Imminent Change in Japan’s Fuel Sources for Electricity

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As of March 15th, Japan had shut down more than 12,000 megawatts of nuclear electricity generation, mostly because of  the effects of last week’s earthquake and tsunami. Nearly 11,000 megawatts of thermal coal generation is shut, and about 8,500 megawatts of supply from fuel-switchable plants is also offline, according to Reuters.  How quickly Japan returns these generation sources to production will have an impact on global coal, oil, and natural gas prices.

While it’s not clear when or if the non-nuclear powered plants will be back in operation, it is relatively certain that 9,700 megawatts of nuclear generation at the two Fukushima sites is gone forever. Until that capacity is replaced permanently, Japan will rely on its coal-, oil-, and gas-fired plants.

The following graphic from The Federation of Electric Power Companies of Japan shows the sources of the country’s electricity generation by hour of the day.

Notice that at peak hours, between about 8:00 a.m. and 6:00 p.m., the non-baseload portion of Japan’s power generation is fueled by oil. Liquefied natural gas (LNG) and other natural gas produces less than half the amount as does oil. And if about 20% of the country’s nuclear capacity is not available, the likeliest substitute is oil. Also notice that coal-burning primarily fills baseload demand and does not contribute much to peak demand.

Tokyo Electric Power Co., or TEPCO, which owns and operates the Fukushima Daiichi nuclear plants that have been essentially destroyed, has agreed to purchase Australian thermal coal at spot prices. According to analysts interviewed by Platts, about 10% of Japan’s coal-fired generation is shutdown.  One analyst estimated that an additional 4 million to 8 million metric tons of thermal coal will be needed to make up a portion of Japan’s lost nuclear generation.

Demand for LNG is expected to be much higher, and could even double. An analyst at Deutsche Bank told Platts that “the majority of Japan’s lost nuclear capacity will be met by increased gas-fired generation, citing a range of 46% at a minimum and 100% at a maximum.”  Because Japan imports 100% of its natural gas supply as LNG, Deutsche Bank’s analysis noted that additional LNG consumption could grow by 340,000-736,000 metric tons per month. That’s about 6 or 7 cargoes per month.

LNG traders expect the UK to get hit hardest by higher prices for LNG because the UK is the largest taker of spot LNG cargoes. That conclusion has bumped the price of LNG in UK and Europe, but it makes little sense because LNG from Russia, Australia, and elsewhere around the Pacific Basin is closer and could be gotten much cheaper. Amazingly, there appears to have been no earthquake or tsunami damage at any of Japan’s LNG receiving terminals.

As for oil, the International Energy Agency estimates that up to 70% of Japan’s oil-fired capacity could be available to make up for the loss of the nuclear generation. That would mean an increase in Japanese oil consumption of 200,000 barrels/day.

An additional 200,000 barrels/day of crude oil is significantly more expensive than an equivalent amount of LNG. Fortunately for Japan, many of its larger oil-fired plants are also capable of burning other fuels.  LNG will be a somewhat more expensive, but the LNG market has been oversupplied, so the price surge should be small.

For the US, rising LNG prices should have little if any effect on natural gas prices. The abundant supply of shale gas has reduced demand for LNG in the US, and any tick up in natural gas prices are almost certain to be totally unrelated to the global LNG market.

The sole US LNG export plant, owned by ConocoPhillips Corp. (NYSE: COP) and Marathon Oil Corp. (NYSE: MRO) announced in February that it would close due to declining supplies of gas to the plant. The plant had shipped about two cargoes a month to Japan.

A LNG receiving terminal in the Gulf of Mexico owned by Cheniere Energy, Inc. (NYSE: LNG), has approval to re-export LNG cargoes, and has applied to modify the facility to produce and ship LNG. If that approval is given, Cheniere wouldn’t begin exporting LNG until at least 2015.

Paul Ausick

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