Weathering the storm: Japanese energy markets

In order to understand the scale of the earthquake in March (in economic terms, notwithstanding the titanic human and environmental impacts), it is important to discuss the key features of Japan’s energy markets, including demand by fuel type, the nuclear power issue, refining, and oil trade.

The Tohoku Earthquake has now added enormous demands on the people, many of whom still grieve the loss of family members, friends, colleagues and homes. The disaster will have a long lasting impact on the environment and the economy. The impacts on energy demand will be complex. A great deal of economic activity was interrupted or ceased entirely, yet new activity has sprung up to deal with the aftermath. A variety of residential, commercial and industrial energy end users have been shifted out of the most severely devastated areas, and many will never return.

The earthquake and tsunami will have a long term impact on the Japanese energy market, though some of the impacts will work at cross purposes to one another. For example, the destruction of fishing boats along the affected coastline reduces demand for marine diesel, yet the clean up effort requires diesel powered heavy machinery.

Energy demand

Japan is a major energy market, yet it relies mainly on imported fossil energy supplies. Indigenous crude oil production, for example, is currently averaging 13 000 bpd, while crude imports are averaging 3.66 million bpd.

Nuclear power

The explosion, fire and meltdown at Japan’s Fukushima Daiichi nuclear power plant are already the topics of numerous reports. The crisis was closely watched all over the world, though quite often it was impossible to discern exactly what was happening.

One of the first actions taken to replace the electric power lost from the Fukushima Daiichi plant was to search for additional supplies of LNG. When Japan embarked on its quest to diversify sources of energy, LNG was a fuel of choice. Initially, part of its desirability came from the reduction in its sulfur emissions relative to oil.

Petroleum product demand

The Japanese oil market has been in a slow decline, helped along by high prices, poor economic performance and demographics.

Although the market has been in a period of decline, the earthquake and tsunami disaster contributed to immediate and visible impacts. There was a significant shift in inland sales of oil product in March, April and May.

Refining industry

Japan is almost entirely dependent on imported crude oil, with domestic crude production a minuscule 15 000 bpd in 2010, while crude imports averaged over 37 million bpd. The Middle East provided 32 million bpd of Japanese imports, or 86.5% of the total. The largest Middle Eastern suppliers are Saudi Arabia, the UAEs, Qatar, Iran and Kuwait. Asia Pacific supplies have dwindled because of declining production and high demand. Japan imported 166 000 bpd of Asia Pacific crude in 2010, yet this had fallen from 956 000 bpd in 1994. Exports from Russia, however, have grown.

Conclusion

The 2011 Tohoku Earthquake will go down in history as one of the greatest natural disasters known to mankind. Nearly 20 500 people are assumed dead and over 500 000 were initially left homeless. The power of the earthquake and the resultant tsunami was almost beyond comprehension. The destruction of property was on a scale now measured in trillions of Yen, not including the damage to the Fukushima Daiichi nuclear power plant, which will never be reopened. The nation faces the prospect of a decade of work to reconstruct and rebuild. Displaced people must restart their lives in new towns and cities.

The Japanese energy sector was already in a period of adjustment, coping with shrinking demand, overcapacity and the need to reduce greenhouse gas emissions. Nuclear power was a key element in the government’s plan to reduce carbon emissions and there had been many proposals involving the construction of new nuclear facilities. These proposals are now highly speculative, and the country is in the process of rethinking its energy future.

For the near term, Japanese utilities have entered the market to seek additional supplies of LNG. Already, Japan is the world’s single largest importer of LNG, but new markets have emerged to compete for future LNG supplies, and it is not clear how much additional supply will be available to Japan in the longer term. As odd as it may sound in today’s world, oil would have to be considered cheap and abundant for Japan’s near term needs. Although the refining industry has been in a process of contraction, and a significant chunk of capacity was taken offline following the earthquake and tsunami, Japanese refiners were still able to supply the domestic market for most key fuels (excluding LPG and naphtha, Japan’s key imports). In fact, Japanese product exports have risen recently because refiners have attempted to keep crude runs more or less stable despite sagging domestic demand. Refinery utilisation rates have been below 80% since 2008; therefore several refineries were able to immediately raise their throughput to ward off potential fuel shortages. On average, fuel supplies were adequate, but the immediate difficulty lay in delivering fuel (and other critical supplies) to those in need. Refinery throughput and utilisation rates continued to fall through March, April and May, indicating that the capacity closures to date have not been sufficient.

In the aftermath of the Tohoku Earthquake and Tsunami, Japan’s people and energy sector showed great resilience and endurance, attributed to the cultural value of gaman. The energy industry also showed great capability and courage. It is possible that supplying the energy market in the near term will involve additional costs and additional carbon emissions. The political process in Japan has grown so difficult that formulating a new national energy policy will be no easy task. One can only hope that Japan will dip into the well of its own resilience and creativity and emerge even stronger in the end.

Nancy’s article can be read in full in the September issue of Hydrocarbon Engineering. Subscribers can sign in to read the full version here.

Published on 30/08/2011

 
 

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