JAPAN CRISIS: Asia's Q2 LNG demand to rise on nuclear outages

Singapore (Platts)--14Mar2011/620 am EDT/1020 GMT

Asia's demand for LNG is set to rise in the second quarter as Japanese utilities are expected to purchase more cargoes on the back of nuclear plants being shutdown after the major earthquake in Japan Friday, Tony Regan, principal consultant at Singapore-based energy consultancy Tri-Zen said Monday.

"The impact on the market depends on how it's handled but if Tokyo Electric Power Company rushes out to buy five cargoes, then spot prices may hit $15/MMBtu," Regan said.

"It's not going to be a quiet second quarter because [Taiwan's] CPC is in the market plus the Japanese and Koreans will be buying to prepare for summer," he added.

Japan's top government spokesman, Chief Cabinet Secretary Yukio Edano, said Monday said that the explosion at Tokyo Electric Power Company's No. 3 reactor building at the Fukushima Daiichi, or Fukushima-1 nuclear power plant was a hydrogen explosion similar to that seen at the No. 1 reactor building Saturday.

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The earthquake Friday led to the shutdown of at least 11 nuclear units, according to Japanese utilities, with Tepco reporting seven units shut and Tohoku Electric reporting a further three shut down. Japan Atomic shut down one unit at its Tokai plant. That capacity totals almost 10 GW of power.

Tepco also reported outages at eight oil-fired power plants, two gas-fired plants and one coal-fired plant.

"Replacing a full year of Fukushima Daiichi generation with gas could require additional LNG imports of 5-7 million mt, a material addition to overall Japanese imports which were a record 70 million mt in 2010," Graeme Bethune, CEO of Australian energy consultancy, EnergyQuest, said.

A producer told Platts that he had been approached by Tepco for spot cargoes but the company did not specify how many it was looking for, adding that Tohoku Electric was also in the market for spot shipments.

SPOT LNG PRICES MAY CLOSE IN ON TERM PRICES

"The Japanese utilities have been minimizing their contract volumes through the use of downward quantity tolerance clauses but now they could choose to maximize contract volumes instead," Regan said, "On top of the term volumes, the Japanese will top up their contracts with spot purchases but they will be discreet about it."

In a report issued Monday, Deutsche Bank said: "As a consequence of the quake, we are likely to see even higher Japanese spot LNG needs this year."

Assuming both of its Fukushima nuclear plants remain offline for the year and potentially permanently, Tepco would lose half of its total nuclear capacity, the report said. Coupled with the shutdown of Tohoku Electric and Japan Atomic's plants, a quarter of Japan's total nuclear capacity is offline, it added.

Japan was likely to boost its imports of oil, LNG and coal to make up for the loss of nuclear power, Deutsche Bank said.

Regan said South America could buy spot LNG cargoes to prepare for winter while the UK could restock its gas storage in summer, resulting in greater demand.

"Supply and LNG vessels remain tight because the [LNG] glut of 2009 has disappeared," Regan said. "I expect LNG demand to increase by 16-18% this year even without factoring in Japan's recent earthquake."

"Spot LNG prices could easily close in on term prices at $12-13/MMBtu," he added.

Overall, Japan paid an average $587.95/mt ($11.31/MMBtu) for its LNG in January.

The Japan Customs Cleared crude oil price in January was $91.775/barrel, up 6.8% month on month and 22.8% higher from January 2010. Term LNG contracts tend to be linked to the JCC crude price, but with a lag of a few months, so the rise in oil prices typically takes some time to have an effect on LNG prices.

NUCLEAR CONCERNS MAY BENEFIT AUSTRALIAN LNG PROJECTS

"Events in Japan have highlighted the risks of operating nuclear generation in seismically active areas. Any potential switch away from nuclear power is likely to favor gas-fired generation, the most practical low carbon-emission alternative," Arnold Musiker from Fitch Ratings said in a report issued late Sunday.

"Australia is well-positioned to meet additional medium-term gas demand," Musiker added. "Asian utilities will continue to sign long-term offtake contracts with Australian LNG projects with some also taking substantial minority equity stakes."

In the last two years, North Asian utilities and gas companies have signed significant LNG supply contracts, underpinning the current wave of Australian LNG development, despite these projects facing inflationary cost pressures.

Besides Australia, South Korea and Russia have already taken steps to divert LNG cargoes to Japan, while Qatar could also help to meet Japan's additional demand.

"Qatar will certainly want to play a role but it will be discreet especially in the spot market," Regan said.

Deutsche Bank added that Qatar would seek to minimize the impact of cargo diversions to Japan on the UK market as it would want to uphold its reputation as a reliable supplier after signing a 2.4 million mt/year supply contract with Centrica in February.

--Hong Chou Hui, chou_hui_hong@platts.com