LNG-Soaked Japan Burns Oil as Nuclear Reactors Sit Idle

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. (DBK) LNG can meet about two-thirds of Japan’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 after last year’s Fukushima Dai-Ichi 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 northeast of Tokyo, 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.

Record High

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. (BARC)

“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.”

Military Conflict

Brent crude closed at $126.22 a barrel on the ICE Futures Europe exchange on March 13, near the highs reached in April 2011 and 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 350,000 barrels a day from global markets, according to International Energy Agency estimates.

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 Cos. That was about 135,000 barrels a day in the second half of 2011, almost four times more than a year earlier, Deutsche Bank said. 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 yesterday at $139.58 a barrel, bringing its gain this year to 17 percent. Minas’s premium over Brent was $14.04 a barrel, compared with an average of $9.07 over the last year, Bloomberg data show.

Fuel Oil

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 rose 0.7 percent yesterday to $132.25 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.