OGJ Senior Writer
HOUSTON, Mar. 21 -- The unfolding crisis in Japan—the world’s third largest economy and fifth largest energy user—has major implications for both the nuclear and the oil and gas sectors, said industry analysts.
Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “The nuclear crisis in Japan may prove to be a very important development for the natural gas market. World gas consumption was approximately 300 bcfd in 2010. Since there are currently about 440 nuclear reactors globally, shutting down 40 of them for safety considerations and replacing with gas would boost gas consumption by up to 7 bcfd.
Moreover, he said, “As much as 1.4 million b/d of refining capacity in Japan has been disrupted as a result of the quake, of which we anticipate 555,000 b/d may remain offline for an extended period of time. We believe this will be bullish for regional gas oil markets given Japan's status as a net exporter of gas oil.”
Japan’s ‘fear factor’
The “fear factor” generated by Japan’s nuclear crisis likely will undermine public acceptance of nuclear power, which is a major component in US President Barack Obama’s “clean energy” policy.
Autorite de Surete Nucleaire (ASN), the French nuclear safety authority, has ranked the Japanese nuclear crisis at Level 6 on the international scale of 1-7. The 1979 accidental release of radiation from the Three Mile Island plant in the US was rated Level 5. The only Level 7 rating so far was the deadly Chernobyl disaster in the Ukraine in 1986.
“The Three Mile Island incident effectively shut down nuclear plant construction in the US for over 30 years,” said analysts at Protiviti, a wholly owned subsidiary of Robert Half International Inc. specializing in risk services consultation.
“How this latest nuclear crisis impacts the debate will largely depend on how it plays out. Worse case, it could shut down the nuclear energy option in the US for another generation or more and slow nuclear plant construction in other countries for a long time,” they said.
The crisis will affect US nuclear power through regulatory uncertainty “and the sort of public opposition that ultimately drives up the cost of financing, and thus the cost of nuclear power,” said Michael Levi, senior fellow for energy and the environment at the Council on Foreign Relations (CFR), in a recent conference call with reporters.
Analysts at FBR Capital Markets & Co., Arlington, Va., earlier reported, “The US electric utility sector has indiscriminately sold off as the events at Fukushima Daiichi in Japan bring into question the safety of nuclear power. While it is too early to draw any conclusions about the implications of what is taking place, an assessment period will likely follow, and it is possible that relicensing and new nuclear construction could slow or pause for a time. But we are doubtful that new nuclear is dead.”
At least 2 Gw of Japan’s nuclear capacity has been permanently lost due to the corrosive nature of seawater injected into the reactor vessels, and another 10 Gw likely will remain shut in “for several years” as a result of last week’s tsunami, IHS-CERA analysts said. This capacity previously generated 8% of Japan’s total electricity output.
LNG imports to fill void
Additional imports of LNG and oil products will fill the void from nuclear and coal plant outages. “Global LNG markets have sufficient flexibility to allow for sending additional cargoes to Japan, the world’s largest LNG importer, most likely diverted from destinations in Northwest Europe,” IHS-CERA analysts said.
Supplying 50% of lost nuclear and coal-fired power generation would require an additional 12 LNG cargoes/month or about 9 tonnes annualized—a 13% increase over previous Japanese imports, said IHS-CERA analysts. “However, it is possible that some of the affected coal capacity will be brought back online within 12 months, reducing the annual need,” they said.
Although liquefaction capacity utilization has been tight in recent months, IHS-CERA said, “The global market is entering the traditionally lower-demand portion of the year, and additional cargoes could be made available. However, additional cargoes will represent a small portion of incremental demand in Japan. The majority of cargoes will be diverted from elsewhere, with Northwest Europe the most likely source market. Increased demand in Japan represents a reallotment rather than an increase in this amount of flexible supply.”
In turn, European buyers will have to tap other gas resources to replace diverted LNG. “Although the European market is well supplied by pipeline gas, the sustained diversion of LNG will tend to push spot prices toward long-term oil-indexed levels,” IHS-CERA analysts predicted.
Additional demand for oil for power generation likely won’t have much impact on global oil prices, however, as reduced transport and industrial demand will more than offset the power generation call until Japan partially recovers from the earthquake and tsunami damage, they said.
They said, “There is sufficient spare capacity to maintain a well-balanced market in Europe. Pipeline imports to Europe could potentially increase substantially. Although higher takes under long-term contracts will have some impact on prices, fundamentally there should be sufficient gas available to keep market prices below contractual levels through summer 2011.”
However, pulling LNG from Europe to meet Japan’s demand beyond this year likely will accelerate a tight global market in 2012-14—“the same effect as from the abnormal weather in 2010,” the analysts said.
