The Greatest East Japan Earthquake and Tsunami: One Month On
Just over one month after the earthquake struck in Japan, the energy industry is still feeling the short term effects of the disaster. In the near term, the focus is on getting the energy supply up and running at a normal level again. The longer term effects are more uncertain and are dependent on potential changes to the energy mix change that Japan may make going forwards. There are other far?reaching consequences for global energy preferences which may manifest themselves once the Fukushima disaster is finally brought to a close.
Refining capacity
In the immediate aftermath of the earthquake and tsunami, six refineries with a combined capacity of 1.34m bpd were closed. One month on, operations remain curtailed at three of these plants, capping maximum throughput by a potential 0.56m bpd, almost 12% of domestic capacity. The closures comprise units at JX Nippon Oil & Energy’s 145k bpd Sendai and 189k bpd Kashima refineries, and Cosmos Oil’s 228k bpd Chiba plant.
JX Nippon has indicated plans to partially restart the Kashima refinery by summer 2011, but the fire?damaged Sendai plant is not expected to resume operations before 2012. The company has reported reduced throughput following the disaster, with March production down 23% on the previous year. The trend is anticipated to continue in April, for which projections indicate a 19% year?on?year decrease. Cosmo Oil has given no indication of a reopening date for the fire?damaged Chiba refinery.
To compensate for the lost production resulting from these closures, some refiners have increased throughput and raised capacity at unaffected refineries. Assuming these refineries were running at a pre?quake utilization equivalent to the Japanese average (90%), expanded capacity plus the effect of full utilization would imply an increase in throughput of 0.2m bpd (to 1.5m bpd from 1.3m bpd). In addition to statements from these specific refineries/companies, reports suggest that, as of March 30th, average utilization of operable refineries in Japan had reached 96.5%. Application of this rate to total post?quake operable capacity indicates that the shortfall engendered by the closures discussed above has been completely compensated for domestically.
On the import side, crude and product supply chain restoration efforts are well underway according to the Petroleum Association of Japan. While operations were suspended at 29 oil tank facilities in affected areas immediately after the earthquake, shipping activities had been resumed at 24 (83%) of those facilities as of April 1st. It has been reported that JX has entered a time swap agreement for two million barrels of crude loading in April and May with South Korea’s SK Innovation. Under the terms of the agreement, SK will buy JX’s April Middle East liftings with the reverse arrangement for May cargoes. The time swap allows the Japanese refiner to delay its crude deliveries by one month such that inventory does not build up in light of the operative closures. There are also indications that Kuwait will donate five million barrels of oil to Japan, equivalent to around 120% of Japan’s 4.2 million barrels of daily import.
The Japanese government has, as a secondary measure to ensure continuity of supply, lowered the obligatory level of emergency stocks to be held by industry from 70 to 45 days’ worth, releasing an estimated 66m barrels of crude and products into the market. According to the IEA, the Japanese government will ‘carefully consider when to replenish the obligatory industry stocks, in close consultation with domestic industries, so that such a move will not have a substantial impact on the oil markets’.
Meanwhile, Japan’s Ministry of Economy, Trade and Industry (METI) is discussing with Japanese refiners whether to reverse last year’s decision to decrease nameplate refining capacity to aid the country during its reconstruction. Cosmo Oil is reportedly considering a reversal of last year’s move to reduce its cumulative capacity by 12%. Fuji Oil and Toa Oil are looking to postpone the removal of a combined 160bpd at the Sodegaura and Toa Oil plants.
OPEC’s outlook on the Japanese situation is that the disaster will ‘affect oil demand only marginally’. The IEA viewpoint in March was that Japanese oil demand would decrease by 120,000 bpd year on year. This assessment has now been revised with the agency now forecasting an increase in oil demand in Japan of 30,000 bpd, primarily due to increased thermal power generation capacity following the unfolding situation at Fukushima nuclear power plant.
Early fears about a catastrophic impact on Japan’s refining and petrochemical industries have been assuaged. The country’s engineers and importers have cooperated efficiently with their international partners to minimize disruptions to Japan’s oil trade and industry. This is good news for the shipping industry as Japan remains the world’s third largest importer of oil and oil products.
