Japan’s nuclear ramp up to weigh on Asia oil and gas market

The approval in Japan to restart nuclear reactors, the first since the earthquake and tsunami that led to the Fukushima Daiichi nuclear plant disaster in 2011, is another bearish development for oil and gas markets in Asia, the most important market for Middle East producers.

Japan’s Nuclear Regulation Authority, last week gave final approval to restart two reactors at Kyushu Electric Power’s Sendai plant, about 1,360 kilometres south of Tokyo.

The plant’s two reactors had been shut down after the Fukushima disaster, along with 48 others across the country. Now, the Sendai plant is the first to have met the much tougher standards set by the authority, which was set up after the disaster with a strict safety mandate.

The Sendai reactors still must get approvals from city and regional governments before they can resume operations, but they are expected to be clear to start producing electricity again from early next year.

Sendai is one of 10 utilities that have applied so far to get safety approval for 20 reactors.

The shutdown of Japan's nuclear power sector has hit the country hard, both economically and environmentally.

According to the International Energy Agency, Japan’s carbon dioxide emissions rose by 70 million tonnes, or 5.8 per cent, in 2012, a rate of growth that had not been seen in two decades, as fossil fuels were burnt to make up for the loss of 90 per cent of the electricity generation that had been coming from nuclear power. About 30 per cent of Japan’s total electricity had been supplied by the nuclear sector before the Fukushima disaster.

Japan’s prime minister, Shinzo Abe, has been making great efforts to soothe public opinion to start getting nuclear capacity back online.

The increase in fossil-fuel imports was also a large contributor to Japan’s record trade deficit of ¥6.9 trillion (Dh236 billion) in 2012.

The most expensive and least efficient method of power generation is oil-fired, which accounts for about 15 per cent of Japan’s power generation and will be first to be substituted, says Laszlo Varro, the head of power, coal and natural gas analysis at the IEA.

However, the natural gas market is likely to feel the impact even more, as Japan has relied heavily on LNG for gas-fired generation – which runs more consistently than oil-fired – to fill the power generation gap left by nuclear. Now, says Mr Varro, “there is a feeling in the gas markets that Japan has turned the corner”.

The Japanese nuclear ramp-up comes at a time when a considerable amount of new LNG supply is due on the market.

Australia has seven large LNG programmes at various stages of development, with total investment of more than $200bn, and production from those plants is due to start hitting the Asian market soon, adding to the more than 20 million tonnes a year of LNG Australia already exports from its three big LNG plants.

Australia is set to surpass Qatar as the world’s biggest exporter of LNG, according to Citibank, which forecasts Australia’s exports will climb to 83 million tonnes a year by 2020, compared with 79 million tonnes for Qatar.

The market already has been weak, mainly because of lacklustre economic performances in Asia and elsewhere.

LNG prices for delivery to north-east Asia were at US$12.50 per million British thermal units at the end of last week, near to their lowest levels since 2011. The good news for Japan’s nuclear industry is likely to darken the mood further in the LNG market.

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