In this Special Report we analyse the prospects for nuclear power restarts in Japan and the outlook for the country's broader energy mix. As one of the largest consumers of energy raw materials in the world, Japan's demand patterns and energy policy decisions will create ripple effects across the global markets. The rise in LNG prices in Asia is a reflection of higher demand from Japan as it substitutes nuclear power with gas-fired electricity generation. Crude oil and coal imports have also soared, though our power and oil & gas analysis and forecasts suggest that heightened demand for these two fuels will be temporary; merely supporting the energy sector until it recovers from the 2011 supply shock. Natural gas utilisation, however, will become a great deal more entrenched, ensuring Japan remains a long-term customer of some of the world's largest LNG suppliers.
At the moment all of 50 nuclear reactors are offline. This gaping hole in Japan's electricity generation is being filled by thermal sources (oil, natural gas and coal), which has led to soaring electricity prices, which in turn are placing significant cost pressures on Japan's consumers, manufacturers and exporters, and risk undermining the effects of 'Abe-nomics'.
In spite of strong popular opposition, we anticipate the financial burden will prompt two nuclear re-starts in mid-2014, assuming that: a) reactors pass the NRA safety inspections, b) the Fukushima clean-up proceeds without complications that would encourage further public opposition, c) pressurised water reactors (assumed to be safer) are prioritised for re-start over boiling water reactors.
The outlook post-2016 is purely speculative at this point as the 2016 election will be a wildcard for energy/nuclear policy.
However, in terms of our base-case scenario, we are operating under the assumption that two to three reactors will come online per year from 2015 onwards. Not all reactors will restart; we forecast about 40-50% of total capacity eventually rolling back online. This will taper demand for oil- and coal-fired electricity generation, but in our view, not for natural gas. The construction of new natural gas infrastructure, from LNG re-gasification terminals, to transmission pipelines and gas-fired power plants, means that natural gas will become entrenched in Japan's electricity mix for the long haul. Official data show more than 5GW of new gas-fired capacity due to come online in 2014 and 4.5GW by end-2017.
This forecast bodes well for LNG deliveries to Japan. Our research suggests that there appears to be a slight increase in volumes earmarked for delivery in 2016-2018.
Pricing of its gas deliveries is the vital issue for Japan and for several of its major suppliers such as Qatar, Russia and Nigeria.
The Japanese government has become much more vociferous about the long-term prices it is willing (or unwilling) to pay and the culture of oil-price indexation. Over 2013, the Japanese buyers seem to have managed to balance LNG spot purchases with bringing forward the delivery date of some contracted volumes. Contracts with Australian, but most crucially, US suppliers, which will come into play in 2016/17, will likely change the leverage that Japan has on pricing, as the US suppliers in particular have indicated willingness to be much more flexible than traditional players.
We conclude the Special Report with a primer on Japan's pilot exploration efforts with methane hydrates; methane trapped in ice, which could alter Japanese demand patterns if extraction proves commercially viable in the coming years. The alteration could be moderate or completely radical, depending on technology, costs and environmental risks associated with methane hydrates extraction. While these changes remain to be seen, the government (via JOGMEC) is demonstrating the motivation and perseverance to explore this possibility - highlighting that this is a crucial element of Japan's energy planning.