Nuclear, LNG vie to meet Japan’s energy needs
Tomoko Hosoe
Tomoko Hosoe, FACTS Global Energy, Honolulu
Japan’s energy policy encourages an increased use of natural gas and nuclear power to mitigate climate change and diversify the energy mix away from oil. This would effectively reduce Japan’s energy reliance on the Middle East. Accordingly, Japanese LNG buyers have significantly increased import volumes since their first imports in 1969, particularly after the two oil crises in the 1970s.
Today, Japan is the world’s largest LNG importer at 62.1 million tpy, about 59% of total demand coming from the power industry and the rest from gas utilities. All of Japan’s gas imports are in the form of LNG.
This article examines market fundamentals and how domestic factors such as power and gas industry reform and nuclear power policy and problems will influence Japan’s LNG demand.
Current scene
Until recently, Japan was considered a saturated market, but demand has started notably increasing again. LNG imports in 2006 were up by 7%, as Japan’s economy continued to improve, increasing productivity, and the power sector continues to have nuclear power problems.
For the first half of 2007, the nuclear utilization rate was 61.9-72.9% and is likely to operate well below 70% for the second half. The main reason for Japan’s additional LNG requirements is Tokyo Electric Power Co.’s (TEPCO) 8.21-Gw Kashiwazaki-Kariwa nuclear power plant shutdown (OGJ Online, July 24, 2007).
The Chuetsu offshore earthquake hit Niigata prefecture, where the nuclear power plant is located, on July 16, 2007. Complete plant closure will last at least through first-quarter 2008 and an additional year (or possibly longer) may be needed until the plant returns to normal operations.
Primary energy consumption
In 2006, the share of natural gas in Japan’s primary energy mix was 12%, in line with 2005 (Fig. 1). Oil (48%) continued to dominate the energy mix with coal’s share at 25%. Japan’s reliance on nuclear power increased to 12%, up from 11% in 2005.
For 2020, both nuclear and natural gas shares will likely increase to 18% and 19%, respectively. Japan’s oil dependency will fall to 33%, given that the government continues to implement strict environmental and energy conservation and fuel-efficiency regulations at all levels.
Gas demand; LNG imports
In 2006, the power sector accounted for 59% of the total gas demand (nearly 8 bscfd), followed by the industrial sector (20%), the residential and commercial sectors (18%), and others (3%; Fig. 2).
The power sector’s natural gas consumption (generally middle-load fuel) fell slightly from 2005, as a result of the increased share of nuclear power in total power generation. On the other hand, the industrial sector’s gas consumption grew a significant 13% year-on-year in 2006, for the following reasons:
- Japan’s economy continued to improve, increasing productivity significantly in areas such as Chubu where many large-scale, energy-intensive manufacturing industries are located.
- Industrial customers nationwide continued to switch from fuel oil to natural gas, supported by attractive gas prices relative to oil prices and also by government subsidy programs. The residential sector grew 2.6% year-on-year.
Accordingly, Japan’s LNG imports increased to 62.1 tonnes in 2006 from 58.0 tonnes in 2005. As shown in Table 1, Japan has a diversified LNG supply portfolio with 72% of total imports coming from the Asia Pacific-Indonesia accounting for 22.5%, followed by Australia (19.6%), Malaysia (19.4%), Qatar (12.1%), Brunei (10.5%), Abu Dhabi (8.4%), Oman (3.8%), the US (1.9%), and others (1.8%).
Indonesia was unable to deliver the contracted volumes to Japanese buyers in 2005 and 2006, reducing the share of Indonesian LNG in Japan’s portfolio of supplies.
Consequently, Australian supplies to Japan have been increasing over the past few years.
Middle East producing sources have also increased with the start of two new contracts with Oman. LNG from the Atlantic Basin accounted for nearly 2% of Japan’s total LNG supplies.
Main consumers
The electric and gas utilities are key LNG consumers.
Japan has 10 private electric power utilities, of which six electric utilities (TEPCO, Chubu Electric Power, Kansai Electric Power, Tohoku Electric Power, Kyushu Electric Power, and Chugoku Electric Power) use LNG as their feedstock for power generation (Table 2). In the near future, Shikoku Electric Power and Okinawa Electric Power will start burning LNG.
In fact, four utilities (TEPCO, Kansai Electric, Chubu Electric, and Tohoku Electric) accounted for more than 90% of LNG consumption in the power sector in 2006. Generally speaking, TEPCO (Japan’s largest electric power utility) remains the dominant LNG consumer, although Chubu Electric’s demand has been growing robustly over the past 3 years.
