Welcome: Guest User

Register / Login

Japan to scramble for LNG, fuel oil to fill nuclear gap

Tokyo, 14 March 2011

Japan will move quickly to import more liquefied natural gas (LNG) and low-sulphur fuels to generate power at thermal plants and replace nuclear electricity supplies put out of action following the nation's worst earthquake in recorded history.

Significant power supplies in Japan, which ranks third in terms of oil imports and size of its economy, were crippled by the 8.9-magnitude earthquake that on Friday, causing the loss of an estimated 9,700 megawatts (MW) of nuclear, about a fifth of capacity, and 10,831 MW of thermal power generation. Another 2,670 MW of nuclear power was shut at the time of the earthquake for regular inspection.

Japan's Tokyo Electric Power Co. (TEPCO), Asia's biggest utility, will be forced to buy power from other utilities and search for a mix of LNG and low-sulphur fuel oil along with other producers as they did in 2007 when the 8,000 MW Kashiwazaki-Kariwa nuclear plant was shut for two years after a 2007 earthquake.

As well, utilities will have to cast afield for more of other fuels like low-sulphur waxy residue and Duri crude from Indonesia to ramp up spare thermal power generators.

"Given its flexibility, an oil fired power plant is the most suitable in replacing the shortfall of electricity generation, which means heavy crude will see an increase in use in the near term," said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting in Tokyo.

But a trader in Singapore warned that low-sulphur fuel oil (LSFO) supplies are tight. "LSFO supply and demand in Asia is quite balanced at the moment, so anything to tip that balance is likely to impact on prices," the trader said.

Asian fuel oil strengthened for a fourth session on Friday, with low-sulphur fuel oil for April/May, which becomes prompt on Wednesday, traded at $5.25-$5.75 and $4.75 a tonne respectively.

The top five Japanese utilities rely most on LNG for power generation, far surpassing the use of fuel oil and coal, but some smaller utilities use more coal than LNG or fuel oils.

"If solely fuel oil was used instead of natural gas, we estimate that the incremental boost to consumption would be about 238,000 barrels a day (b/d)," Barclays Capital said in an energy flash research note on March 11. Japan's total power demand was forecast to rise 5.5 percent in the business year ending this month to 1,056.5 billion kilowatt hours.

But that estimate is likely to change as the economy is roiled by the earthquake and the government asks industry and households to cut power use and face rolling blackouts as it attempt to bring power plants back online.

TEPCO on Sunday said it had resumed generating electricity from the oil-fired 350-MW No.3 unit at its Oi power station in Tokyo, though the No. 2 unit remains closed.


History shows that any shutdown in Japanese nuclear plants, which supply 30 percent cent of the country's total power generation capacity, drastically boosts demand for LNG as well.

A shutdown of 17 of Japan's 54 reactors in August 2002, for safety inspections, led to an 11-percent increase in Japan's LNG demand in the year that followed. while the three year closure of the country's biggest nuclear plant, Kashiwazaki-Kariwa power station, from 2007 drove up LNG spot market prices sharply around the world.

Russia has already offered to increase LNG supplies to Japan from the Sakhalin-2 project if requested. "We note that 1,000 MW equates roughly to 150-180 (million metric cubic feet per day) of gas demand if the units were running as base load, around the clock, as nuclear plants typically do," Barclays Capital said.

"Thus, these outages would translate to 1.0-1.2 (billion cubic feet per day) of gas demand if replaced solely by natural gas."

Refining facilities were also hit, including a fire at the 220,000 bpd Cosmo Oil's Chiba refinery and 145,000 bpd at JX Nippon Oil & Energy's plant in the Sendai region, meaning Japan has shut down a total of 774,000 bpd of refining capacity since the earthquake, Eurasia Group said.


On Sunday, TEPCO said radiation levels around the shut Fukushima Daiichi plant had risen above the safety limit but it did not mean an "immediate threat" to human health.

Analysts said a full restoration of nuclear power operations may take a much longer time to come back online, if at all, than the Kashiwazaki-Kariwa plant in 2007.

"Considering that it took over two years for the project to become fully operational after its shutdown, it is possible or even likely that the lost 12,370 MW of capacity at impacted sites will be offline for at least that long," Eurasia Group said in a report.

Eurasia Group estimated that the 9,700 MW loss of power generation capacity translates into 7.3 billion cubic metres of new annual gas demand for Japan, or 5.6 million tonnes per annum of LNG.

Global supply of LNG is expected to top 360 million tonnes by 2015, according to Tri-Zen International, with Japan's post quake additional requirements equivalent to 1.5 percent of world output.

"Given the high operating capacity rates for baseload nuclear power, there will be a correspondingly high demand for thermal generation to ramp up or reactivate to meet the shortfall," it said.

Japan has grown increasingly reliant on nuclear power and planned sizeable increases in capacity in the coming decade in a country that imports 80 percent of its energy needs and also aims to be a global leader in cutting carbon emissions. But a swing away from nuclear power is possible after the leaks at the Fukushima Daiichi plant and is likely to have a major impact on long-term power generation plans in Japan.

"Everything has now become a lot more serious following explosion at Fukushima," said Tony Regan, analyst at Tri-Zen Capital in Singapore.

"I expect far more to be shutdown particularly those of similar age and specification. It will then be very difficult to bring them back on line even after repairs/upgrading."

Ends --

By Chikako Mogi and Osamu Tsukimori, Reuters - for Commodities Now