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More high carbon fuel burn to follow Japan nuclear closure

By Stephanie Wilson in Singapore

October 2, 2013 - The scheduled shutdown of Japan's sole operating nuclear reactor on September 15 could equate to additional LNG requirement of around 18 Bcf of imports from September until the end of the year, according to a Bentek and Platts analysis.

But with LNG burn at power plants already close to maximum, coal and oil are seen more likely to fill the vacuum.

Japan's nuclear capacity factor has now dropped to zero from 5.1% in August with the shutdown of Kansai Electric Power Company's 1.18 GW No. 4 reactor at Oi power plant, Fukui, western Japan, for maintenance and inspection in early on September 15, Bentek data showed.

Atomic generating capacity is likely to remain offline until the end of the year at the earliest, as none of the 50 operational reactors in the country have yet been authorized to resume operations, marking only the second time that Japan has been without nuclear power since the 1970's.

Analysis continues below...

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Bentek estimates that this loss of nuclear generation will equate to an additional LNG requirement of around five or six cargoes over the period, assuming normal autumn and winter temperatures.

While Fukui does not have an LNG import terminal or any gas-based power plants to burn additional LNG imports for power generation, the outage could drive some additional demand of one or two cargoes at Osaka based terminals; Senboku 1 and 2 and Sakhai, or Nagoya terminals; Chita, Kawagoe and Yokaichi, to the south.

Imports into these terminals south of Fukui could support additional power generation at southern power plants, which could be sent north along one of the country's main 500kV transmission lines.

But gas burning facilities are likely to be operating at maximum rates as gas burn was already close to 83% utilization over this summer, Bentek estimates showed, limiting the scope to raise imports from September onwards due to bottlenecks at both receiving terminals and gas burning facilities.

“At the corporate level, Kansai Electric is the only utility to have nuclear power for the last 13 months, so we won’t see any widespread impact on demand across other areas of Japan as a result of the shutdown,” Nicholas Browne, a Senior Analyst for Asian Gas Research at Wood Mackenzie noted.

“Japan will be likely have to increase coal and LNG imports, but also oil is an option,” Browne noted. “It depends on the price and storage levels of these commodities though.”

The buyer was widely agreed to have exercised a combination of upward quantity tolerance (UQT) clauses on existing term contracts and had reportedly signed a strip deal with term supplier Qatar for delivery over the winter.

But Kansai was actively seeking at least one cargo for delivery over November and December, according to numerous sources, although the delivery date was very flexible.

This preference for exercising UQTs and locking into strip and short term deals has been reflected across Japan over 2013 so far; largely as buyers had known gas-fired plants would be likely to run at maximum rates over both the summer and winter seasons, regardless of any of the usual peaking factors such as temperature.

However, figures from the Federation of Electric Power Companies show that 2013 LNG procurement at the country's 10 largest utility buyers is actually down 2.8%, with consumption 3% lower on a year-on-year basis so far, which could be attributed to record-high spot LNG prices at the start of the year and effective power saving measures.

In the capital Tokyo alone, energy consumption has been cut 10% since 2011, according data from the Renewable Energy Foundation of Japan.

Other alternatives

A similar situation can be seen in the baseload coal market, where coal consumption hit its highest monthly level over a two year period in August 2013 at 5,695,890 mt according to FEPC data. Several industry sources said coal generation is therefore now close to maximum capacity.

Japan has been importing around 4.5 million mt/month of thermal coal from Newcastle, Australia, for the past year -- a figure which has remained more or less constant in the aftermath of the earthquake and tsunami in March 2011, according to Platts data.

But the addition of two new 1,600 MW coal plants in April and the restart in May 2013 of a third 2,000 MW unit which was damaged in the tsunami has further increased capacity, increasing coal consumption at power utilities by almost 11% year-to-date in 2013, according to FEPC data.

While Fukui prefecture does have two coal based power plants, both of these are also now likely to be operating at maximum levels in order to supplement the loss in nuclear generation capacity.

"Japan will be likely to increase coal imports, but also oil is an option," Browne said. "It depends on the price and storage levels of these commodities though."

Oil procurement and consumption in Japan had increased significantly in the wake of Fukushima, with most of the increment coming from crude oil.

Temperatures averaging around 30 degrees Celsius over July and August resulted in the highest daily power demand of 50.93 GW in Tokyo on August 9 since the devastating March 2011 earthquake.

As a result, Tokyo Electric Power Company had little choice but to meet the spike in power generation over August by buying and burning more crude and fuel oil, rather than cheaper gas and coal.

But since the start of 2013, oil procurement has reduced by 20.7%, while consumption is down 19.7%, according to FEPC data, again suggesting that, in addition to burning more coal, power saving measures in Japan are performing well.

The increased reliance on cheaper coal imports comes in the wake of Prime Minister Shinzo Abe's aggressive stimulus drive to move the beleaguered economy into growth, as the government looks to tackle a trade deficit of Yen 960.3 billion ($9.8 billion) for August, with the weaker Yen -- the downside of the expansionary push -- sending Japan's energy bills soaring.

In a switch from long standing policy, the government is encouraging utilities to burn more coal by building plants that use technology to reduce emissions and relaxing environmental dirty burning rules.

With no definitive date set for a restart of any of the 50 operational reactors in the country, Japanese importers are unlikely to reduce coal or gas burn in the immediate future.

So far, restart proposals have been submitted for 10 reactors at six power plants. But with checks expected to take up to six months per plant, nuclear generation is not expected to return on any scale in Japan until 2014 at the earliest.

Related chart: JKM leading into winter ($/mil btu): 1 July 2013 - 26 September 2013

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