TEPCO alone consumed 16.3 tonnes (45%) of the power industry’s total consumption (36.2 tonnes), and Chubu Electric’s consumption rose to 9.8 tonnes, up 8.8% from 9 tonnes in 2005. Demand in the Chubu area has been growing significantly, given the many large-scale, energy-intensive manufacturing industries in the region, such as Toyota Motor and its affiliated manufacturers.
Meanwhile, Japan has 212 city gas utilities, of which the “Big Four” gas utilities accounted for 77% of the total LNG consumption in the gas sector in 2006 (Table 3). Tokyo Gas accounted for 37% of the total 25.2 tonnes, followed by Osaka Gas (27%), Toho Gas (11%), Saibu Gas (2%), and others (23%).
The industrial sector’s recent demand growth has been considerable, as industrial customers continue to switch to natural gas from fuel oil, supported by attractive gas prices relative to oil prices and government subsidiary programs. All of the “Big Four” utilities increased their sales volumes to their industrial customers in 2006, with their demand growth rates as follows on a year-on-year basis: Tokyo Gas (8%), Osaka Gas (8%), Toho Gas (20%), and Saibu Gas (17%).
LNG Imports: 2007
For first-half 2007, Japan’s cumulative LNG imports totaled 32.7 tonnes (up 8.9% or 2.7 tonnes) from the same period a year ago. Electric utilities’ cumulative LNG consumption for the period totaled 19.7 tonnes (up 3.5 tonnes), while gas utilities’ cumulative consumption remained mostly unchanged at last year’s 13.4 tonnes.
The demand increase was driven primarily by the following:
- Strong electricity and city gas demand from the large-lot users, supported by Japan’s continuous economic growth.
- A series of unexpected nuclear power plant shutdowns.
- Lower utilization of hydro power plants, due to Japan’s record-high winter temperature (thus low winter snowfall) and low precipitation during the rainy season caused drought problems, particularly in western Japan.
- A series of unexpected hydro power plant shutdowns. Several hydro power plants had received penalties from the Ministry of Land, Infrastructure, and Transportation on May 16, 2007, as a result of maintenance and operational data manipulation. These penalties included: halting power plant operations; taking away the right to use water for power generation; and reducing their water intake, which is used for power generation. TEPCO’s Shiobara plant (a 1.05-Gw pumped storage type plant), which is designed to meet their summer peak demand, was one of the plants penalized.
Fig. 3 illustrates Japan’s LNG imports for first-half 2007.
For the second half of 2007, strong demand is expected primarily from TEPCO, as a result of its 8.21-Gw Kashiwazaki-Kariwa nuclear power plant closure in July.
The Chuetsu offshore earthquake (magnitude of 6.8) hit Japan’s Niigata prefecture, where the Kashiwazaki-Kariwa nuclear power plant (consisting of seven nuclear reactors) is located. A fire broke out in a transformer at the Unit 3 reactor, while some water containing radioactive materials leaked from another unit into the sea.
At the time of the earthquake, three reactors out of the seven were operating normally and one was to commence operation after its maintenance shutdown. The other three reactors were not operating due to maintenance shutdowns. Due to the earthquake all reactors ceased operations.
The Kashiwazaki municipal government issued an emergency order to TEPCO to stop operating the power plant, stating that the plant can only resume operations after TEPCO receives permission from local municipalities. Similarly, Minister Akira Amari at the Ministry of Economy, Trade and Industry (METI) ordered TEPCO not to resume operations of the plant until safety is ensured.
Complete plant closure will last at least until the end of March 2008 and an additional year (or possibly longer) may be needed until the plant will return to its normal operation. Essentially, TEPCO will have to resolve two concerns:
- Safety of the plant site, since various data suggest a fault line may run underneath the nuclear power plant.
- Earthquake resistance of the nuclear power plant, as it has already experienced an earthquake more severe than the plant was designed for.
It remains in question how long until the nuclear units can resume normal operation because Japan has never experienced nuclear power problems of this scale and has no way of assessing how long each step (e.g., investigation, geological survey, repair and construction works, government approval, and public approval) will take before TEPCO can resume plant operations.
From past experience, receiving permission from the local community and local municipalities is one of the most difficult and time-consuming processes in resolving nuclear-related problems. The general public’s trust in nuclear power has been lost again and will damage TEPCO’s attempts to resume plant operations.
