Hormuz shutdown to cause electricity panic in Japan

Tensions over the Iran's nuclear development has been a factor to cause turbulence in the global energy market.

The strait of Hormuz might be closed in case of military conflict, it means suspending transportation of 17 million barrels per day of crude oil from Persian Gulf nations.

Some Persian Gulf nations such as Qatar and the United Arab Emirates are also known as major suppliers of Liquefied Natural Gas.

Japan has been eager to gather LNG for thermal power generation after suffering the severe earthquake in March 2011, in order to make up for the nuclear power shortage. The biggest part of the urgent LNG supply to Japan has been from Persian Gulf nations.

Japan's monthly LNG imports from the Persian Gulf area had been around 1 million tons prior to the earthquake. Those were based on long-term contracts held by CHUBU Electric Power Company, Tokyo Electric Power Company and some other utility firms.

Qatar decided straight away following the quake to supply extra 4 million tons of LNG to Japan over a year. Then additional shipments boosted Japan's LNG imports from Persian Gulf area significantly. It reached to 2.24 million tons in March 2012 when imports from the region accounted for 27% of total LNG imports by Japan.

Although the quantity from the Persian Gulf has calmed following the end of urgent shipments from Qatar, recent import figures are still over 1.5 million tons. Additional imports on 1 million tons per annum of new long-term contract between TEPCO and Qatar are scheduled to start in August.

The graph of Japan's LNG imports by origin describes that shipments from traditional main suppliers such as Southeast Asia and Australia have not increased after the earthquake despite stronger demand. The additional LNG supplies came from Persian Gulf, Russia, Latin America and Africa etc.

Japan imported LNG from 13-14 countries before 2010, but the number of exporting nations increased to 17 in 2011 then has risen to 20 in 2012.

Despite the diversification of supply sources, the most reliable supplier in case of emergency is Qatar which holds an annual 77 million tons of production capacity. Therefore, Japan's LNG dependence on the Persian Gulf area is unlikely to be less in the near term.

If Iran shuts the Hormuz strait, about 1.6 million tons per month of LNG supply to Japan will cease. Since the frequency of LNG tanker's departure toward Japan is every other day, even very short interruption could cause serious effects.

The suspended LNG is equivalent to about 500 thousand bpd of petroleum in order to generate same amount electricity. Japanese 10 major electric power companies used 470 thousand bpd of petroleum in total in June. Their historical record consumption of petroleum was 730 thousand bpd. We can imagin how the 500 thousand bpd of sudden additional demand causes turmoil in the market.

Meanwhile, LNG storage capacity in Japan is about 7.1 million tons which includes storage for city gas supply. If half of the storage capacity is used for electricity, domestic LNG-burning thermal power units could use up within 20 days in case of the high electricity demand period during summer and winter.

Especially, CHUBU is likely to be faced power blackout because 60% of its thermal power units use LNG as fuel and the company relies on Qatar for more than half of LNG supply. The company cannot restart its Hamaoka nuclear power plant over couple of years and its petroleum-burning units do not have enough supply capacity.

Recovery of Japan's energy use has disrupted

Energy demand has started to decreasing again in Japan.
The country's weekly crude oil processing showed recovery between March and early June this year, following the slump after the serious earthquake in March 2011.

However, the crude oil demand has declined from a year earlier again since the second week of June.
Current decline is more critical damage than last year. Last year's demand was compared to that in 2010 when economy showed steady recovery, but recent figures are compared to the post-earthquake situation.

Monthly electricity supply by Japanese 10 major utility companies also has shown sluggish. The electricity supply rose from a year ago in five consecutive months after February this year, but the growth rate in May was only 0.2%.

Let's have a quick look at more recent figures.
Electricity supply by Tokyo Electric Power Company fell 2.9% on year in June, according to the data released by the company. The supply in the first week of July sunk further to 8.9% from a year ago.
Other nine major companies' supply in June was likely to decrease as well, due to power saving caused by shuts of nuclear power units.

The below chart shows year-on-year growth of monthly electricity supply by TEPCO. Data until April 2012 were provided by the Agency for Natural Resources and Energy, while May and June numbers are estimated figures calculated by the TEPCO released data.

Nuclear power supply by the Japan's biggest electricity supplier has stopped entirely since April, and the growth of thermal power generation are shrinking throughout May and June.
Liquefied Natural Gas consumption for thermal power generation by TEPCO fell 0.9% on year in May for the first time decline in 15 months. The use of LNG decreased further to 5.7% on year in June.

