The 11 March earthquake and tsunami in Japan, and the continuing nuclear crisis that they triggered, will have significant repercussions in global energy markets, according to international energy price reporting agency Argus.
Japan will rely more on oil for power generation at least until the end of this year, altering regional balances for some grades of crude and providing a large boost in demand for low-sulphur fuel oil (LSFO). And it will seek additional LNG supplies.
The quake and tsunami knocked nuclear plants with 11GW of generating capacity off line, and another 1.1GW nuclear plant was shut for maintenance at the time, leaving 25pc of Japan's nuclear capacity shut after the disaster. Tokyo Electric Power's (Tepco) 4.7GW Fukushima-Daiichi nuclear power station is causing most concern following explosions and radioactive leaks.
Tepco shut an additional 12 thermal generation after the earthquake, including three gas-fired combined cycle units. And utility Tohuko closed nine thermal power generation units because of the quake, including two gas-fired combined cycle units. But it is unclear how badly damaged these units are.
The loss of nuclear units accounts for a high percentage of base-load capacity. This is in addition to widespread damage to other critical power infrastructure such as transmission lines and transformer stations.
Tepco and other utilities have warned customers to expect rolling blackouts of three to four hours every day, a measure that will add to the considerable toll this tragedy has had on Japan's GDP.
Indications about likely outcomes of the nuclear shutdowns can be gleaned from 2002-03, the last time the Japanese power industry was affected by such widespread shutdowns, and 2007-08, when Tepco's 8.2GW Kashiwazaki-Kariwa plant was closed by quake.
Tepco was forced to take 17 nuclear power plants off line by April 2003, after it emerged that the company had falsified safety records. The result of the 2002-03 shut-ins was that demand for fuel oil and crude for burning in power plants rose by 54pc and 33pc year on year, as idle oil-fired power generating units were pressed into service. Fuel oil and burning crude demand rose by almost 300,000 b/d, compared with a year earlier, from mid-2002 until a year later.
The smaller Kashiwazaki-Kariwa nuclear shutdown resulted in a similar spike in oil consumption, averaging over 200,000 b/d, as well as smaller increases in coal and LNG demand.
This time is likely to be no different. Some new gas-fired capacity has been added and existing coal-fired plants can be run at higher utilisation rates, but Japan will be forced to rely once again on older fuel oil and crude-burning generating units in the short and medium term.
Argus estimates that making up for the lost nuclear capacity following the events of 11 March will require additional fuel oil and crude demand of up to 300,000 b/d. But this extra oil demand will be tempered by the damaging effects of the natural disasters on Japan's economy. Lower GDP growth over the next six months would pull down overall oil demand growth, but reconstruction efforts would then kick in, leading to rising demand in the fourth quarter.
Expensive substitutes
Japan faces some problems in securing adequate supplies of LSFO and direct-burn crude. During the last major nuclear crisis, Indonesia was a regular exporter of Japan's preferred grade of fuel oil — low-sulphur waxy residue (LSWR) — as well as burning crudes, such as Minas. But Indonesia is now a net crude importer and rarely exports LSWR or Minas in significant quantities. Indonesian state-owned oil company Pertamina formally asked Argus and other price reporting agencies to stop assessing some grades of LSWR late last year because it was halting exports.