The key difference between the 2003 nuclear crisis and the current Kashiwazaki-Kariwa problem is that by law, TEPCO is not allowed to resume plant operations, whereas in 2003 TEPCO could have resumed operations because the plants were operational. Without the 8.21-Gw baseload capacity today, TEPCO must increase its dependency on thermal power generation (fuels being LNG, fuel oil, and crude oil).
Assuming the power sector’s LNG demand for 2007 is near 2003 level, when Tokyo experienced a nuclear power crisis, Japan’s overall LNG demand in 2007 will likely increase to 65.2 tonnes, up from 62.1 tonnes in 2006. (See an accompanying sidebar on p. 14 Japan’s 2003 nuclear power crisis.)
Long-term demand outlook
In the long term, LNG imports will likely reach 70.2 tonnes in 2010 and 82.0 tonnes in 2020 (Fig. 4). The industrial sector’s demand will grow strongly at 7.0%/year until 2010, with a slowdown in growth thereafter. In fact, gas utilities have intentionally slowed down their marketing activities for beyond 2010 in the face of an uncertain LNG supply/price outlook.
The power sector’s demand will likely grow at 2.0%/year until 2010, then at 1.3%/year towards 2020. Please note this outlook does not take into account a worst-case scenario-that the Kashiwazaki-Kariwa nuclear power plant may remain completely idle for more than 3 years.
The residential and commercial sector’s demand will grow at 4.5%/year until 2010 and start slowing afterwards.
Nuclear energy policy
Despite the accidents and problems, nuclear power generation remains at the core of Japan’s energy policy. Japan’s Energy Policy and Strategy (announced by METI in 2006) set an ambitious target of increasing the share of nuclear power in total power generation to 40% or higher by 2030, up from the current 29-30%, in an effort to fulfill the country’s obligations under the Kyoto Protocol and achieve energy security.
Currently, Japan has 55 nuclear units (totaling 49.6 Gw of capacity) and has two reactors (owned by Hokkaido Electric Power and Chugoku Electric Power) under construction. Additionally, 12 nuclear units are in planning stages, but there is no definite timetable for their construction (Table 4).
Inevitably, the recent disruption in nuclear power operations will make the government’s ambitious energy policy target difficult to achieve. For example, TEPCO has delayed its plans to add two more nuclear units (1.38 Gw each) to the existing 4.70-Gw Fukushima Daiichi power plant several times and is unlikely to build them anytime soon.
Another essential issue for all electric utilities is that the financial burden of building nuclear power plants has become too heavy to bear-with the growing costs involved in running, maintaining, and decommissioning plants-when the potential market share is declining. This is especially true because, under deregulation, new entrants to the power market are building more cost efficient gas-fueled combined-cycle units.
As well as an energy security, economic, and political issue, the nuclear issue has become a social one. Among the reasons TEPCO’s nuclear-related issues tend to be more controversial than other cases is that all of its nuclear power plants are located outside of TEPCO’s service areas. TEPCO has no nuclear power plants in the Tokyo area.
Despite the accidents and problems, however, the core of Japan’s energy policy remains in nuclear power to fulfill the country’s obligation under the Kyoto Protocol and to achieve the “ideal” fuel mix for energy security that the government has planned. Further, for many villages and cities, a combination of employment and government subsidies relating to the nuclear industry plays an important role in their economic activities.
Power, gas industry reform
Japan has been opening the power market to competition on a step-by-step basis since 1999. In March 2000, the power retail market was partially liberalized to allow power producers and suppliers to sell electricity to extra-high voltage users whose demand exceeds 2 Mw (e.g., industrial complexes, large department stores). From April 2005, the scope was expanded to all users whose demand is more than 50 kw. Thus, about 63% of the market has already been liberalized.
The next stage is to include low-voltage users (e.g., residential customers), which will fully liberalize the market. The timing has not yet been decided, however, and it is unlikely that full liberalization will come about anytime soon because the government finds little merit in full liberalization at this time.
Recent high fuel prices have already hindered new participants from competing with established utilities. Nevertheless, the government’s deregulation initiative is aimed at stimulating competition between the established electric utilities and new entrants to bring down electricity charges (Table 5).
Meanwhile, the gas industry in November 1999 opened the market to large-lot users with a minimum consumption of 1 million cu m/year. The market to customers using 500,000 cu m/year or more was opened in 2004; this segment accounts for about 44% of the gas market. As of April 2007, the market to customers using 100,000 cu m or more opened, liberalizing 50% of the entire market. The timing to open the rest of the market, customers using less than 100,000 cu m, has not yet been decided (Table 6).
