It has been two weeks since Japan was devastated by the March 11 earthquake and tsunami, which shuttered in around 20% of the country’s nuclear capacity and 30% of its refining capacity. According to IHS-CERA, 2 GW of Japan’s nuclear capacity have been permanently lost as a result of injecting seawater into reactors, while another 10 GW—8% of Japan’s total electricity—will be shut in “for several years.” The following addresses how Japan will cope with meeting its electricity and fuel shortfalls, and the obstacles facing the energy sector and their broader implications. (See March 17 RGE Analysis on options available to Japan for meeting energy needs.)
Release of strategic oil reserves and reduction in economic activity will limit crude oil import growth.
Japan’s power sector uses around 400,000 barrels per day (b/d) to produce electricity. This is equivalent to 9% of Japan’s 4.4 million b/d in total oil demand. Since the earthquake, Japan’s Ministry of Economy, Trade and Industry (METI) has approved the release of 66.0 million barrels of oil from private sector strategic reserves—equivalent to 25 days’ worth of consumption. Japanese companies now hold 45 days’ worth of oil inventories, the minimum amount they are allowed to hold under law.
The drawdown oil and oil product stockpiles will reduce the growth in oil imports that analysts had expected in the aftermath of the earthquake. Japan’s trade ministry said the release of these reserves, along with extra shipments from western Japan, have helped bring oil shipments to the Kanto region in east-central Japan and around Tokyo to levels seen one year ago. Refining capacity is also expected to increase in the week ahead and will reduce imports. In the near term, imports of oil also face downside risk due to losses in productive capacity. Depending on how much oil is used to meet electricity needs, Japan could actually experience a net reduction in oil demand although an increase is expected in the second half of 2011 as rebuilding efforts commence.
Damage to Japan’s transport infrastructure, perhaps even more than shut-in refining capacity, is posing the major challenge to meeting electricity and gasoline shortfalls.
Japan’s refining capacity was around 4.7 million b/d in 2009, according to the U.S. Energy Information Agency. This fell to 2.7 million b/d immediately after the earthquake, but has since recovered to 3.9 million b/d, according to the Petroleum Association of Japan (PAJ). As of March 23, two of Japan’s six refineries that were shut down in the Tohoku and Kanto region resumed operations. Despite these improvements, damage caused to Japan’s roads and bridges, along with a shortfall of tanker trucks, is hampering the country’s ability to sufficiently distribute energy. PAJ attribute the shortage in tanker trucks to government policies designed to reduce oil consumption; in 2005 fuel tankers numbered 17,744, but by 2010, there were only 6,966. This has contributed to difficulties in delivering fuel to affected districts. According to METI, Japan is increasing the number of tanker trucks from 198 to 300 in the Tohoku region and is seeking to secure railway transport routes to supply affected regions with gasoline, kerosene, and light oil. On this basis, repairing damaged supply routes is as important as securing the energy supplies to meet Japan’s power needs.
Asian refineries step in to make up for lost Japanese capacity.
According to Moody’s, Japan’s refineries account for around 9% of Asian demand and 2% of global capacity. Though refiners such as JX Nippon Oil and Energy, Idemitsu Kosan and Kyokuto Petroleum Industries have restarted operations, as of March 22, they were neither resuming overseas sales nor taking new orders for bunker fuel. As a greater portion of Japan’s refining capacity is used to meet domestic shortfalls, it is likely that Asian refiners in India and Korea will increase their utilization rates to meet regional demand.
Australian LNG will benefit from non-contracted volumes.
If Japan were to meet all 9.7 gigawatts of lost nuclear capacity with LNG, it would have to import an additional 10 million-11 million tons of LNG, according to FACTS, though reliance on other energy sources will reduce this to 4 million-6 million tons. In the short term, Japan will rely on the spot market to increase its imports of LNG to make up for lost nuclear capacity. LNG supplies will also reportedly be diverted from Indonesia, Korea, Brunei and Russia to meet Japan’s LNG needs. Despite concerns that LNG cargoes would be diverted from Europe to meet Japanese demand, this has not occurred, according to AIS Live’s tanker-trafficking systems, which have observed similar tanker flows into Europe since the earthquake. In the medium term, however, Japan will need to renegotiate and sign new contracts with LNG exporters to meet longer-term demand. Given limited tanker availability from the Atlantic basic, Japan will largely rely on LNG produced in the Pacific. This could be especially beneficial to Australian companies that are currently developing LNG projects, but have not yet committed volumes for export.
Imports of thermal coal will fall in the short term, rise in the medium term.
According to Platts, as of March 16, five thermal power stations, the equivalent of 10% of Japan’s installed coal-fired generation capacity, were offline. A portion of Japan’s coal shipments from Newcastle were reportedly being redirected to other parts of Asia, and offered at a discount to Chinese buyers. Though Japanese utilities in the western side of the country can absorb increased deliveries, the electricity grid prevents their ability to transfer power eastward. In the short term, this suggests that coal will play less of a role in meeting electricity shortages than LNG and oil. However, once some of these power stations resume operations, coal could play a larger role in meeting electricity needs. In 2010, Japan imported 125.3 million tons. According to Clarkson Research, this could rise to 131.4 million tons in 2011.