(EnergyAsia, March 23 2011, Wednesday) — The following is an edited version of an analysis by Vivek Mathur of US-based Energy Security Analysis Inc (ESAI) of the Japanese oil markets following the impact of the deadly earthquake and tsunami on March 11.
At the time of writing, 890,000 b/d, equivalent to 19% of Japan’s total crude distillation capacity, was offline. Refinery runs in March should average only 2.9 million b/d, down by a million b/d from February levels.
As undamaged plants gradually restart, ESAI expects second quarter runs to recover to 3.4 million b/d, and third and fourth quarter runs are forecast to average 3.4 and 3.5 million b/d respectively. Overall, Japan’s refinery throughput in 2011 is expected to fall 3.8% (140,000 b/d) from 2010.
Consequently, the reduction in product supply will be significant, but not crippling.
In 2011, ESAI expects Japan’s gasoline output to be lower by 60,000 b/d compared to last year, while diesel supply will be reduced by roughly 35,000 b/d on average. Jet fuel supply will register a modest fall of 6,000 b/d, while fuel oil supply will diminish by 15,000 b/d.
ESAI expects gasoline and fuel oil will be in short supply in Japan, despite an initial drop-off in demand. The gasoline shortfall will peak at 130,000 b/d on average in March-April. Korea’s exportable gasoline surplus will average 125,000 b/d in this time-frame, and could likely cover a substantial portion of that deficit, but Japan will have to draw in cargoes from Singapore.
This is bullish for gasoline-Dubai spreads in the near-term. Japan’s own rising supply and weaker demand will moderate that deficit in later months.
In contrast, higher demand for low-sulphur fuel oil by Japan’s utilities will continue to keep fuel oil fundamentals tight through the year, propping up regional LSFO prices. Lower diesel output will reduce Japan’s surplus to only 75,000 b/d through May, down from about 150,000 b/d in the same period last year.
With the use of diesel generators now and reconstruction efforts likely supporting diesel demand later this year, we expect Japan’s diesel surplus to fall to 120,000 b/d in 2011, compared to a robust 170,000 b/d in 2010.
This could potentially reduce Japan’s clean diesel exports by 50,000 b/d this year. ESAI believes that the production shortfalls will be partially compensated by refineries in neighbouring countries, particularly Korea, which has the right volumes and quality available to meet Japan’s fuel standards.
In the near-term, lower Japanese clean diesel output will also tighten Asia’s diesel fundamentals, while reducing its own and potentially also South Korea’s ULSD exports to Latin America and Europe.
Power supply disruption
As of March 17, four Japanese nuclear power plants were affected by the earthquake and tsunami. ESAI estimates that 9,700 MW of Japan’s nameplate nuclear power generation capacity is offline. This disruption will have a significant impact on the input fuels for power generation in Japan, affecting demand for fuel oil, LNG, and crude oil.
In 2010, Japan’s utility fuel oil use averaged 100,000 b/d, while demand for crude for direct burn was 70,000 b/d. LNG demand for power generation was 3.4 million tons.
If the 9,700 MW capacity lost from nuclear power were to be met exclusively by oil-fired generation, that would require about 370,000 b/d of oil (fuel oil and crude oil). If this lost power supply is met only by gas-fired power plants, it would require 14 million tons of LNG per year – that’s a little over 10 million tons from current levels of LNG use for electricity generation in Japan.
Electricity generation, however, will be constrained in the short term. If we assume that the generating capacity to meet power demand is more likely 6,790 MW (i.e. 70% utilisation of 9,700 MW), and half of that need is met by LNG and oil fired generation equally, Japan’s demand for LNG should grow by 5 million tons in 2011.
Similarly, incremental oil demand (fuel oil and crude) will be 130,000 b/d. Total oil demand in the utilities sector will rise to the 270,000-300,000 b/d range this year. Japan’s increased demand for LNG will translate into an additional seven tankers of LNG per month.
For now, it appears that Japan’s numerous LNG terminals could handle this extra traffic. Of Japan’s 23 terminals, only two are affected: JX Energy’s Hachinohe terminal in the Tohuko region, and another in Sendai. Russia, South Korea, and Qatar have agreed to supply extra spot volumes.