With liberalization, power and gas utilities have gone outside of their traditional markets, while oil refiners and others are entering the LNG retail and power markets. The market/price competition for large-volume users in the industrial sector has been especially fierce, as under deregulation, industrial users can choose utility suppliers.
About 8% of the gas market was taken by new market entrants, including the power utilities, Teikoku Oil (which produces domestic gas), Nippon Steel, and others, while about 2% of the power market was taken by the new entrants, mostly power producers and suppliers. Competition has been particularly fierce in the Kansai area due to its slow demand growth.
Industry deregulation has made it crucial that the established power and gas utilities find optimal ways to procure fuels and cut costs in order to compete in the increasingly liberalized market. City gas utilities, in particular, find it very difficult to remain competitive by offering low gas rates to their industrial clients, given the rising LNG prices beyond 2010-11 when their large volume contracts will be renewed with new price formulas.
LNG contracts
With market liberalization, “traditional” Japanese consortium LNG buyers have become competitors and ultimately abandoned the “one price fits all” consortium approach in LNG negotiations. Already, new contracts arranged since December 2005 (including North West Shelf Train 4 and Sakhalin II) have been signed without a consortium. The negotiations for NWS Trains 1 to 3 contracts have also been carried out separately by each of the eight initial buyers.
Japan has two large-volume contracts that will expire by 2010-11-the 7.33-million-tpy NWS Trains 1 to 3 and the 12.0-million-tpy Bontang contracts-which will supply reduced volumes to the buyers after renewal.
• NWS Trains 1 to 3. NWS was historically a Japan-focused project and the majority of the output is still destined for Japan. TEPCO was the consortium leader that negotiated the original contract for 7.33 million tpy on behalf of the eight utilities. The existing consortium contracts will expire by 2009.
Chugoku Electric and Toho Gas were the first to sign and have renewed contracted supplies from NWS. Chugoku Electric agreed to purchase 1.2-1.4 million tpy of LNG from the NWS venture. They increased the quantity purchased from the initial 1.1 million tpy, but the new contract is for a shorter duration (12 years). Toho Gas also raised the quantity purchased to a maximum of 0.76 million tpy from 0.23 million tpy and reduced the duration to 12 years. The prices agreed upon have no ceiling but do contain a clause to meet and discuss once JCC (“Japan Crude Cocktail”) prices exceed $60/bbl.
Meanwhile, the rest of the eight original buyers participated in the allocation process launched by the Australian venture in April-May 2006 for the sale of up to 4 million tpy, consisting of volumes available for the renewal of Trains 1 to 3 contracts and Train 5’s uncommitted volumes.
As a result of the allocation process, six buyers in the original consortium have signed preliminary agreements with the Australian venture for a total of 3 million tpy. The contracts’ durations have been reduced to 6-8 years, depending on the buyer, and the extensions of the contracts’ durations remain the seller’s option.
The delivered ex-ship price agreed upon with these buyers was believed to be higher than prices agreed by Chugoku Electric and Toho Gas. When adding the contract renewals previously agreed during bilateral negotiations with Chugoku Electric and Toho Gas, total volume to Japan will be reduced to 5.12 million tpy from the original 7.33 million tpy.
• Indonesian Bontang. A total of 12 million tpy of Bontang contracts will expire by 2011. The consortium of Japanese buyers and Pertamina had supposedly reached an agreement during fourth-quarter 2005 for the renewal of 6 million tpy over 10 years, at a price significantly lower than the legacy contract. The contract is subject to the approval, however, of the Indonesian regulator BP Migas, which (as of August 2007) had still not approved the contract renewal and is concerned by the low price level.
Also, there is Indonesia’s new focus on the domestic market instead of exports. After all, serious doubts remain about the volume of LNG potentially available for contract renewal after 2010; thus we believe only a maximum of 3 to 4 million tpy will be renewed.
As a consequence of the reduced volumes of the two large-volume contracts, Japanese buyers have turned mainly toward greenfield projects (e.g., Australian and Russian projects) to meet the supply gap. Table 7 summarizes heads of agreement for Australian greenfield projects. In some cases, Japanese buyers have acquired equity shares in the projects, Tokyo Gas and Kansai Electric each owns 5% of the Pluto project.
Fig. 5 illustrates our base-case and high-case LNG demand outlooks vs. the existing Japanese LNG contracts until 2015. We take the difference between each forecast and the existing contracts to come up with an uncommitted demand figure. Note: Table 7 only includes supply-purchase agreements and selected HOAs, which we consider firm (e.g., NWS renewals and Sakhalin II) in terms of their start-up timing.
