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Guest Commentary: What will be Japan's choice in supplying its energy demands?

Guest Commentary: What will be Japan's choice in supplying its energy demands?

2011-03-30 14:03:00
Lior Cohen, Energy Analyst for Trading Energy,
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What will be Japan's choice in supplying its energy demands?

The adverse affects of the tsunami attack on Japan's economy are far from over (see here a preliminary outlook on Japan's aftermath). Nonetheless, Japan will need to look towards importing energy sources to replace the power loss in the nuclear reactors.

Japan relies heavily on nuclear as one of its prime sources of energy. Japan is the third worldwide in nuclear energy usage, and prior to the earthquake had 54 nuclear reactors that supplied in 2009 27% of Japan's electric needs. The Japanese government planned to increase the share of nuclear power in total electricity generation to 40% by 2017 and to 50% by 2030. This recent turmoil however might make the government reconsider its plans on this front.

In the earthquakes 11 of Japan's nuclear reactors were damaged. Thus, it's estimated that 10-20% of Japan's energy sources from nuclear power were damaged.

Let’s examine the two main sources of energy Japan will likely to consider in dealing with its current energy shortage:

Oil

Japan is the third largest importer of oil after United Stats and China; it imported 4.3 million bbl/day in 2009, mainly from the Middle East (nearly 80%).

Due to the earthquake, five oil refineries were damaged, causing a drop of nearly 1.2 million bbl/day in oil output, which is at least 26% percent of Japan's current capacity. Japan may look towards Russia, South East Asia, and Africa to import oil.

Natural Gas

Japan is the largest importer of liquefied natural gas, and is the world largest holder of natural gas reserves with 738 billion cubic feet (Bcf) and over 40 operating LNG import terminals, as of January 2011.

It's reported that only one small gas terminal, Shin Minato LNG, was shut down because of the recent earthquake, allowing the country to continue importing LNG mainly since most of the natural gas fields are located in the western coast, and the tsunami attacked the eastern coast. In order to cover the loss in the nuclear energy supply, Japan might fall back on natural gas to fill in the energy shortage. Qatar, Russia, and Indonesia have already offered Japan LNG.

There are several reasons why Japan may consider relying more on natural gas over crude oil (if possible of course):

1. The current high prices of crude oil;

2. The recent Libyan war is causing a disruption in crude oil supply, so it contributed towards the tightening of the oil markets (see here for more on the Middle East turmoil and its affect on crude oil prices);

3. As stated above, several of Japan’s oil refineries were damaged, so that Japan will need to import refined oil, which will be more costly than crude oil;

4. On the other hand, most of Japan’s natural gas fields and import terminals weren’t damaged in the earthquake so that there is less of a chance of impediments vis-à-vis natural gas imports and delivery.

There are news items of how Japan's shift towards purchasing LNG affects the liquefied natural gas market:

In Bloomberg it was reported that the average cost of shipping liquefied natural gas may rise by 67%, from an average rate of 60,000$ during last quarter to 100,000$ in this quarter. Partly because of Japan's growing need in importing LNG.

There were also reports that Japan received emergency liquefied natural gas from Malaysia's state-owned oil company Petronas, and from Indonesia to cope with its energy shortage (For more on the considerations about recovery of Japan see here).

By: Lior Cohen, Energy Analyst for Trading Energy

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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