Sieminski said, “We believe some portion of Japan's additional LNG needs will be drawn from flexible European supplies over the next 3 years, and that the German supply gap will be initially filled by coal-fired generation.”
Oil will be used to replace some of the nuclear and coal-fired power generation that has been lost in the wake of the disaster. Of Japan’s 4.4 million b/d of total oil demand, roughly 400,000 b/d is typically used in the power sector. Power sector oil demand consists mostly of direct-burn of crude oil and low-sulfur fuel oil.
There is significant spare oil-fired power generation capacity in Japan, IHS-CERA reported, with utilization rates of oil-fired plants around 20% percent prior to the crisis.
However, there is considerable uncertainty about the overall mix of generating fuels in the aftermath of the disaster. Any increase in oil demand from the power sector could be negated—at least in the short term—by a significant drop in oil demand because of reduced transport and industrial use owing to the disaster.
IHS-CERA analysts estimate Japanese oil demand outside the power sector could decline as much as 600,000 b/d in the near term because of lower economic activity as that country recovers from the disaster. “The net result therefore could be a temporary demand reduction of 100,000 to 200.000 b/d—or even higher depending on how much oil-fired power generation is used,” they said. “While this is a source of downward pressure on crude oil prices, the price of oil products may be stimulated by the shutdown of 1.4 million b/d of refining capacity throughout Japan.”
If the refineries do not restart quickly, the global refining industry will have to supply up to 1 million b/d of incremental imports. “This would increase the global refinery utilization rate and support margins, but this impetus could dissipate if, as expected, some of the shut-in capacity restarts soon,” IHS-CERA analysts said.
Nuclear power outlook
“The unfolding nuclear crisis in Japan has already touched off reassessments of nuclear programs around the globe, including a 3-month hold on nuclear plant life extensions announced by German Chancellor Angela Merkel. China has also announced a review of its nuclear plans. More reviews are likely to come in the weeks and months ahead,” said IHS-CERA analysts. “It is clear that safety standards for both operating and new plants are likely to be tightened.”
Obama ordered nuclear regulators to review US safety, including lessons from Japan. “An initial review will likely take several weeks, and a full report more than a year,” said FBR analysts. “Industry spokespeople believe that the accident [in Japan] was beyond a design basis and does not have obvious implications for US reactor, containment, or spent fuel design. A thorough safety inspection would not require facilities to power down.”
The US nuclear industry is confident modern safeguards are more than adequate to address similar events, “especially given the low risk of tsunamis in the US,” FBR analysts said. “The industry has undergone extensive updates to protect against airplane strikes and has also started a ‘beyond design’ safety review.” However, they acknowledged, “New licensing will remain uncertain.”
Levi at CFR said, “There's clearly a reaction, a political reaction, already happening in [the US]. So far, we've moved past the first phase where people have downplayed the situation and into a second phase where everyone largely sees it as confirming their previous biases. People who are antinuclear see this as emphasizing the threat of nuclear energy; people who are pronuclear see this as showing that even if there is an accident, so far, the consequences are contained. I think we will probably move to a third phase as we see exactly what the consequences are. But in the big picture, most people will have their previous biases reconfirmed.”
FBR analysts said, “Battle lines will be redrawn. …The Fukushima incident will test tenuous alliances, including those between clean air advocates and business groups, as well as Tea Party nuclear supporters and conservative opponents of nuclear industry subsidies. Clean air also serves as a political backstop for existing nuclear generation.”
Levi said, “The so-called nuclear renaissance has a lot of speed bumps still ahead. It had those speed bumps [before the crisis in Japan]. This adds another complication to it, but to predict that this will somehow decisively shift the course—I think it's at best too early to make that judgment.”
He added, “Right now, the Obama administration is somewhat pronuclear. So they're not looking for a reason to lean against nuclear, and they're not going to take advantage of the situation to do that.” On the other hand, the administration brought its full weight down on the offshore drilling industry after the Macondo blowout last year.
Levi pointed out, “One of the reasons that nuclear is already having difficulty in the US is that natural gas is very cheap. And so if nuclear is the competitor, particularly in a world where utilities are averse to building new coal-fired power, cheap natural gas already makes things tough. If you add on top of that any kind of pullback on nuclear then, yes, the burden on natural gas becomes more significant, particularly if you're focused on a world where you want to reduce greenhouse gas emissions.”
The “other big question” is the available supply of natural gas. “There's still a lot of regulatory uncertainty surrounding gas production,” Levi observed.
Contact Sam Fletcher at firstname.lastname@example.org.