Effects on LNG
It is only now that the position of LNG imports into Japan following the earthquake and tsunami is becoming clearer. Japan’s LNG import terminals were left undamaged in the disaster, encouraging the markets to consider an increase in gas imports to substitute for oil. Indeed, initial estimates of additional imports varied between 11 and 18 cargoes per month above normal requirements. Japanese imports in 2010 were at their highest level at just over 70 million tons and thus the additional requirements could potentially have had a huge impact on an already tight market. Global LNG production levels are high with Qatar now producing at maximum levels from its new mega trains. This, combined with product from within the region, has enabled Japan to acquire additional volume without too much difficulty.
Other Japanese utility companies have managed to divert a number of cargoes to Tepco to meet its increase in LNG demand with Kogas of Korea supplying eight cargoes in April. In addition, both Shell and Gazprom have diverted cargoes into Japan to meet requirements.
Qatar is to supply 20 incremental cargoes to its long term customers in Japan between the end of March and June. TEPCO has met cargo needs for both April and May and the volumes are such that some of these may be moved into June. A tender which had been promised by Pertamina of Indonesia has now been sold to a number of Japanese utilities companies. In addition, Adgas are now to supply additional volumes of one cargo per month (previously tendered as spot cargoes) to TEPCO, who have been their long term offtaker and who had previously reduced their requirements in 2010.
In the longer term, it seems that additional volumes are likely to stabilize around toe 500/600,000 per month level, although this will be dependent on the Japanese summer and winter of 2011. This translates into between seven and nine additional cargoes per month which, at the current time, seems to be well within the capability of the market.
Effects on the dry markets
The BDI has fallen consistently since the earthquake in Japan, from 1562 to 1284 today. If we compare this to similar situations in Japan such as the Kobe earthquake of January 1995 then the BDI fell 6% in the weeks following the quake but then bounced back by 20% in the next three months. It is thought that this resurgence in the market was down to companies effectively reconfiguring their supply chains. This time however, companies will need to focus on the supply of power due not only to power supply lost during the earthquake but also because of the uncertainty still surrounding the situation at the Fukushima Daiichi plant. A recent timetable released by Tepco, the operator of the plant, suggests that the nuclear crisis could take nine months to resolve. Although ideally this should mean an increase in thermal coal imports in the medium term which could benefit a depressed dry bulk market, this does depend on the ability of Japanese power plants to further increase coal power generation. In 2007, Japan’s largest nuclear reactor was shut for 21 months following an earthquake. The following year, coal imports rose from 125m tons to just over 130m tons.
Commodity prices do not seem to have been affected directly by the crisis in Japan. Earlier this month, a UK listed miner settled record prices for the annual thermal coal contracts in spite of the damage to several Japanese coal?fired power plants. Xstrata and Chugoku Electric of Japan closed a deal for the miner to supply thermal coal at $130 a ton, up 32.6% from $98 a ton of 2010?11. The flooding in Australia’s coal?rich state of Queensland significantly reduced coal supply, consequently pushing up coal prices. Factors outside Japan are dominating bulk commodity markets, swamping any effect from the earthquake and tsunami.
Furthermore, the exclusion zone around Fukushima is not preventing bulk cargoes from reaching Japan. There have been no further terminal closures, indeed, many of Japan’s ports did not experience any damage, providing ample capacity to continue imports of coal and other dry bulk needs. According to reports, only one iron ore and three coal handling ports were damaged. Mining companies are also reporting that sales to Japan are continuing as normal.
In the longer term , the aftermath of the earthquake could not only mean an increase in thermal coal but also other commodities which could be used in the rebuilding of the infrastructure damaged by the impact of the earthquake and the subsequent tsunami such as steel, cement and wood. Our brokers have not noticed any particular increase in such commodity imports to Japan, indicating that any reconstruction has yet to commence and may not do so for the next six months.
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SOURCE: Braemar Shipping Plc