By TSUYOSHI INAJIMA and ICHIRO SUZUKI

JX Holdings and TonenGeneral Sekiyu, Japan’s two biggest oil refiners, said they intend to merge in April 2017 through a share swap, creating a company with control of more than half the country’s gasoline market.

The companies plan to reach a final agreement in August that will include a merger ratio, according to a statement on Thursday. The new company aims for more than 100 billion yen ($810 million) in annual savings within five years, they said.

The merger comes as Japan’s government encourages refiners to consolidate and cut processing capacity amid declining fuel demand because of a shrinking population and the shift to more energy-efficient cars. The new company would be the biggest competitor to Idemitsu Kosan Co. and Showa Shell, which agreed to merge last month into a company controlling about a third of Japan’s gasoline market.

“While we would pursue efficiency and rationalization, we are aware that’s not enough to compete with foreign competitors in the time range of 10, 20 and 30 years,” Yukio Uchida, president of JX Holdings, told reporters in Tokyo. 

That recognition prompted the two companies to agree on a deal that would help improve their competitiveness, Uchida said.

By reducing the number of refiners to two major companies, the industry as a whole would likely see betterrefining margins, said Syusaku Nishikawa, an analyst at Daiwa Securities.

The companies plan to consider merging and scrapping refineries and oil terminals and integrating operations in the Kawasaki area south of Tokyo, where they have ethylene plants, according to the statement. 

There will be “no sacred cows” when deciding which refinery will survive or be scrapped, Uchida said.

Demand for oil-related products will fall about 6.8% in the five years through the end of March 2020, according to a forecast in April by the Ministry of Economy, Trade and Industry.

The companies will determine the share swap ratio by considering factors such as the market values of the two companies and the valuations made by financial advisers, according to the statement.