Suppliers of LNG, coal, oil look to replace nuclear in Japan

Russia’s Prime Minister Vladimir Putin has ordered officials to accelerate development of the OAO Rosneft-led Sakhalin-3 oil and gas project to help meet projected demand coming from Japan.

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Mar. 15 -- Russia’s Prime Minister Vladimir Putin has ordered officials to accelerate development of the OAO Rosneft-led Sakhalin-3 oil and gas project to help meet projected demand coming from Japan.

"It is obvious that this is a long-term loss of generation so we need to think how to speed up plans for developing hydrocarbon production including gas in the Far East,” said Putin, adding, “I have in mind the Sakhalin-3 project.”

Putin was not alone in recognizing Japan’s need—or the effect of that need—for alternative sources of energy to replace supply from nuclear reactors that were damaged or shut in the aftermath of last week’s earthquake.

LNG suppliers ‘stand ready’
“Qatargas stands ready to provide all the support to its long-term partners and foundation customers in Japan to meet any increased requirements for LNG at this time,” said a Qatargas spokesperson.

“Qatargas can also rely on our sister company RasGas to support Qatargas’ efforts to meet our Japanese buyers and partners needs,” the spokesperson said.

Royal Dutch Shell PLC Chief Executive Peter Voser said his company was already working with the Japanese government to divert energy cargos to Japan, with one delivery of LNG made in the Tokyo Bay area on Mar. 14 under difficult conditions.

“It’s still difficult to get some communication going from the affected areas,” Voser said. “We have to assess landing terminals. This has to be one by one. You can’t have a plan going forward, but so far so good. We managed to deliver what we needed to deliver.”

Analysts said the situation in Japan would probably affect energy markets for several months, a point underlined by Shell Chief Financial Officer Simon Henry, who said, “It’s a little too early to say how the market will be affected but there’s likely going to be a tightening of the LNG market.”

That view was shared by Barclays PLC analyst Kerri Maddock, who wrote in a note: “The prolonged risk of nuclear outages could divert spot LNG cargoes to Japan and incrementally tighten LNG supply.”

Coal suppliers ‘stand ready’ also
Meanwhile, Indonesia, which is the world's largest exporter of thermal coal, said it stands ready to provide additional coal to Japan to meet an expected surge in demand.

“We are ready to provide additional coal to Japan to meet the expected surge in coal use following the shutdown of the country's nuclear power plants," said Kaz Tanaka, vice-chairman of the Indonesian Coal Mining Association.

Dileep Srivastava, a director of PT Bumi Resources, Asia's top thermal coal exporter, said he expects to see coal prices and demand rising in the medium term following the earthquake.

Indonesia expects to produce 340 million tonnes of coal this year, up from an estimated 310 million tonnes in 2010 as miners increase production on higher prices.

While Japan could turn to other power-generation fuels such as coal or LNG, analysts said that fossil fuel has been the most common substitute in the past, when outages occur at its nuclear plants.

Japan ‘certain’ to turn to oil
Japan is likely to turn to oil—mainly low-sulfur fuel oil or low-sulfur crudes—as replacement power-generation fuel, with Barclays Capital estimating that 200,000 b/d of oil would be needed.

"Right now, it's not clear how much fuel oil they are going to buy, but it is quite certain that they will, and in large volumes,” said a Singapore-based Japanese trader.

He may be right, too.

At the moment, according to Tomomichi Akuta at Mitsubishi UFJ Research & Consulting Co., the oil market “is facing selling on the view that economic activity in Japan will stall for the short term” amid rolling blackouts in areas served by Tokyo Electric.

But with the Fukushima nuclear plant out of commission, demand for oil by fossil fuel plants is set to rise, he said.

If so, then Japan's utilities will be looking for a very specific type of fossil fuel, of 0.3% sulfur content, with most of its demand normally met by Indonesia's low-sulfur Duri and low-sulfur waxy residues (LSWR).

But Indonesia will export only 5-6 LSWR cargoes of 200,000 bbl each for this year, down from 6-7 cargoes last year, and another 4-6 cargoes of Duri at 40,000-50,000 tonnes apiece.

"That's not very much and most of these cargoes are already going into Japan,” said a trader, who added that, “There certainly will not be enough to meet the extra requirements.”

As a result, he said, "The Japanese will have to look at other alternatives and perhaps maybe even lower their very stringent sulfur requirements if the situation becomes desperate."

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