It is clear that Japan’s contracted volumes are not forecast to meet demand by 2010. Supply could be even more insufficient if Pertamina does not solve its production problems by then. By 2015, Japan’s uncommitted demand could reach 30.85 tonnes because the Bontang contracts and the Brunei contract are scheduled to expire by then.
Beyond 2015, expiration of the contracts with Malaysia Satu and Dua (from 2015 to 2018) and with ADGAS (2019) will also take place. If we take into account all the HOAs (e.g., Pluto and Gorgon), preliminary agreements, optional volumes, and potential renewals from Bontang, however, for a total volume of 3 million tpy (not included in the figure above), the volume of uncommitted demand is reduced to 15.6 tonnes by 2015.
Implications
Japan will face an LNG supply shortfall problem, unless the supply agreements for the greenfield projects materialize on schedule and more contracts will be signed. Clearly, those who have a higher dependency on Indonesian LNG are more exposed to future supply shortfalls, given that the Indonesian supply will be reduced after 2010-11. Also, the reduced supply volumes from NWS Trains 1 to 3 beyond 2009 cause added concerns over future supply.
In the long run, other supply reductions may come from ADGAS, as Abu Dhabi needs gas domestically. Meanwhile, buyers continue to hope that potential new supplies from Japan-operated and participated projects may be available, such as INPEX’s proposed Ichthys LNG project off northwestern Australia. That’s especially true now, as INPEX plans to build its first domestic LNG import terminal in the Niigata prefecture by 2013, where Teikoku Oil owns natural gas pipelines.
Apart from the global supply situation, Japan has domestic issues such as the Kashiwazaki-Kariwa plant shutdown and its effects on other utilities and on the industry as a whole. Under any scenario, Japan’s utilization of nuclear power plants will remain reduced without the Kashiwazaki-Kariwa capacity. Without the 8.21 Gw of nuclear power generating capacity, Japan’s commitments under the Kyoto protocol is unlikely to be reached.
The long-term answer to the problem involves revising Japan’s nuclear safety regulations further and trying to keep the existing nuclear power plants, as well as those under construction, from closing indefinitely. Consequently, some nuclear power plants may need to be upgraded to meet the higher safety guidelines that METI will set.
Japan’s nuclear problems have made it very difficult to forecast not only LNG demand, but also oil product balances. An additional some 2 tonnes of LNG, which need to be secured from the spot market in 2007-08 in a tight LNG market, is a serious problem. If the nuclear shutdowns last longer than anticipated, electric utilities will have to depend even more on LNG.
Meanwhile, oil refiners will produce or procure as much low-sulfur fuel oil as TEPCO requires. TEPCO will need a total 180,900 b/d of LSFO and crude oil combined for fiscal year 2007 (April 2007-March 2008). The utility’s consumption volume in FY2006 was 69,600 b/d.
The emerging high LSFO demand could be a double-edged sword because it will produce more middle distillates and lighter products when domestic demand remains stagnant. Japanese refiners, especially those who have their own supply network, are expected to enhance their product exports.
Once again, Japan’s nuclear power crisis has illustrated the fact that Japan’s change in its energy-demand pattern rapidly affects the Asian oil and gas demand-supply picture in its entirety.
Nuclear power crisis in 2003
TEPCO’s LNG consumption was abnormally high in 2003 due to unexpected nuclear power plant closures, which is remembered as the “nuclear power crisis.” Beginning late August 2002, TEPCO began nuclear shutdowns for safety inspections as it admitted to having covered up the fact that there were cracks in several reactor parts that were not properly reported in routine plant inspection reports in the late 1980s and 1990s.
By March 2003, TEPCO had shutdown all 17 nuclear power units (17.3 Gw) for safety re-inspections. The company ramped up the existing units’ utilization factors and started its backup oil-fired plants to make up for the loss of baseload electricity supply from nuclear shutdowns.
TEPCO’s LNG demand remained higher than normal until early 2005.
The author
Tomoko Hosoe (T.Hosoe @FGEnergy.com) is a senior consultant with FACTS Global Energy, Honolulu, where her focus is primarily on downstream oil and natural gas and LNG East of the Suez, energy policy, environmental and nuclear power issues, with a special emphasis on Japan. She holds a master’s in public affairs from the School of Public and Environmental Affairs, Public Management, Indiana University and is a project specialist at the East-West Center in Hawaii.
Volume 4 Issue 4
Oct 01, 2007
Add RSS Feed