July 15, 2011 / 11:26 AM / 8 years ago

Analysis: Japan power sector oil demand may triple as nuclear

SINGAPORE (Reuters) - Japan’s demand for crude and oil products to fuel power plants could triple if the country shuts all its nuclear reactors due to growing public safety concerns after the March earthquake and tsunami.

The country’s energy policy was left in tatters after the quake caused by the worst nuclear accident in 25 years. Japan had planned to increase nuclear power supply to meet 50 percent of demand, from 30 percent before the quake. Now, Prime Minister Naoto Kan is talking about a nuclear-free future.

The world’s third-largest oil consumer may need to import an additional 350,000 barrels per day (bpd) of crude and fuels to make up for the loss, according to Morgan Stanley. That would be

8 percent of Japan’s total oil consumption, straining a market already struggling to compensate for the loss of production from Libya and trading over $100 a barrel. It may need an extra 20 million tonnes of LNG, equivalent to a third of annual demand.

“It is quite dramatic. Nobody expected this even few weeks back,” Ravi Krishnaswamy, vice president, energy and power for Asia Pacific at Frost & Sullivan, said.

“In the short term, they would definitely try to import oil and gas, or even coal where they have a coal plant. But that is still not going to satisfy the need and I’m sure there’s going to be shortfalls and energy crisis.”

A month ago, a full nuclear shutdown looked unthinkable. But Kan’s comments and a government announcement that it wanted more safety tests conducted at the plants have fanned public concerns and increased the risk of a full shutdown.

Morgan Stanley’s assessment is for a total of 540,000 bpd oil demand for power between June and December in the worst case scenario if all reactors are shut compared to an average of 192,000 bpd in 2010. Total demand would be higher than OPEC-member Ecuador’s crude output of about 500,000 bpd.

Morgan forecasts demand of 300,000 bpd even if all nuclear reactors return to full output because of the capacity already lost across the power sector. Only 36.8 percent of nuclear capacity is in operation at present, the lowest in 32 years.

Other analysts are predicting additional requirement of over 300,000 bpd of crude and residue products such as fuel oil used for generating power if reactors are not brought online, with Morgan Stanley making the steepest forecast.

Kansai Electric Power Co said on Friday it will shut two reactors later in July for planned inspections. That is in addition to four reactors that are halted for maintenance and public worries over nuclear safety have prevented the company from starting test runs on them.

NUCLEAR POWER

Kansai has asked customers to reduce energy consumption by 15 percent from its peak in 2010, and has said it may have to seek power supplies from other companies for the summer.

Prime Minister Kan said on Wednesday the Fukushima crisis had convinced him that Japan should wean itself from nuclear power, creating an uncertainty over the fate of the nation’s 54 reactors.

The radiation crisis at the plant owned by Tokyo Electric Power Co, triggered by the March 11 earthquake and tsunami, has sparked debate about the role of the technology in the quake-prone country. The Fukushima plant is still leaking radiation after four months.

Japan would be able to avoid summer and winter power shortages through energy conservation, the government has said.

The nation also plans to take steps to alleviate the impact on consumers and business from the short-term loss of nuclear power, but has yet to give details.

BURNING CRUDE, FUEL OIL

Burning crude for power may average about 140,000-150,000 bpd this year, up from 85,000 bpd last year. If nuclear reactors that are scheduled to come back this year fail to restart, then direct crude burning would probably increase further to 170,000-180,000 bpd, Osamu Fujisawa, an independent oil economist based in Japan, said.

In terms of low-sulphur fuel oil for generation, Fujisawa expects additional burning of 70,000-80,000 bpd this year.

Demand for the fuel from Japan has picked up strongly in the past one to two weeks as summer temperatures rise. Premiums for the 0.3-percent sulphur cargoes, loading in July and August, have jumped, with transactions pegged at $140.00-$160.00 a tonne above Singapore spot quotes on a cost-and-freight (C&F) basis.

The nation may also require diesel as small- and medium-sized companies may run standalone generators to operate their factories, analysts said.

“Diesel could be used to meet some of the power generation needs, but the fossil fuels used will mostly be crude and fuel oil,” said Victor Shum, an analyst at Purvin & Gertz. “Just like in China, diesel demand surges when alternatives dry up and that’s a temporary measure using diesel-power generators.”

Shum declined to give any numbers on additional demand.

Using fossil fuels will create a new set of problems for the country - boost emissions.

Japan’s CO2 emissions could rise by 210 million tonnes annually, Japan’s Ministry of Environment estimated. That could potentially cost 270 billion yen ($3.4 billion) in carbon credits as its chances to meet its Kyoto protocol target fade in the aftermath of the nuclear crisis, Thomson Reuters Point Carbon reported.

The projected increase in emissions would put Japan’s emissions 16.7 per cent over 1990 levels, compared to its obligation to cut carbon 6 per cent from 1990 in the 2008-2012 period.

LNG TO BE KEY

To keep emissions under control and also boost power output, the country’s only real option is to boost gas-fired power generation, analysts said. That would increase its reliance on liquefied natural gas (LNG), analysts said.

In the worse case scenario where the plants can’t get permits to restart by next spring or summer, an additional 20 million tonnes of LNG may be required, according to Tony Regan, principal consultant with energy consultancy Tri-Zen International in Singapore.

The market can accommodate about 5 million to 10 million tonnes of additional requirement, but 20 million tonnes would push spot prices into Japan above $20 per million British thermal units from about $14 now, Regan said.

The growing reliance on LNG was already evident as utilities compensated for nuclear reactors damaged by the March quake and for others shut down since.

Japan’s 10 utilities consumed 31 percent more LNG in June than a year earlier to generate electricity, industry data showed on Tuesday.

The utilities consumed the equivalent of 4.03 million tonnes of LNG at power plants last month, up from 3.08 million tonnes a year earlier, the data from the Federation of Electric Power Companies of Japan showed.

Additional reporting by Francis Kan, Alejandro Barbajosa, Li Peng Seng in Singapore, Osamu Tsukimori in Tokyo; Editing by Simon Webb

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