Japan’s Surging LNG Demand
Introduction
Uncertainty over the future of nuclear power in Japan and the spectre of power-supply shortages continue to weigh on business sentiment and pose downside risk to Japan’s economic rebound. More than five months have passed since the March 11 earthquake and tsunami and only 15 of Japan’s 54 nuclear reactors are in operation (see Figure 1) with total capacity of 13.25 GW, 27% of total nuclear capacity of 48.96 MW. To meet lost nuclear capacity, Japanese utilities will increasingly rely on gas and oil feedstock to generate thermal power, which has risen by double digits on a year-on-year basis in each of the last three months. This will especially be the case as Japan’s currently operating 15 nuclear reactors undergo regular maintenance, which can last anywhere between three months and one year (see Figure 1). On this basis, Japan’s use of liquefied natural gas (LNG)—the largest feedstock meeting lost nuclear capacity—is expected to remain firm.
Decline of Nuclear Power
The most recent data from Japan’s Federation of Electric Power Companies shows that in July 2011, the country’s nuclear capacity factor was at its lowest level since the earthquake–33.9% compared to 70.0% a year ago (see Figure 2). In July, only 16 of Japan’s 54 nuclear reactors were in operation, with a combined power generation capacity of 14.36 GW of the country’s total installed capacity of 48.96 GW. Apart from the 10 reactors shut down by the earthquake/tsunami, Japanese authorities and citizens are reluctant to restart reactors that were undergoing routine inspections at the time of the earthquake.
Renewed political opposition to Japan’s use of nuclear power along with upcoming routine inspections (the first to occur by Aug. 23) on the 16 reactors that are in operation increases the risk that Japan will have to confront power-supply shortages this winter as demand for gas increases. Japan’s Institute for Energy Economics estimates that next summer, if no nuclear plants are restarted, total generating capacity of Japanese utilities (excluding mothballed thermal stations) will be 7.8% below projected peak demand
Figure 2: Japanese Nuclear Power Generation
Source: Japan’s Federation of Electric Power Companies
Rise of LNG
Even pre-earthquake, Japan was the world’s largest importer of LNG, accounting for 35% of the global LNG trade. In 2010, Japan consumed around 70 million tons. Japan’s electricity sector is the largest consumer of LNG followed by the industrial sector; both depend on increased LNG imports to replace lost nuclear capacity.
Japan’s consumption of LNG surged in the aftermath of the March 11 earthquake. In July 2011, Japan’s 10 largest utility companies consumed 4.49 million tons of LNG, an increase of 23.4% y/y, following increases of 30.8% y/y in June and 29.2% y/y in May. LNG consumption has also risen by more than 10% m/m in each of the last two months (see Figure 3).
Figure 3: Japan’s Growing Use of LNG
Source: Japan’s Federation of Electric Power Companies
Shifts in Import Patterns
Japan will need to keep increasing LNG imports to meet forecast rises in energy demand. In June, LNG imports rose by 35.0% y/y to a 33-month high, following a rise of 35.8% y/y in May. At least nine spot cargoes were bought by Japan from countries including Yemen, Peru, Algeria, Nigeria and Equatorial Guinea over this period. The previous record was 11 spot cargoes bought in September 2008.
According to Japan’s Institute for Energy Economics, under a scenario in which offline nuclear reactors are restarted in December 2011, the value of LNG imports in between FY2010 and FY2012 will rise by 640 billion yen and by 1,396 billion yen if no reactors are restarted. With prices of LNG expected to remain strong through H2 2011 on robust Asian demand, it appears that LNG will continue to weigh down Japan’s trade surplus. (see Figures 4 and 5)
Figure 5: Japan’s Import Bill: Cost of LNG Imports: 2010 vs. 2011
Source: Japan Ministry of Finance
Ready for More LNG
Japan’s LNG infrastructure has the capacity to absorb increased imports. According to the International Energy Agency (IEA), Japan has 28 importing LNG terminals in operation as well as excess storage capacity. The majority of LNG terminals are located in the main population centers of Tokyo, Osaka, and Nagoya, near major urban and manufacturing hubs, and are owned by local power companies, either alone or in partnership with gas companies. Japan’s regulatory system supports LNG imports. Both LNG companies and natural gas distributors are allowed to sign contracts with foreign suppliers and purchase volumes on the spot market.
The extent to which Japan will be able to meet lost nuclear power with LNG depends on whether offline nuclear reactors become operational along with infrastructure capacity. The 912 MW Tomari nuclear power plant, which resumed operation in mid-August on the north island of Hokkaido will relieve some pressure on LNG demand. Nevertheless, there is little sign that Tohoku Electric Power’s and Tokyo Electric Power’s (TEPCO) nuclear reactors will restart any time soon. On the import side, Japan has sufficient capacity to absorb larger volumes. According to the U.S. Energy Information Agency Japan has “total throughput capacity well in excess of demand in order to assure flexibility [in increased imports].” Japan has an import capacity of 180 million tons of LNG per year. In total, Japan has 54 GW of gas-fired generation capacity. According to Deutsche Bank, if none of the nuclear reactors schedule for maintenance are allowed to come back online, LNG consumption would rise by 800,000 mt/y. This would raise the utilization rate of gas-fired generation capacity from 72% to 85%. In the longer-term, this could put pressure on Japan to increase its thermal capacity.
Searching for New Sources
In order to secure increased volumes of LNG, Japanese energy companies have been looking to invest in overseas gas projects. Japan Petroleum Exploration Co. (JAPEX) is participating in a study with Russia’s Gazprom to develop gas resources in the Sakhalin region and East Siberia and build an export terminal in Vladivostok. A joint venture, Japan Far East Gas Co., was created by the two companies to examine the possibility of a 5 million mt/year LNG, compressed natural gas and gas chemical project at Vladivostok. This would be the second Sakhalin project for JAPEX which has a stake in Russia’s Sakhalin-1 LNG project operated by ExxonMobil. The project is expected to start up around 2017. Most recently, on August 16, Nigeria’s state-oil company NNPC offered Japan LNG a 4% stake in its $5 billion Brass LNG project. NNPC also signed a $2 billion loan from a group led by the Japan Bank for International Cooperation. The Brass LNG Project, which envisages initial exports of 10 million mt/year, is expected to come online in 2014.
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