The Unfolding Japan Crisis and What It Means to Energy
March 18, 2011
The nuclear situation in Japan remains precarious. The powerful earthquake and subsequent tsunami on Friday March 11, 2011, washed away towns and villages, damaged ports, rails, and power plants; and caused a staggering loss of life. As rescue efforts continue and survivors struggle to obtain basic necessities, power plant operators battle difficult conditions at several nuclear units. The unfolding crisis in Japan—the world's third-largest economy and fifth-largest energy user—has major implications for the energy sector. In this Alert IHS CERA begins to lay out assessments.
- Substantial electric power generating capacity lost, some permanently. The greatest challenge is managing the cooling water problem at several nuclear reactors. At least 2 gigawatts (GW) of nuclear capacity has been lost permanently; another 10 GW will likely stay shut for several years. In recent years these 12 GW generated 80 terawatt-hours annually, about 8 percent of Japan's total electricity output and about 20 percent of the combined generation of Tokyo Electric Power Company (TEPCO) and Tohoku Power Company, whose service territories have been devastated by the earthquake and tsunami. At least 8 GW of coal-fired capacity has also been badly damaged.
- Power companies implementing rolling blackouts, despite low power demand. In addition to damaged power plants, other generating capacity remains offline. Many companies, including Toyota and Nippon Steel, shut their factories owing to a lack of parts and materials for production as well as reliable power. Despite low demand TEPCO began rolling blackouts Tuesday; Tohoku plans to begin them Thursday, if necessary. The power supply-demand balance in affected areas will be tenuous for the coming days and weeks; interconnection capacity among Japan's power systems is limited.
- Liquefied natural gas (LNG) imports and oil products to fill the void left by nuclear and coal outages. Global LNG markets have sufficient flexibility to allow for sending additional cargoes to Japan, the world's largest LNG importer, most likely diverted from destinations in Northwest Europe. Although Europe is well supplied by pipeline gas, the sustained diversion of LNG will tend to push spot prices toward long-term oil-indexed levels. Additional Japanese oil demand for power generation is not likely to have a major impact on global oil prices, however, as the near-term drop from reduced transport and industrial activities will more than offset the power generation call.
Station Blackout: The Crisis at Nuclear Power Plants
The nuclear crisis in Japan appears to stem not from the Friday, March 11, earthquake, massive as it was, but from the tsunami that it set off. Based on currently available information, the nuclear plants withstood the huge earthquake well. At the six-unit Fukushima Daiichi plant (totaling 4.5 gigawatts [GW]), 150 kilometers (km) (95 miles) southwest of the epicenter, units 1, 2, and 3 shut down, or were "scrammed" as the nuclear industry calls it, when the earthquake hit—just as designed; units 4, 5, and 6 were already in what is called "cold shutdown" when the earthquake hit. Grid power was lost at the plant site. Emergency diesel generators started to supply power, also as designed. An hour later, however, the tsunami hit the plant site, rendering the emergency generators inoperable. Walls designed to fend off tsunamis were not sufficient to hold back this 7-meter high tsunami. Plant operators then brought in mobile generators to pump seawater plus boron into the reactor vessel to maintain cooling of the fuel rods. However, there have been problems with these as well.
The nuclear operators have been struggling since last Friday to cool the reactor cores. But with no grid power they have faced a series of emergencies. As we issued this Alert, situations at the Fukushima Daiichi plant remain unstable and appear to be worsening, as the spent fuel pools have also experienced problems with low water levels, and local radiation levels prompted the suspension of operations and the temporary withdrawal of workers from plant site.
Three other nuclear plants have been directly affected as well: the four-unit Fukushima Daini (4.3 GW), the three-unit Onagawa plant (2.1 GW), and the one-unit Tokai plant (1.1 GW); all are reported to be safe, with grid power at the stations, thus making cooling of decaying heat in the reactor vessels and the spent fuel pools more manageable.
The Lesson of 2007
The 12 GW of nuclear capacity at four plants will not likely come back in service for several years, if at all. At least 2 GW of the 12 GW—Fukushima Daiichi units, 1, 2, and 3—have been permanently lost because of the corrosive nature of seawater injected into the reactor vessels.
The experience of the earthquake in 2007 that struck the seven-unit Kashiwazaki-Kariwa plant (8.2 GW) provides a good reference for how long it might take to bring back shutdown units. These seven units were largely undamaged from the 2007 earthquake. But seismic measurements at the plant site exceeded the design basis of the units. The resulting higher standards necessitated retrofits. The first Kashiwazaki-Kariwa unit began producing power in May 2009, 22 months after the July 2007 earthquake; the unit resumed commercial operation in December 2009, 29 months after the earthquake. Three of the seven units remain shut.
The shutdown of 2007 also provided a second lesson. The global liquefied natural gas (LNG) market responded quickly, with supplies diverted to Japan. That response demonstrated the degree to which LNG had become a much more global, flexible, and liquid market. The LNG industry is currently in a five-year period of tremendous expansion, and world capacity will have increased by half by 2012 compared with 2007, making the LNG market much larger and even more global and liquid, with greater capacity to respond to Japan's needs.
This time the 12 GW of affected nuclear capacity generated around 80 terawatt-hours (TWh) over the past few years—accounting for about 8 percent of Japan's total power generation and about 20 percent of Tokyo Electric Power Company's (TEPCO) and Tohoku Power Company's combined power generation. Analysis of the power systems of TEPCO and Tohoku suggests that most of the replacement power will be fueled by LNG imports and some by oil products.
