On 11 March 2011 a 9.0 magnitude earthquake occurred approximately 75 km east of the Oshika Peninsula of the Tohoku region in northern Japan. The earthquake triggered a series of destructive tsunami waves that subsequently struck the Japanese mainland, in some cases travelling 10 km inland.
As a result of these events it is expected that Japan’s electric power companies will increase utilisation of gas-fired power generation capacity in order to offset reduced nuclear power generation output. With only very limited indigenous gas production, any significant increase in gas consumption will result in higher imports of LNG. With imports of LNG into Europe reaching record highs in recent months it is conceivable that import levels will decline as a higher demand pull from Asian markets causes spot prices in Northeast Asia to strengthen and draw LNG supply out of the Atlantic Basin, possibly forcing spot gas prices in Europe to increase. What is the potential magnitude and timing of incremental Japanese LNG demand and what will be the impact on European LNG import volumes?
European energy demand
Since the middle of 2008 the quantity of LNG entering the European market has continued to grow with import volumes for 2010 some 55% higher at 64.7 million t than the three year annual average of 41.7 million t for the period 2006-2008. However, statistics at the regional level mask diverging geographical trends that have developed over the last five years. In the period to the end of 2008 LNG imports into the Mediterranean market had been on an increasing trend while those into Northern European market had been on a declining trend. Until 2008 the main driver of LNG import growth in the Mediterranean region was Spain where gas demand had been boosted by relatively strong economic growth, limited gas supply alternatives and low hydropower output as a result of lower-than-average rainfall.
Unfortunately, the Mediterranean economies fared particularly badly in the economic crisis with the result that both gas demand and LNG import quantities declined in early 2009 and only started to grow again towards the end of 2009.
The UK has Europe’s longest established, deepest and most liquid gas trading hub, the National Balancing Point (NBP) market, with the result that, following commissioning of additional LNG import capacity in 2009, the UK has been viewed by LNG marketers as an attractive outlet for flexible LNG supply and used as a gateway to the Continental European market. For some years now the UK has had a structural year round gas supply deficit that could be met by either imports of pipeline gas from Belgium via the UK Interconnector, Netherlands via the BBL pipeline or Norway via the Langeled and other pipelines, or as LNG.
Japanese generating capacity
The real challenge facing the Japanese power sector relates to loss of power generating capacity in the service areas supplied by Tokyo Electric Power Co. (TEPCO) and Tohoku Electric Power Co. (Tohoku Electric). Along the eastern seaboard region there are five nuclear power plants comprising 15 reactors with an aggregate generating capacity of 13.5 GW. At the time of the earthquake, four of the reactors were off-line for maintenance and the remaining eleven were immediately shut down. Eight of these plants were subsequently brought off line but a serious incident occurred at the Fukushima Dai-Ichi nuclear power station which has resulted in the plant becoming inoperable and unlikely to operate again. In addition to these nuclear power stations, TEPCO also operates the giant 8.2 GW Kashiwazaki-Kariwa nuclear plant that comprises seven reactors located on the west coast of Japan. This plant was partially damaged by an earthquake in 2007 and, at the time of the most recent earthquake, only four of its reactors had been returned to service with 3.3 GW still under inspection and not expected to return to service for several months.
In many countries the loss of significant regional power generation capacity in a particular region can be compensated, by the transfer of power into the affected region from adjacent regions. Unfortunately, it is not possible to do this in Japan to any significant extent due to the structure of the industry. The 10 electric power companies that serve consumers in Japan have discrete service areas with minimal inter-connectivity. Thus, Tohoku Electric has a 250 kV connection with Hokkaido to the north and a 500 kV connection with TEPCO to the south. TEPCO has three connections with Chubu Electric Power Company to the west with an aggregate transfer capacity of 1 GW although the two systems operate at different frequencies. Thus, to all intents and purposes any power capacity shortfall in the Tohoku Electric and TEPCO system can really only be supplied from Chubu and even then imports will be limited due to HV line capacity. Historically, TEPCO has imported less than 5% of its power supply from adjacent regions.
Analysis of the expected development of the Tohoku and TEPCO power systems suggests that there will be an increase in LNG demand due to the earthquake. The potential increase in LNG imports over the period to the end of 2012 could be as much as 1.3 million t per quarter although the magnitude of imports will depend on the rate at which damaged power generation capacity can be brought back on line. With Japan forecast to import around 70 million t of LNG during each of this year and next year, the potential incremental demand as a result of the earthquake equates to around 3.5 million t this year and 4.1 million t in 2012.
Significant new liquefaction capacity has been commissioned over the course of the last two years, such that by the end of 2010, additional nameplate liquefaction capacity of more than 60 million t has been be added since the end of 2008. With this increase, global LNG production capacity had increased from around 166 million tpa. at the end of 2005 to 266 million t at the end of 2010, a massive 60% increase.
Comparison of our forecast of global LNG demand with the availability of LNG supply indicates that sufficient capacity appears to exist to supply both ‘pre-earthquake global demand’ and any potential incremental demand that may emanate from Japan as a result of the earthquake. The demand outlook indicates that sufficient LNG production capacity is expected to exist such that utilisation of capacity will not need to exceed 90% in order to meet demand – an operating level that should be achievable for most producers.
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