Oil consumption hits four-year high as LNG use peaks to cover reactors

by Jacob Adelman and Yuji Okada

Bloomberg

Japan is consuming the most oil in four years as it runs out of capacity to use liquefied natural gas as a stopgap for idled nuclear power plants.

Utilities are burning about 400,000 barrels a day, more than at any time since 2008, after more than doubling use of crude last year, according to Deutsche Bank AG. LNG can meet about two-thirds of the nation’s electricity needs when all its nuclear reactors are offline, government data and forecasts from the Institute for Energy Economics show.

Japan, turning to alternative sources of energy as it continues to grapple with last year’s Fukushima No. 1 nuclear disaster, is boosting its reliance on oil at a time when supply concerns from Sudan to Iran are already roiling markets. Brent crude has jumped 16 percent this year to trade near a three-year high, stoking speculation governments will be forced to release oil from emergency stockpiles.

“In a global market characterized by supply-side constraints, we think sustained incremental demand of nearly 400,000 barrels a day from Japan would help keep crude prices well supported,” Michael Hsueh, a London-based analyst at Deutsche Bank, said in a report. “These are non-trivial numbers at a global level.”

Japan, the world’s biggest buyer of LNG, has imported record amounts of the fuel in response to the March 11, 2011, earthquake and tsunami that wrecked three reactors at the Fukushima plant in Fukushima Prefecture, triggering the worst radiation leak since Chernobyl in the 1980s. The country relied on nuclear sources for almost 30 percent of its electricity before the disaster.

LNG prices paid by Japan climbed to a record $16.96 per million British thermal units on Nov. 30 and traded at $16.76 per million Btu at the end of January, according to data compiled by Bloomberg. Until the nation completes additional capacity for turning liquefied fuel back into natural gas, the country can’t increase its reliance on LNG, according to Barclays PLC.

“Japan’s ability to burn any more incremental gas to meet its power demand this year will be heavily constrained,” said Amrita Sen, an analyst at Barclays in London who forecasts Brent may top $150 a barrel this year amid the tension with Iran. “Oil-fired generation is likely to step up to fill in a large part of Japan’s power shortfall, at least until a decision is made regarding whether to continue with nuclear power.”

Brent crude closed at $126.22 a barrel on the ICE Futures Europe exchange on March 13, near the highs reached last April and in August 2008. Prices have risen this year amid speculation that U.S. and European sanctions on Iran may trigger a military conflict that disrupts supplies in the Middle East. The region is home to more than half the world’s oil reserves.

South Sudan shut oil production in January after accusing its northern neighbor, from which it became independent in July, of stealing its crude. The dispute has removed about 360,000 barrels a day from global markets since the end of January and placed an “additional burden” on Japan, which relied on Sudan’s low-sulfur crude for power generation before the disruption, Deutsche Bank said.

Japan’s use of crude oil for generating power rose 118 percent to 8.8 million kiloliters in 2011, according to data from the Federation of Electric Power Companies of Japan. That was about 135,000 barrels a day in the second half of 2011, almost four times more than a year earlier, according to Deutsche Bank. Demand continued to increase at the beginning of 2012, rising 177 percent from a year earlier, the bank said.

Indonesia’s Minas crude, a grade whose low-sulfur content meets Japan’s oil-burning regulations, settled Wednesday at $138.30 a barrel, bringing its gain this year to 16 percent. The Minas premium over Brent was $14.14 a barrel, compared with an average of $9.11 over the last year, Bloomberg data show.

Japan is also using more fuel oil. Demand for the refining residue rose 22 percent in the second half of 2011 and was up 50 percent at the start of this year, Deutsche Bank said.

Low-sulfur waxy residual fuel oil, a benchmark grade for Japanese power producers, settled at $132.40 a barrel on March 14 in Singapore, exceeding the previous record of $131.35 on July 15, 2008, according to Bloomberg data. It fell 0.7 percent Thursday to $131.35 a barrel.

The increase in crude and fuel-oil consumption comes as Japan’s LNG processing power falls about one-third short of the 93 million tons it would need to replace all the nation’s nuclear reactors while servicing gas-company customers, according to Bloomberg calculations using a December forecast by the Institute of Energy Economics.

Japan may already be purchasing more LNG than it can process, trade ministry data show. The nation’s power producers have enough gas-fired generators for about 63 gigawatts a year, according to trade ministry data. That’s equivalent to about 63 million metric tons of LNG. Japan imported almost 71 million tons in the year through March 2011.

Not all of Japan’s LNG is imported for power generation. Tokyo Gas Co. and Osaka Gas Co. also pump the fuel into their networks for heating and other purposes.

Japanese officials are wary of turning back to nuclear power. With the closure of Tokyo Electric Power Co.’s largest unit in Niigata Prefecture for maintenance on March 26, Japan has only one of its 54 reactors in operation.

Assuming none of its reactors returns before the last remaining unit shuts for maintenance on May 5, the country will have no atomic power.

Utilities are running stress tests to assess whether reactors can withstand the kind of earthquakes and tsunami that caused the meltdown at Fukushima.

“This is a test of the Japanese government’s seriousness about energy security,” said Nobuo Tanaka, a former director of the IEA and now an associate with the Institute for Energy Economics.

The Nuclear Safety Commission endorsed the first of those tests on March 23, triggering public protests.