The unfolding nuclear crisis in Japan has already touched off reassessments of nuclear programs around the globe, including a three-month hold on nuclear plant life extensions announced by German Chancellor Angela Merkel. China has also announced a review of its nuclear plans. More reviews are likely to come in the weeks and months ahead. It will take time to derive lessons learned from this Japanese nuclear crisis. It is clear that safety standards for both operating and new plants are likely to be tightened.
The Loss of Coal Plants Will Be a Longstanding Problem
Six coal-fired stations, with 8.3 GW capacity, are understood to have suffered major damage. Immediately adjacent to the megaquake epicenter and directly in the way of the resultant tsunami, Tohoku's Haramachi (2 GW), the Soma Shinchi joint venture (2 GW), the Joban joint venture's Nakoso (1.5 GW) and TEPCO's Hitachinaka (1 GW) look as though they bore the brunt of the disaster and are expected to be out of commission for many months. In addition Tohoku's Noshiro (1.2 GW) is reportedly down, even though it was not in the line of the tsunami, and TEPCO's Hirono 5 (0.6 GW) is believed to have suffered damage, although its closeness (less than 20 km [12 miles]) to the Fukushima nuclear station means that it may be difficult to assess the damage there at the moment given the 20 km evacuation zone around the nuclear plant.
Until the quake hit, these stations were operating at close to base load, meaning that they were probably taking in about 18 million metric tons (mt) of coal annually. Much of this total will not be needed for the rest of this year at least. There may be some coal-fired capacity that can step into this gap, but IHS CERA expects LNG- and oil-fired capacity to make up most of the shortfall.
For the 705 mt international steam coal market, the loss of 18 mt of import demand will be a significant blow to suppliers, particularly in light of an apparent slowdown in Chinese purchasing over the past quarter. Japan is the largest importer of Australian steam coal, and we can assume that the Australians will be the worst hit by the loss of demand. The impact on steam coal prices is likely to be negative initially, assuming that there is no surge in the price of alternative fuels that carries all values up, since Australian and some Indonesian producers will be looking to place this stranded coal on the spot market. As prices fall, however, IHS CERA expects Chinese interest to reawaken, stabilizing the market.
LNG Will Have to Step Up
Global LNG markets have sufficient flexibility to allow for rerouting cargoes to Japan. LNG demand in Japan—already the world's largest market—will increase. There is reported damage at one of the Higashi Ogishima gas-fired facility, but on the whole, gas generation remains intact. Generation from existing gas-fired and oil-fired capacity can replace some of the lost generation from nuclear and coal capacity. Pledges have already been made to send additional cargoes from Russian, Qatari, and Indonesian suppliers as well as to loan cargoes from the world's second largest market, Korea.
Covering 50 percent of lost nuclear and coal generation would require an additional 12 cargoes per month or about 9 mt annualized—an increase of 13 percent over previously expected Japanese imports. However, it is possible that some of the affected coal capacity will be brought back online within 12 months, reducing the annual need.
Although the past few months have been very tight in terms of liquefaction capacity utilization, the global market is entering the traditionally lower-demand portion of the year, and additional cargoes could be made available. However, additional cargoes will represent a small portion of incremental demand in Japan. The majority of cargoes will be diverted from elsewhere, with Northwest Europe the most likely source market. Increased demand in Japan represents a reallotment rather than an increase in this amount of flexible supply.
European buyers will have to replace diverted LNG by pulling from other natural gas sources. Although the European market is well supplied by pipeline gas, the sustained diversion of LNG will tend to push spot prices toward long-term oil-indexed levels. Through 2011, IHS CERA believes, there is sufficient spare capacity to maintain a well-balanced market in Europe. Pipeline imports to Europe could potentially increase substantially. Although higher takes under long-term contracts will have some impact on prices, fundamentally there should be sufficient gas available to keep market prices below contractual levels through summer 2011. However, the outages and ensuing issues surrounding the Japanese nuclear fleet are not short term, and pulling LNG from Europe to meet additional demand further accelerates the appearance of the tight global market in 2012–14—the same effect as from the abnormal weather in 2010.
Oil Demand: Reduced Transport and Industrial Use Outweigh Power Sector Call on Oil
Oil will be used to replace some of the nuclear and coal-fired power generation that has been lost in the wake of the disaster. Of Japan's 4.4 million barrels per day (mbd) of total oil demand, roughly 0.4 mbd is typically used in the power sector. Power sector oil demand consists mostly of direct-burn of crude oil and low-sulfur fuel oil.
There is significant spare oil-fired power generation capacity in Japan. Utilization rates of oil-fired generation plants were around 20 percent prior to the crisis in Japan. In 2007–08, when portions of Japan's nuclear fleet went offline after the July 2007 earthquake, monthly oil demand from the power sector increased by as much as 0.45 mbd—from 0.22 mbd to 0.67 mbd.
However, there is considerable uncertainty about the overall mix of generating fuels in the aftermath of the disaster. Any increase in oil demand from the power sector could be negated—at least in the short term—by a significant drop in oil demand because of reduced transport and industrial use owing to the disaster. We estimate that, outside the power sector, Japanese oil demand could decline as much as 0.6 mbd in the near term because of lower economic activity. The net result therefore could be a temporary demand reduction of around 0.1 to 0.2 mbd—or even higher depending on how much oil-fired power generation is used. While this is a source of downward pressure on crude oil prices, the price of oil products may be stimulated by the shutdown of 1.4 mbd of refining capacity throughout Japan. If the refineries do not restart rapidly, the global refining industry will have to supply up to 1 mbd of incremental imports. This would increase the global refinery utilization rate and support margins, but this impetus could dissipate if, as expected, some of the shut-in capacity restarts soon.
Source: IHS CERA
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