Coal Winning Out As Expensive Oil Impairs Trade Balance

BMI View: We expect oil imports in Japan to see long term declines as utilities are increasingly turning to lower cost sources of coal to substitute lost nuclear power generation. LNG imports are also expected to stabilise from a peak in 2012 but will be favoured over oil. Crucial to the country's fuel demand will be the decision on nuclear restarts, which if authorised, would further reduce demand for oil and LNG in Japan.

With Japan's 44GW of nuclear power currently offline due a rigorous inspection schedule, the country has been hit hard by the growing cost of fossil fuel imports. Japan is currently dependent on imported energy sources for around 96% of its domestic energy use, though this could be reduced to 80% if nuclear power were available at pre-Fukushima levels. Oil, liquefied natural gas (LNG) and coal are the main imported fuels.

The vast majority of imported energy is used in Japan's power generation sector, and with the shutdown of nuclear power over the last two years, the demand scenario for oil, coal and LNG has been considerably altered. Directly following Fukushima, oil consumption grew rapidly as an immediate solution to fill the void left by nuclear, while gas consumption also grew as record levels of LNG were imported in 2012. Coal power was largely restrained by limited capacity and Japan's environmental ambitions.

Post Fukushima Spike Reacting To Price
LNG, Crude, HFO And Coal Use In Power Generation, metric tonnes

BMI View: We expect oil imports in Japan to see long term declines as utilities are increasingly turning to lower cost sources of coal to substitute lost nuclear power generation. LNG imports are also expected to stabilise from a peak in 2012 but will be favoured over oil. Crucial to the country's fuel demand will be the decision on nuclear restarts, which if authorised, would further reduce demand for oil and LNG in Japan.

With Japan's 44GW of nuclear power currently offline due a rigorous inspection schedule, the country has been hit hard by the growing cost of fossil fuel imports. Japan is currently dependent on imported energy sources for around 96% of its domestic energy use, though this could be reduced to 80% if nuclear power were available at pre-Fukushima levels. Oil, liquefied natural gas (LNG) and coal are the main imported fuels.

The vast majority of imported energy is used in Japan's power generation sector, and with the shutdown of nuclear power over the last two years, the demand scenario for oil, coal and LNG has been considerably altered. Directly following Fukushima, oil consumption grew rapidly as an immediate solution to fill the void left by nuclear, while gas consumption also grew as record levels of LNG were imported in 2012. Coal power was largely restrained by limited capacity and Japan's environmental ambitions.

However, in 2013 we have seen a significant reorganisation of Japan's energy mix as the spike in fossil fuel use post Fukushima reacts to prices.

Post Fukushima Spike Reacting To Price
LNG, Crude, HFO And Coal Use In Power Generation, metric tonnes

In particular there has been a sharp increase in the use of coal to replace higher cost oil and to manage growing LNG use. In April 2013, 1.6GW of coal capacity was added from the Hitachinaka and Hirono plants, which has allowed Tokyo Electric Power Company (TEPCO) to vastly reduce its use of crude oil.

Furthermore, Tohoku Electric has recently been able to restart 1GW of coal-fired capacity at the Haramachi plant which was damaged by the 2011 earthquake. Two additional coal power plants are due to enter operation in December 2013 adding another 1.6GW of capacity further boosting the use of coal. Together, the four coal power facilities and the 1GW restart brought online in 2013 are expected to consume an additional 30 million tonnes of coal per year.

Considered from a cost perspective, coal imports per million British thermal units are as much as five times cheaper that oil and LNG, hence the growing trend of using more coal. LNG in Japan remains indexed to the price of oil distorting its value from other regional gas markets. It should also be noted that the price shown on the chart below is a 1 month swap value and does not reflect the likely lower cost of LNG sold on longer term contracts. Therefore power utilities have been keen to reduce oil consumption over LNG as the flexibility of their gas contracts is greater. Many Japanese utilities have been avoiding spot markets recently specifically because of the high prices and are instead leaning on long-term suppliers to increase export volumes.

LNG & Crude Too Expensive
LNG, Crude And Coal Cost, $/mnBTU

The surge in oil and LNG imports in 2011 and 2012 has had a significant impact on the country's balance of trade due to the high costs of additional imports of fossil fuels. Because of this development Japan is experiencing its longest running trade deficit in over 30 years, which is being further undermined by a weak Yen. Greater utilisation of coal alongside a reduction in the use of oil, and to some extent LNG, will therefore be critical to Japan's economy while nuclear remains offline. Shinzo Abe's 'Abenomic's' reform programme is centred around low cost energy and with limited future nuclear capacity, increased use of lower cost coal will be key to ensuring the programme succeeds.

High Energy Import Costs Damaging Balance Of Trade
Balance Of Trade In Goods, US$bn

Recently, The Federation of Electric Power Companies of Japan released consumption figures for October which confirm the continued decrease in oil use and growth in coal. For the first ten months of 2013 (Jan-Oct) coal consumption for power generation has increased 15.5% on the same period in 2012. Over the same timeframe, oil consumption in 2013 has fallen 23% on 2012, while LNG use is down 1.8%.

We therefore highlight our forecasts for Japanese gas and oil imports, which saw a considerable spike as a result of the Fukushima disaster, but are now retracting and are expected to stabilise in the coming years. We therefore expect import demand for crude oil in Japan to notably reduce over the coming years, while LNG imports are likely to stabilise.

Coal Reducing LNG And Oil Cost Impact
Net Exports Of Natural Gas (LHS) And Crude (RHS), bcm & '000b/d

As Japan has made significant efforts to manage its energy sector and keep costs to a minimum, the low cost advantage of coal has made it the main beneficiary. While our forecasts mirror the current trend, the question of nuclear restarts still hangs in the balance and could fundamentally alter our outlook. A return to nuclear power generation, if authorised to go ahead, is expected to be piecemeal and would further reduce the demand for oil and LNG imports into Japan over the longer term. We await the completion of the first nuclear inspection in order to gauge the sentiment towards a return to nuclear power generation.

Read the full article

This article is tagged to:
Sector: Oil & Gas, Infrastructure
Geography: Japan
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.