution facilities. All the major city gas companies in the region were similarly affected, and in December 1944 they merged to help ensure their survival. The main companies in this merger were Osaka Gas Company, Ltd.; Kobe Gas Company, Ltd.; and Kyoto Gas Company, Ltd. Following Japan's surrender, the Allied powers—led by the United States—took temporary control of the country. Gas supply in Osaka was sporadic at best and explosions, due to damaged pipelines, were frequent. The years 1945 through 1950 were spent identifying and repairing pipeline and reconnecting as many households as possible. Like most essential items in Japan immediately after the war, gas was rationed; its use by the public was limited to two hours a day.

Company Perspectives:

Aiming to become a one-stop energy solution provider, Osaka Gas strives to achieve superior competitiveness in all facets of its business, from cost and efficiency to environmental preservation and customer services. In all of our activities we aim to become the corporate group that is the preferred choice of our customers.

Postwar Expansion

In 1949, under the Law for the Elimination of Excessive Concentration of Economic Power, implemented by the Allies to break up the big Japanese industrial groups, the merged gas companies were split up, and Osaka Gas became a separate entity again. The year 1949 also saw the death of Kataoka, who had led the company since its founding. He was replaced by Jiro Iiguchi, a former vice-president of the company. During the years 1950 to 1955, Japan underwent a remarkable period of reconstruction that involved the united efforts of the entire Japanese population. Using manual labor when necessary, Osaka Gas began a full-scale rebuilding of its Yujima facility, which had returned to its prewar production level by 1952. A gas appliance research center was opened in the same year, and in 1953 the Yujima factory produced its first oil-based gas. Using German technology, high-pressure storage and gas transport mechanisms were added. A combination of U.S. aid and cheap educated labor fueled Japan's growth during the 1950s, and toward the end of the decade the Japanese began to see the fruits of their hard work in the form of consumer goods such as televisions and cookers. The government promoted the use of gas in all areas of Japan as an alternative to firewood for cooking and heating. Osaka Gas stepped up its own promotional campaign, hailing gas as being four times as cheap and twice as quick as electricity for heating and cooking purposes. Customer service was made a priority, with a fleet of three-wheeled motorized bicycles providing emergency cover and a Univac computer introduced at the company's Osaka headquarters.

In 1960, the capacity of the Yujima factory was increased. In 1962, the production capacity at Iwazaki was closed, the site being demoted to a storage facility. Osaka Gas's high-pressure storage and supply network was expanded in 1961 into what became known as the 370-kilometer network, in reference to the length of high-pressure gas piping installed throughout the city. In 1964, the company announced a "calorie-up" program in which the energy content of its city gas was upgraded from 3,600 kilocalories per cubic meter to 4,500. This necessitated the inspection of 6.5 million appliances in 1.7 million homes being supplied by Osaka Gas. The company also began to sell gas in the form of liquid propane gas steel canisters to customers who were not connected by the pipe network. Company representatives delivered filled canisters to customers and took away the empty ones for refilling.

By 1965, Osaka Gas was a major corporation with several thousand employees and staff training facilities. A five-day, 40-hour working week was introduced. In 1966, a research and development center with 160 employees was opened adjacent to the production site on Yujima. By 1968, the Japanese economy ranked second only to the United States in terms of gross national product (GNP), which continued to grow uninterrupted between 1966 and 1973. This period, known as the Izanagi Boom, ended abruptly with the oil shock of 1973. Japan had come to rely on cheap, plentiful Middle Eastern oil for more than 70 percent of its energy needs, and when OPEC trebled its oil prices overnight the effects on the economy were profound. In 1974, for the first time since World War II, the Japanese economy registered a negative year-on-year growth figure of −0.5 percent, and the Japanese government set about reducing its dependency on oil. There were three major alternatives: nuclear power, coal, and natural gas. At that stage, Osaka Gas produced all of its gas from relatively cheap oil and coal, the import of natural gas being uneconomical. Technological advances in the storing and transport of natural gas as a liquid, coupled with the sharp increase in the price of oil, now made the import of natural gas feasible. Osaka Gas began to amass a supply of gas in 1980, with huge refrigeration ships transporting the liquefied natural gas (LNG) at −160 degrees centigrade from fields throughout Southeast Asia and Australia. This achievement required the rapid development of refrigeration technology by the company, which it undertook with other Japanese users, notably Tokyo Gas. Beginning in 1980, Osaka Gas relied increasingly on LNG for the bulk of its gas supply, and by 1990 it used LNG exclusively.

During the 1980s, Osaka Gas used its considerable engineering expertise to diversify into other areas. This process began with the sale of coal-related byproducts such as coke, benzene, and coal-tar products, which had been supplied by the company since its founding. In 1987, a subsidiary, Donac Company, was formed to produce the Donacarbo carbon fibers used in a range of products, including golf clubs, that were sold throughout the world. Another subsidiary, Harman Company, developed and manufactured gas-run appliances and relied heavily on Osaka Gas's research and development facilities. Osaka Gas imported three million tons of LNG at this time, about 10 percent of Japan's total. It used the low temperature of the gas while being shipped to collaborate with the food industry, forming Kinki Cryogenics as a supplier of frozen foods. This subsidiary also became the first company in the world to utilize LNG to produce liquid carbon dioxide.

