Japan Will Need to Boost Energy Imports

By SIMON HALL And MARI IWATA

BEIJING—Friday's closures of nuclear reactors will raise Japan's need to import oil and natural gas, but it remains unclear how much industrial output has been affected by the earthquake and tsunami and how long nuclear- and thermal-power plants will stay shut.

Rising energy imports would underpin prices in an already highly volatile energy market. Japan is the world's third-largest oil user, and all of that oil is imported.

In July 2007, Tokyo Electric Power Co.'s Kashiwazaki-Kariwa's seven reactors in northwest Japan was closed due to an earthquake, and kept shut until 2009. Japan's largest electricity supplier had to pay much more to provide power.

The struggle to contain a fire and radiation leaks at Tepco's Fukushima complex Saturday is likely to be followed by extended closures of those plants and other reactors while safety checks and inquiries are completed.

Energy-demand comparisons between the 2007 and 2011 earthquakes are further complicated by the impact of the global economic crisis, which hit oil, gas and coal use in Japan, as it did elsewhere. Oil traders have had to factor in sharp price rises and oil-market volatility in recent weeks caused by political turmoil in the Middle East.

Ten nuclear reactors with a combined capacity of 8.6 gigawatts have been taken off line in Japan. Seven are operated by Tokyo Electric, two by Tohoku Electric Power Co. and one by Japan Atomic Energy Power Co. Tepco said it has suspended operations at five thermal power plants as well.

Japan isn't a big fuel-oil buyer, but it may need to ramp up imports of the refined product, which is used in thermal power stations, and also buy more crude oil to process into fuel oil in domestic refiners or for direct burning in its power stations.

Late Friday, the Asian fuel-oil market reflected an anticipated demand increase, which could further tighten availability. Regional fuel-oil fundamentals are already tight as the heavy refinery maintenance season in Asia and the Middle East has cut supplies.

At least five refineries in Japan, with a combined oil-processing capacity of 1.2 million barrels a day, shut down automatically when they sensed the earthquake. This is roughly a quarter of Japan's total refining capacity. Two of them, JX Holdings Inc.'s refinery in quake-hit Sendai and Cosmo Oil Co. Ltd.'s Chiba facility, have been damaged, but how badly still isn't clear.

Large numbers of tankers call at Japan's ports every day. Given the scale of damage to northwestern coastal areas and some ports, and disruption of the country's energy infrastructure, vessels may need to be diverted elsewhere.

Japan imported an average 3.7 million barrels a day of crude oil in 2010, up 0.8% on year. Imports of liquefied natural gas imports totaled 6.32 million metric tons last year, down 3%.

If all the nuclear power capacity now off-line was replaced by natural gas, this would require between one billion and 1.2 billion cubic feet of gas a day, which could affect spot LNG prices in Asia and Europe, said Barclays Capital in a report issued Saturday.

"Previous large-scale disasters in Japan and across Asia have tended not to produce discernible negative effects on demand...reconstruction tends to be highly a resource- and energy-intensive activity," it said.

Macquarie Bank said the tight coking-coal market may see pressure eased as a consequence of the earthquake while steel mills assessed damage, but that demand for thermal coal used in power plants could rise.

The increased fuel costs and repair work from the 2007 earthquake were chiefly responsible for Tepco posting a 150 billion yen ($1.82 billion) loss for the year ended March 2008. Tepco's oil use jumped around 50% on year to 9.99 million kiloliters in 2007-08.

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