* Fuel oil use for power may drop more than 50 pct -IEEJ
* Fuel oil demand hinges on nuclear reactor restarts
* Prices supported for now on South Korea demand
By James Topham and Osamu Tsukimori
TOKYO, Jan 14 Japan's use of fuel oil to generate power is set to fall over the next fiscal year to levels not seen since before the Fukushima disaster, if enough of the country's nuclear reactors are allowed back online.
Demand for low sulphur fuel oil has already dropped as Asia's largest listed power utility Tokyo Electric Power Co (Tepco) leads a switch to coal and gas to cut costs.
Further falls will push product back into an over-supplied Asia-Pacific market, hitting prices and processing margins already expected to be weak due to refinery expansions in China and the Middle East.
Japan's low sulphur fuel oil imports rose to a 39-year high of 150,600 barrels per day (bpd) in the financial year that ended last March 31, but between April and November 2013 fell about a third from the same period the previous year, according to trade ministry data.
Japan is the largest importer of fuel oil for power use in Asia, taking more than twice the volumes of the next biggest user, South Korea, according to traders.
Asian countries besides Japan do not give details on the different types of fuel oil imported, so comparisons of official low sulphur fuel oil import figures are not available.
"Factors including the rise in burning of LNG and coal, as well as the restart of nuclear power, will increase the pace C-type fuel oil use declines," the government-associated Institute of Energy Economics, Japan (IEEJ) said in a forecast.
Under a scenario many observers consider optimistic for assuming as many as 16 nuclear reactors come back online, the IEEJ says fuel oil burned for power will fall 53 percent to 143,000 bpd in the year through March 2015.
Use of low sulphur fuel oil and direct-burn crude for power had swelled after the 2011 earthquake that triggered the Fukushima nuclear crisis. Reactors were shut for checks, driving Japanese power utilities' fuel oil use to an 18-year high of 336,000 bpd in the year ended March 2013.
Starting in April last year, though, power companies began cutting reliance on oil, ramping up coal use and continuing to burn liquefied natural gas at record rates, and that trend looks to be extended with new gas- and coal-fired units coming online.
The IEEJ estimate would be Japan's lowest rate of use of fuel oil for power in four years. However, fuel oil's actual decline will depend on the nuclear restarts.
"Coal and LNG will make up a bigger share, but oil will still be the cushion for demand fluctuations until nuclear power comes back," said an official in the supply department at one Japanese refiner.
With pro-nuclear government and industry officials stepping up calls for Japan's nuclear watchdog to complete checks and begin the process of restarting the use of atomic energy, expectations are growing that at least some reactors will come back online in the financial year beginning April 1.
Japan is currently nuclear free for just the third time in more than four decades, following the reactor meltdowns and radiation leaks at Tepco's Fukushima Daiichi facility.
TEPCO, OTHERS CUT FUEL OIL
Japan's power utilities are expected to bring on 14 new gas-fired plants between April 2014 and July 2015, while two new coal-fired units with a combined capacity of 1,600 megawatts started commercial operations last month.
"Power companies will back out of crude oil and fuel oil first due to the cost," said Osamu Fujisawa, an independent oil economist. Fujisawa estimates crude and fuel oil will make up 5-6 percent of total power generation in the year through March 2015, down from 9-10 percent this fiscal year.
Tepco, which accounted for more than one-third of Japan's use of low sulphur fuel oil for power in the year to March 31, 2013, cut its consumption of the high-cost product by 41 percent to 71,566 bpd over the next nine months against the same period the previous year.
So far, despite the slower buying from Japan, prices have held steady as robust demand from South Korea for fuel oil due to outages of a few of its nuclear power plants last year supported premiums this winter, traders said.
Premiums for low sulphur fuel oil for delivery into Japan in January and February are about $140 a tonne to Singapore spot 180-cst FO180-SIN, steady to slightly firmer than a year ago.
But further reduction in demand from the biggest regional importer of low sulphur fuel oil would weigh on prices, especially with European refiners ever ready to send surplus product to key demand centre Asia, keeping it well supplied. (Additional reporting by Jane Xie in Singapore; Editing by Aaron Sheldrick and Tom Hogue)