Nuclear shut doesn't boost oil use in western Japan

Kansai Electric Power Company (KEPCO), that supplies electricity to big cities in western part of Japan such as Osaka and Kyoto, avoided power outage successfully during winter despite a lack of nuclear power supply. The company, however, is very eager to restart its nuclear power plants. Because its electricity supply capacity without nuclear power is likely to be smaller by 14% than expected demand during coming summer.

KEPCO's maximum electricity supply in August 2011 was 22.59 million kilowatts. About 3.43 million kw was provided by nuclear power plants. Thermal power will have to compensate the lack of nuclear power supply in coming summer season.

KEPCO has thermal power generation capacity of 16.91 million kw in total. But regular maintenance and unexpected troubles usually reduce its utilization to about 80% of the rated capacity. Hydroelectricity is able to provide maximum 5.3 million kw. Although the sum total of thermal power supply and hydroelectricity is 18.88 million kw, it is lower by 17% than the maximum demand in last August.

Even if the company can expect some relief by other electricity suppliers, it is difficult to avoid power outage without asking to consumers to reduce electricity use by 15% compared to the previous year.

The following chart shows KEPCO's maximum electricity supply and its power generation capacity over the past couple of years. Monthly supply by sum total of thermal power and hydroelectricity have always exceeded thermal power generation capacity. It means that KEPCO always must reduce electricity supply when it shuts all of its nuclear plants.

Electricity consumption in Kansai area may be required to reduce by 15% from a year ago during the active demand season. About 5-10% power saving is also necessary in other period.

If the power-saving to depress thermal power generation, petroleum consumption by KEPCO is unlikely to increase significantly.
 A 15% reduction of electric power use will limit KEPCO's monthly electricity supply to 10 billion kWh during summer period. Hydroelectricity can supply 1.6 billion kWh per month, while liquefied natural gas and coal are likely to generate 6 billion kWh. Therefore, petroleum-burning thermal power plants are required to supply only 2.4 billion kWh.

Monthly petroleum consumption by KEPCO is likely to remain at about 550,000 kiloliters, or 110,000 barrels per day. It seems to be a small quantity despite a serious situation of the shut of entire nuclear power plant in the megalopolis area.

Meanwhile, KEPCO seems to have boosted operations at its LNG-burning thermal power plants. The company's montly LNG consumption has almost reached to the physical limit of 700,000 metric tonnes.

If KEPCO continues to use monthly 700,000 mt of LNG to make up for a lack of nuclear power supply, its natural gas consumption in 2012 will rise 45% from a year ago.
Failure of additional LNG purchase may force the company to use more petroleum.

US sucks excess Saudi oil

Recently, media reported that Saudi Arabia is boosting crude oil exports to the U.S.

Members of the Organization of Petroleum Exporting Countries have been increasing crude oil production following the western sanction against Iran. Their outputs have rebounded to the pre-Lehman shock level.

Especially, Saudi Arabia that has the largest spare production capacity lifts its crude oil production significantly. OPEC evaluates the Kingdom's February output at 9.66 million barrels per day, meanwhile International Energy Agency estimates that Saudi production has already reached to the 10 million bpd level.

Japan and China has reduced Iranian crude oil import since the beginning of this year, while France and U.K. has stopped buying Iranian oil. These nations have increased purchase from Saudi Arabia.

But media reported U.S. also had boosted Saudi crude oil imports by 38% from a year ago in the first 10 weeks of 2012. The kingdom's crude oil shipments to U.S. was reported rising about 25%.
Import of Saudi crude oil by U.S. seems to have recovered 1.5 million bpd, the same level as the pre-Lehman shock. U.S. imported 1.3 million bpd of Saudi crude oil in December 2011.

However, the U.S. has not imported Iranian crude oil for a long time. Thus American refineries should not require any alternative crude oil to Iran.
On the other hand, petroleum consumption in the U.S. is declining despite recent indicators suggesting economic recovery.
Why U.S. needs to boost Saudi oil import?

Crude oil import statistics over the past three months show that total U.S. imports surged in February. Import from Canada, that had increased significantly after the Keystone pipeline started business operations in February 2011, was capped in 2012.

Crude oil stocks figures show that crude oil inventories in the Gulf of Mexico area are not increasing significantly despite the surging imports. But stocks in the Midwest area is rising despite reduction of Canadian oil flow.
Imported crude oil carried by tankers seems to be transported into Midwest through pipelines.

Iranian crude oil outputs are expected to be falling in March but are still avoiding large amount of reduction. It means other OPEC members' extra production may cause excess supply in the global market.

Saudi Arabia has decided to increase production levels further in July when EU's import ban against Iran is scheduled to be effected, because of request by the Obama administration.
U.S. is responsible to over-supply which may happen. Is that the reason why U.S. lifts Saudi crude oil import with cutting Canadian oil purchase despite sluggish domestic demand?

These imports may be suitable for supplement to the strategic petroleum reserve that was reduced by 30 million barrels last year for urgent release. But absorbing commercial stocks is likely to stimulate the crude oil market and that is not desirable for recent rising gasoline prices.