TEPCO explains that the fewer LNG consumption was caused by maintenance shutdown at thermal power plants prior to the electricity demand period in summer. But the sluggish of regional electricity demand seemed to be an another major factor.

Such slump in electricity supply is match to the sluggish of petroleum demand that was mentioned in the beginning. These tendencies suggest that industrial activities are shrinking in Japan currently.

Power shortage risk in China to diminish

The typical seasonal problem in China - the shortage of electricity supply during summer has not been so much fear this year.

Since growth of electricity demand has exceeded the increase of electricity generation capacity in China, serious shortage of power supply were frequently seen during the peak demand season in summer and winter over the past several years.

However, very few power supply shortage were reported during the last winter season in early 2012. Then, sufficient electricity supply against expected demand is expected in the coming summer.

Declining coal prices in China seems to prove the forecast. About 80% of total electricity output comes from thermal power generation. Bulk of thermal power fuels are coal in the country.

Although coal prices should be steady during the second quarter prior to the strong summer electricity demand, current coal market in China continues declining since late 2011 due to the sluggish demand.

Both electricity supply and crude oil processing in China seem to appear steady growth tendencies for a long term. But recent movement suggests the growth is slowing.

The following chart draws transition of year-on-year growth electricity outputs in China. Before mid-2008, growth of power supply had been at 10-17%. It became to 10-15% in 2011 after the turmoil caused by the Lehman shock. The growth rate, however, dipped to the single digit level this year and keeps decreasing month by month.

It looks like right after the Lehman shock. Situation on growth of electricity demand in China seems like serious recession period. Slowing down of gross domestic product could be a natural consequence.

Increasing China's crude oil stocks

China's end-May commercial crude oil stocks rose 0.2% from a month before, according to Xinhua News. It was the third months consecutive increase.

In May, China's crude oil imports surged by 10.8% from a month ago to 6.02 million barrels per day, while month-on-month growth of crude oil processing was only 0.4%.

Since crude oil supply (net imports plus domestic production) exceeded throughput by 1.04 million bpd in May, increase of inventory was the natural result.

However, the increase rate of crude oil stocks was lower than 4.4% recorded in April when supply had exceeded demand by 520,000 bpd.

Necessary oil for strategic petroleum reserves into the total 80 million barrels of newly constructed sites seemed to limit the rise of commercial crude oil inventories.

On the other hand, even though a small amount of increase in crude oil stocks in May, it suggests that China's crude oil demand in the period was lower than expected. Crude oil inventories in the previous same month had recorded decrease over the past couple of years.

China crude oil demand keeps decreasing

Although China's crude oil throughput scored the record high of 9.35 million barrels per day in early this year, sluggish petroleum demand has kept crude oil throughput lower after that. April and May figures were lower than a the previous year's level.

Crude processing in June is also estimated lower further, according to media reports. Two giant state owned firms PetroChina and Sinopec are currently processing 7,09 million bpd of crude oil in total, that is down 0.2% from a month earlier.

June is known as the season for regular maintenance at refineries. Since crude oil throughput in June 2011 also decreased 4.5% from the previous month, current situation might not represent a slump.

Meanwhile, many regional refineries except for two giants are reported reducing crude processing rate significantly due to weak demand and unfavorable refining margins. Refinery utilization rates are less than 30% in some area.

The problem is that very few people expect shortage of petroleum products in spite of the sluggish growth of crude oil throughput.

China recorded 8.1% growth on its gross domestic product in the first quarter in 2012, while the growth rate in the second quarter is forecasted to below 8% or even below 7%.
However, flat or smaller petroleum demand compared to last year suggests that these lower economic growth forecasts might be even being overestimated.

On the other hand, the above chart shows China's recent relatively steady crude oil imports compared to sluggish growth of throughput. The country's crude oil imports rose 18.2% on year in May, according to the customs data.

The surge of imports did not caused by the actual consumption of course. Since China has completed the construction of total 80 million barrels of the new strategic petroleum storage facilities by early this year, the filling into these facilities seems boosting crude oil imports.

The monthly gap between net crude supply and throughput in China was averaged at about 200,000 bpd in 2011, but it has increased to around 600,000 bpd in the first five months of this year.

