Japan’s risky LNG strategy

By Eric Watkins

LOS ANGELES, May 25 – Liquefied natural gas has fast become the fuel of choice in Japan, a choice that looks to be extending into the future given the indecision of the country’s policy makers over the continuation of nuclear-generated power.

The final decision regarding Japan’s nuclear future has largely been left in the hands of the county’s politicians after a subcommittee of the Advisory Committee for Natural Resources and Energy failed to come to a unanimous decision of its own.

Absent a unified approach, the subcommittee instead decided to present five different policy proposals. The first leaves the choice of energy source to consumers, while the remaining options differ on the percentage of nuclear power in the country by 2030: 0%, 15%, 20-25% or 35%.

The subcommittee’s decision, or perhaps one should say its indecision, is not hard to understand given the degree of popular opposition to nuclear power in the country, a position underlined even by Greenpeace activists who formerly favored nuclear power as the best way for Japan to cap C02 emissions.

GREENPEACE AGAINST NUCLEAR

“Before the disaster, some people believed that nuclear energy was a good way to cut CO2 emissions, but now it has been proven that nuclear energy is not a reliable means of doing this,” said Greenpeace Japan’s climate and energy campaigner Hisayo Tacked

That view will probably gather more strength following a report that the radiation released in the first days of the Fukushima nuclear disaster was almost 2-1/2 times greater than the amount first estimated by Japanese safety regulators.

At least that’s the view of Tokyo Electric Power Co, operator of the doomed Fukushima Daiichi nuclear power plant, which issued the report.

TEPCO estimated meltdowns at three Fukushima reactors released 2-1/2 times the amount of the first estimate by Japan’s Nuclear and Industrial Safety Agency in April 2011, and 17% more than the highest estimate provided by the government safety agency.

TEPCO, of course, might have good reason for releasing such a condemnatory report of the government, given the fact that it will be unwillingly nationalized in July in exchange for 1 trillion yen of taxpayer money.

TEPCO’S HOSTILITY

While it wants the money, TEPCO has shown itself resistant – hostile even – to efforts by the government to impose changes.

An example of that hostility arose in April when TEPCO Chairman Tsunehisa Katsumata criticized government efforts to force out company president Toshio Nishizawa. “If you are going that far, let us go belly up,” Katsumata said.

Still, regardless of TEPCO’s motivation in releasing a report casting aspersions on the government’s handling of the Fukushima disaster, the plain fact of the matter is that the report will play well in a country where popular opinion appears determined to turn its back on nuclear power.

That turn means alternative sources of power must come into play, a point underscored by the International Energy Agency in its most recent monthly report, underlining demand growth for oil in the wake of Japan’s nuclear shutdown post-Fukushima.

REPLACEMENT FUELS

“OECD Pacific demand remains supported by the nuclear-related shutdowns in Japan, with preliminary consumption of 8.4 million b/d in March, 335,000 b/d (4.2%) more than the corresponding month in 2011,” IEA said in its May report

“Heavy fuel oil and other products, which include crude oil for direct burn, continue to dominate growth prospects, as they are the key replacement fuels in the power sector shorn of nuclear capacity,” IEA said

“Demand grew across all product categories, bar naphtha and jet/kerosene, notably residual fuel oil and ‘other products’, which include direct crude burn, rose by 41.6% and 32.5% respectively, on the back of strong electricity generation,” the IEA report said.

The agency said its 2012 demand outlook for Japan remains “unchanged for now at 4.5 million b/d” but it noted that the nuclear closures bring “an additional layer of uncertainty” to the forecast.

“We continue to assume a very gradual nuclear recovery towards end-2102, although a zero-nuclear case has only a marginal impact and would raise our oil demand projections by 80,000 b/d for 2012 as a whole,” IEA said

GROWTH OF LNG 

While the IEA’s remarks underline the growth of oil demand in Japan, they say nothing about the phenomenal growth in demand for LNG. Indeed, reports now indicate that in fiscal 2011 Japan imported 83 million tons of LNG, up 20% on the year, with the same amount expected this year.

In an effort to meet such demand growth, Japanese companies are buying natural gas assets and fields around the world, with some $30 billion pledged in development funding.

Such spending plans, along with the closure of the country’s nuclear facilities, have doubled the share of gas in Japan’s power mix to about 50%, and have now tied the country’s future to a single fuel more than any other major energy-consumer.

That view is underlined elsewhere by the IEA, which says of the 34 countries in the Organization for Economic Cooperation and Development, only five members rely on gas for more than 50% of their electricity. According to IEA data, Japan would become the most gas-reliant in the top 10 energy consumer countries.

Japanese utilities plan to build an extra 24,000 megawatts of gas-fired capacity, 40% more than now, within a decade, according to government reports cited by Bloomberg. Japan will also add 10 LNG import terminals to an existing 28 in the same period, increasing storage capacity by 23%, the data show.

That growing dependence on LNG puts Japan in a vulnerable position.

CURRENT ACCOUNT DEFICIT 

Shigeki Sakamoto, a researcher with Japan Oil, Gas and Metals National Corp., said that raising dependence on LNG above 50% will probably be thought of as risky because of the fuel’s high price. Japan, he said, should add coal and other fuels to the mix to avoid being “ripped off.”

To the mix suggested by Sakamoto, Tokyo must also strongly reconsider nuclear power and, in particular, its decision to close down the country’s nuclear power plants, a decision already proving costly and one that could become even more costly in the future.

Nuclear energy may not be popular, but then national poverty is not either. If that seems an unlikely possibility for Japan, then consider a report by Barclays Capital.

Higher fossil fuel imports may bring Japan into current account deficit sooner than expected, the Barclays report said, adding that such a deficit will make the yen more sensitive to events abroad and tie its rate movements more closely to that of the oil price.

© Glamma Productions Inc. 2012

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About Eric Watkins

Eric Watkins is a consultant specializing in oil diplomacy. A former journalist, Mr. Watkins's work has appeared in numerous leading publications including The Wall Street Journal, The Economist, The Financial Times, and specialist media such as Oil & Gas Journal, Middle East Economic Survey (MEES), and Lloyd's List.
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