In 1978, Osaka Gas Engineering was formed, providing technological assistance to outside clients. Offices were established in the United States and England in the late 1980s to market this expertise. Like many Japanese utility and transportation companies, Osaka Gas took advantage of rapidly rising city land prices between 1984 and 1990. As a major land owner in Osaka, it formed Urbanex Company in 1989 to develop surplus company land for commercial and private use. Other diversified businesses included retail and restaurant operations and business consulting services.

Deregulation Leads to Changes in the 1990s and Beyond

During the early 1990s, the supply of gas remained the core business of the Osaka Gas Group, accounting for almost 75 percent of revenue. The group was organized into five main business divisions: gas-related, refrigeration, engineering services, computer services, and consumer services. The last division, which included real estate, was the fastest-growing. The group launched a major restructuring effort in 1993 in order to bolster operating efficiency. Masafumi Ohnishi, president since 1981, stated his desire to increase the international activities of Osaka Gas in many of the group's business areas. This policy, along with ongoing diversification and investment in new technology, continued into the latter half of the 1990s as the company faced changes related to market liberalization.

Key Dates:

1897:: Osaka Gas is formed with capital provided by the municipal authorities and overseas investors.
1905:: The company starts to supply gas to 3,350 homes.
1933:: By now, Osaka Gas supplies 300,000 households.
1940:: A gas works on Yujima Island is completed.
1944:: Japan's major gas companies merge to ensure their survival during the war.
1949:: The merged gas companies are split up; Osaka Gas becomes a separate entity.
1953:: The Yujima factory produces its first oil-based gas.
1980:: The company begins to rely heavily on liquid natural gas for the bulk of its gas supply.
1995:: Deregulation starts in Japan's energy sector.
2002:: Osaka Gas supplies wholesale electricity to Kansai Electric Power.

Just before deregulation hit Japan's market, however, Osaka Gas was dealt a major blow. On January 17, 1995, a devastating earthquake shook Western Japan that caused over $1.9 billion in damages to the firm's gas network. Throughout most of 1995, the company worked diligently to restore gas supply to its customers and had to rebuild its damaged facilities.

At the same time, Osaka Gas continued to strengthen its business holdings as deregulation started. Beginning in 1995, the Japanese government partially liberalized the electric utility industry, allowing independent power producers (IPPs) to sell electric power to the regional companies. Then, in March 2000, these IPPs were allowed to market directly to customers, enabling both foreign and domestic competition in the retail electricity market. The gas industry was in the process of deregulating as well, which gave Osaka Gas the impetus to expand further. The company was the first gas concern to enter the IPP market. In April 2000, the firm began construction on a 150-megawatt power generation facility in Torishima, Osaka. In April 2002, the plant went online and provided wholesale electricity to Kansai Electric Power.

While deregulation brought with it increased opportunities for expansion, it also set the stage for intense competition. In response to the changing business environment, Osaka Gas launched a new management plan in 1999 entitled Vision 2010. Two specific strategies were the cornerstone of the plan—diversification into multi-faceted energy activities and branching out into new business areas. The initiative also focused on "value creation management," a corporate mission based on generating value for shareholders, customers, and society.

Japan's deregulation moves started to significantly change the industry during the early years of the new century. An April 2002 World Gas Intelligence article claimed that LNG businesses were "slashing prices, buying fuel more efficiently, tying up with foreign oil companies, and using new pricing methods." In addition, Osaka Gas and its competitors pursued new opportunities made available by industry deregulation. During 2001, the company moved into the electricity retailing sector when it partnered with NTT Facilities Inc. and Tokyo Gas Company Ltd. to launch ENNET Corporation. Osaka Gas also began supplying LPG to its customers by teaming up with Nissho Iwai Petroleum Gas Corp.

While natural gas remained a core business in Osaka Gas's portfolio, the company continued to strengthen its electric power business with the intent of making it a significant portion of its business. According to the company, it planned to market electricity to specific customers, propose multiple energies to these customers, and then expand into a larger geographical area.

By 2003, Osaka Gas's management was confident that deregulation would continue to bring positive changes to the company and the customers it served. The firm's Energy Business unit included natural gas, electricity, LPG, and energy solutions divisions. Its Non-energy Business unit was comprised of real estate, restaurant and food, information, materials, and service holdings. While competition would remain intense in the years to come, Osaka Gas was intent on securing its position as a multi-faceted energy services group. With a solid strategy in place, the company appeared to be on track for future growth.

Principal Subsidiaries

Nabari Kintetsu Gas Company Ltd. (85%); Kinki Piping Company Ltd.; Harman Company Ltd. (60%); Ehime Nissho Propane Company Ltd. (66.7%); Gasnet Company Ltd. (55%); CYRO-AIR Company Ltd. (55%); Cold Air Products Company Ltd. (55%); Liquid Gas Company Ltd.; Liquid Gas Kyoto Company Ltd.; Kinki Ekitan Company Ltd. (51%); Kochi Nissho Propane Company Ltd.; Shanshin Engineering Company Ltd.; Nissho Iwai Gas Company Ltd.; Nissho Iwai Gas Energy Company Ltd.; Nissho Iwai Petroleum Gas Company Ltd. (70%); Nissho Gas Supply Company Ltd.; Nissho Propane Sekiyu Company Ltd.; Hokuriku Nissho Propane Company Ltd. (70%); Mie Nissho Gas Company Ltd.; Urbanex Company Ltd.; OG Capital Company Ltd.; Harman Planning Company Ltd.; Kyoto Research Park Company Ltd.