Is Japan able to cut LNG prices?

Recently, only two of total 54 nuclear power units are operated in Japan. Thus thermal power generation has been boosted to make up for the nuclear power shortage.

Petroleum consumption by Japanese ten major electric power companies in 2011 surged 80% from a year ago to 17.76 million kiloliters, while liquefied natural gas (LNG) consumption rose 20% on year to 49.13 million tonnes, according to the federation of electric power companies of Japan.

Fuel costs for thermal power generation spent by ten major firms during April and December 2011 increased by 950 billion yen ($12 billion) from a year ago.

Expanded fuel costs were mainly caused by the volume of consumption, but higher fuel prices pushed the costs up as well.

Increased petroleum demand from Japanese electric power generation seemed to do little to lift crude oil prices. Japan has been a negative factor against the crude oil market because of its declining total demand. Tensions over Iranian nuclear development have been supporting crude oil prices for past several months.

However, petroleum is not main fuel for Japanese thermal power generation. Volume of electricity generated by LNG is 2.5 times larger than that generated by petroleum.
If LNG prices have not soared in step with crude oil, power companies' spending could be much smaller.

Since Asian LNG prices have been set by formulas based on Japan's average crude oil import prices, LNG traces price movements in the crude oil market.
The following chart shows Japan's average import prices of LNG and petroleum. LNG prices exceeded petroleum last year since electric power companies bought many expensive spot cargoes added to usual long-term contracts.

LNG prices are usually higher than petroleum prices when crude oil markets decrease sharply such as later half of 2008, but higher LNG prices compared to petroleum when crude oil markets are rising seems to be abnormal condition.

World LNG market is apparently over-supply. Even if International Energy Agency forecasts that global LNG demand will increase to 540 billion cubic meters by 2020 from 265 billion cubic meters in 2011, surplus is also predicted to expand to 90 billion cubic meters from 80 billion cubic meters during the same period.

Natural gas prices in North America, that has declined significantly after the shale gas revolution, are less than one sixth of Asian LNG prices.Aggressive supply from North America to Asia may reduce Asian LNG prices considerably as Qatar has expanded its supply capacity.

To boost supply from North America, huge investments are required to both suppliers and consumers. Also number of LNG tankers are not enough for increasing supply of spot cargoes, because LNG carriers have been built based on long-term projects.

Japanese government and power companies have to decide to choose natural gas as the future main energy source to start such investments. But many people still do not give up nuclear power and concerns over the global warming make them hesitate to boost use of fossil fuel.

No one can provide alternative to Saudi oil

Crude oil prices fluctuated turbulently in the first couple of days in March following a report about an explosion on Saudi Arabian pipeline. NYMEX WTI April crude oil futures contract surged above $110 per barrel for the first time since May 2011, but started falling after Saudi officials denied the news. Crude oil prices eventually ended the week at negative range compared to previous week.

Recently, South Sudan halted its 350,000 barrels per day crude oil production because of conflicts on sharing oil revenue with neighboring Sudan. Then Sudan's bombing attack against oil fields in South Sudan was reported. However, these situations failed to lift crude oil prices.

The reason why only Saudi Arabia has special influence to the market is not only the country's large crude oil output volume but also its ample spare production capacity.

Saudi Arabia increased its crude oil production level from around 9.0 million bpd to the second half of 9 million bpd after the civil war entirely hampered Libyan output.

Libyan civil war boosted WTI crude oil prices to $150/bbl in April last year, but urgent release of strategic petroleum reserve by Organization for Economic Co-operation and Development member nations and Saudi Arabian apparent output hike led the market to below $80/bbl later.

Libya's crude oil production is recovering sharply since Q4 2011, while Iraqi output is increasing steadily as well. Iraq has also started operations at its 400,000 bpd new oil export terminal at Persian Gulf.

Iraqi crude oil output is expected to grow from present 2.7 million bpd to 4 million bpd by mid-2014. Libyan production, which is estimated at 1.3 million bpd in February, is also projected to rise to 2 million bpd within five years.

Tensions on Iran is supporting the crude oil market presently, but decrease of Iranian oil supply is unlikely to affect the market seriously except for war case. Even though increasing refinery costs caused by different type of alternative crude oil supply may affect petroleum products markets.

Currently, most members of Organization of Petroleum Exporting Countries including Iraq and Libya are being estimated to produce crude oil close to their capacity limit. Russia, which is currently producing about 10.3 million bpd, is unlikely to have enough spare capacity as well.

Saudi Arabia was estimated to be pumping 9.8 million bpd of crude oil in February maintaining nearly 2.5 million bpd spare capacity. The kingdom is the sole supplier that has an enough spare capacity for boosting crude oil production in case of emergency. Conversely, no one can provide plenty of alternative crude oil if Saudi Arabia fails to supply.
Crude oil prices are likely to show a crazy surge if the U.S. and other nations do not decide urgent and massive release of oil reserve.