Japan which imported about 80% of its primary energy requirement in 2008, is the world’s largest importer of both coal and liquefied natural gas (LNG) as well as the third-largest net importer of crude oil. The shallow-focus earthquake (which registered 9.0 on the Moment Magnitude Scale) off the country’s coast last week, generated three-meter high tsunami waves, rendering about 25% of the country’s nuclear power generating capacity offline. Market response ranged from initial stock-selling frenzies through re-evaluation of the nuclear power option but oil and gas supply-demand re-balancing, even if on a regional basis is also expected. While long-term outcomes may be currently unclear, certain trends are indicated:
Oil and Gas
Japan has an interesting energy mix: about 30% of its power needs are met by nuclear capacity, but it also has gas-fired, coal-fired as well as oil-fired power generating installations and is only one of a few countries with the oil-fired variety. With a significant proportion of its nuclear as well as some gas-fired installations offline, it is expected that fuel oil and crude oil will be in greater demand for the short- to medium-term. Increase in LNG demand is also anticipated. Outages at three of the country’s major refineries would mean that an immediate drop in crude oil demand for refining throughput would be offset by an uptick in its demand for power generation. Preliminary estimates of the increase in demand range from 200,000 barrels per day (bpd) to 340,000 bpd, which figures are not likely to strain global supply. According to the Center for Global Energy Studies, CGES, Japan’s dependence on oil as a primary energy source has decreased from 78% in 1973 to its current value of 43%. The country has seen increasing productivity with relatively less use of energy. Figure 1 below for example shows that while Japan’s GDP grew by about 15% between 1999 and 2007, its Energy Use per unit of GDP decreased by about 12%.
The challenge however may be in securing adequate grade fuel oil, specifically, Low Sulfur Fuel Oil (LSFO) which is more suited to its boiler configurations; and prices have already seen anticipatory upticks. Heavy, low-sulfur crude oil grades may therefore be in higher demand.
In 2009, almost 80% of Japan’s 4.4 Mbpd crude oil consumption came from the Middle East while about two thirds of its LNG came from Asian suppliers in 2010. Some European LNG cargoes are set to be diverted to Japan and this has seen higher European LNG prices. Middle East crude oil supplies however, remain a source of global concern especially with regard to the Saudi spare production capacity. The recent arrival of Saudi troops in Bahrain along with brutal crackdown on dissent, ostensibly to protect state installations raised the stakes in the current MENA unrest; for example there are media reports that Saudi Arabia’s main export crude oil facilities may come under intense terrorist retaliatory attacks, a situation — depending of course, on the magnitude — that is certain to put severe, sustained upward pressures on global crude oil prices if not outright shocks.
One of the consequences of the current Libyan unrest has been the disruption of crude oil supplies to Europe. The onset of the Libyan unrest which coincided with a six-year low in European crude oil inventories for that period, exerted upward pressures on the European benchmark Brent. Libya’s light, sweet (low sulfur) crude oil grade is better suited to European refining preferences than the heavy, sour grades produced in many other parts of the world. There are reports which are still unconfirmed, that the exploding civil war in Libya has caused substantial damage to oil and gas installations there. If confirmed, Libya’s production could see protracted outage, further straining the global spare production capacity.
Crude oil grades such as Nigeria’s Bonny Light and Forcados Light among others from the prolific Atlantic petroleum provinces of Africa are expected to bridge that supply gap. Contrary to some media reports however, Nigeria’s crude oil production and not Libya’s, is the largest in Africa. Algeria and Angola also produce more oil than Libya (See Figure 2 below).
Angola, which became a member country of the oil group Organization of the Petroleum Exporting Countries, OPEC, in 2007 has since ramped up its production above Libya’s.
The year 2011 is an election year in Nigeria with increased threats of sabotage attacks on the country’s main oil and gas production facilities in the Niger Delta region; these had led to force majeure declarations on oil cargo deliveries in previous years. There is already a report of explosions at a flow-station operated by a major Integrated International Oil Company, IOC. Production outages in the Niger Delta have correlated with spikes in global crude oil prices; with the Libyan production outage, supply disruptions in the Niger Delta could further tighten Europe’s light crude supply, putting even stronger upward pressures on prices.
Nuclear Energy Swap
A cloud of nuclear uncertainty is gradually swirling around the globe, in the wake of Japan’s nuclear mishaps. In Germany for example, a moratorium on nuclear energy has been quickly emplaced, while many European nations have called for a radical re-evaluation of the nuclear power option. China however, with the highest number (27) of nuclear plants under construction, has vowed to press on, even if with an evaluative pause. Stocks in some major nuclear energy companies such as Areva were down in intra-day trading on Thursday. But if the truth must be told, Japanese nuclear power installations in the main, withstood the Sendai quake. The associated tsunami was the major culprit, knocking off auxiliary generators used for pumping reactor cooling fluids, in the absence of which radiation would spread. In addition, the magnitude of a given earthquake is not the sole determinant of the degree of structural damage; it is possible for lower magnitude quakes to produce higher peak ground acceleration (necessary for structural damage) than higher magnitude quakes. According to records for example, Chile’s 2010 was a magnitude 8.8 and had a peak ground acceleration of 0.78g; the Christchurch (New Zealand) quake earlier this year on the other hand, had a magnitude of just 6.3 but a peak ground acceleration of 2.2g.
Following these global concerns about the safety of nuclear power installations, global demand for natural gas as alternative power generation fuel would likely increase as would pressures for an end to oil-indexation of natural gas prices. This could be added incentive for mega gas projects such as Chevron’s Gorgon works in Australia. Royal Dutch Shell also has significant liquefied gas capability. Japan which holds extensive methane hydrate reserves in its exclusive but undisputed offshore zones may then need to commence exploitation. Strident objections (which cite energy independence issues) to the export-licensing of the increasing U.S natural gas production, would in the short- to medium-term likely see no substantial increase in prices there.
The events may give fillip to renewable energy roles in the global energy mix, as calls grow for more environment-friendly energy. Renewable energy companies also stand to benefit from some energy re-balancing. For example, due to plant outages in Japan, Asian demand for PVC has turned to the United States where export prices are expected to increase substantially.
Japan is not new to reconstruction. The aftermath of Kobe’s massive 1995 earthquake (then listed as “the costliest natural disaster to befall any one country”) is testimony to that. But the current reconstruction efforts may hold added problems. For example, if there is substantial pollution from radiation — and authorities are seemingly at their wits’ end as to management of the nuclear risk — not only would costs escalate steeply, but swathes of the productive eastern part of the country could be shut in for some time. This may translate to lower productivity as well as lower energy demand. Some companies such as General Motors in the U.S. have according to media reports, announced temporary production delays due to unavailability of automotive parts from Japan.
In terms of funding, a massive influx of insurance payouts is expected; in addition, there is reportedly an estimated US$2trln in external holdings which may be repatriated. This pullout could potentially impact some countries. The rapidly-strengthening yen, which recently reached a post world war II high against the U.S. dollar however, may be a disincentive to domestic manufacturers; though the G7 countries have just announced intervention plans, the nature of that planned intervention is still unclear.