The additional 400,000 bpd could be for the strategic reserve. If China plans to fill up the new storage facilities during half year, the additional volume is make sense.
Meanwhile, the country's crude oil imports are likely to decrease by the amount in the later half of this year after finished filling up the strategic oil reserve.

Why is west-Japan so keen for nuclear?

To secure enough electricity supply into western Japan around Osaka and Kyoto during summer demand season, Kansai Electric Power Company may resume No. 3 and No. 4 reactors at its Oi nuclear power plant in the near future.
Regional local governments and the central government are expected to approve the restart. Meanwhile, possibility of large power outage forces opponents to be silence.

KEPCO is not able to meet electricity demand during the summer season without nuclear power supply. Since the two reactors will add nearly 2.4 million kilowatts of output capacity, the company can avoid serious shortage of power supply.

On the other hand, Tokyo Electric Power Company earlier said it is likely to supply enough electricity without nuclear power output even if under the heat wave conditions.

What causes difference between KEPCO and TEPCO?
We can find a part of the reason when watch the change in power output sources by each company over the past decade.

TEPCO and CHUBU Electric Power have increased their thermal power output capacity, while KEPCO has deepened dependent on nuclear power. KEPCO also seemed not to eager to upgrade thermal power facilities.

Breakdown of thermal power output capacity by fuel describes that liquefied natural gas is accounting for more than 60% of total thermal power generation capacity at TEPCO and CHUBU, while their old fashion petroleum-burning output capacity remains less than 30% of the total. But petroleum-burning output capacity is the biggest part for KEPCO's thermal power facilities.

Since very few petroleum-burn thermal power plants have been constructed in Japan after mid-1980's, more than half of KEPCO's thermal power units are aging facilities.

However, the poor thermal power output facilities is not only because of KEPCO. Japanese government has encouraged utility firms to develop nuclear power. Also global warming has pressured power companies to reduce carbon dioxide emission.

The reason why TEPCO has expanded its thermal power output despite such social environment was unexpected errors.
The company caused a scandal about faked maintenance records of nuclear power plants. After the revelation of the scandal in 2002, TEPCO's executives were forced to resign and its all nuclear power units were forced to shut for examination.

Then a heavy earthquake in central Japan in 2007 forced TEPCO's Kashiwazaki-Kariwa nuclear power plants to shut for long period.
Because of these serious nuclear power supply shortage, the company has been keen to secure alternative power supply sources.

CHUBU scrapped two reactors at its Hamaoka nuclear power plant in 2009 as there was no economic reason to spend huge amount of money to strengthen those old facilities. Since the company has no spare location to build fresh nuclear plants, it has increased thermal power output capacity.

In contrast to those, KEPCO has not had serious problem over its nuclear plants. The above chart shows KEPCO's stable nuclear power supply compared to TEPCO.
KEPCO seemed not to feel the TEPCO's scandal as their own affair because the company uses pressurized water reactor different from boiling water reactor which is used by TEPCO and CHUBU.

Seven out of the total 11 reactors owned by KEPCO are old facilities that started operation in 1970's. Their useful lifetime had finished long time ago. However, extending was not difficult supported by overconfidence over the safety of nuclear power plants. It was not only cost efficient compared to building new thermal power plants but was thought useful for global warming issue.

Over 40 years old reactors, however, are likely to be abolished as well as Hamaoka. Extending further to 50 years and 60 years without recognizing the aging is not realistic, especially in the earthquake-prone area like Japan.

Thus considering to build advanced thermal power units and new fuel unloading facilities is urgently required for KEPCO. Possible growth of electricity demand and troubles over aged thermal plants may urge it. But open discussion about such direction is not heard much.

Tokyo electricity demand does not show clear recovery

Electricity supply in the Tokyo metropolitan area in eastern Japan rose only 1.2% from a year ago in May at 21.6 billion kilowatt-hours, according to the Tokyo Electric Power Company. The amount was lower by 7.7% compared with May 2010. Supply in April was 22.1 billion kWh, up 6.1% on year but down 10.8% from the same month in 2010.

Although eastern Japan is under recovering from the severe earthquake in March 2011, current electricity demand remains lower than the same period in 2010 level. It is even lower than 2009 when post-Lehman shock economic slowdown depressed energy demand.

TEPCO says electricity demand in the Tokyo Metropolitan area during May was maximum 88% of its supply capacity, and no sign of supply shortage was seen. The company expects its electric power supply facility is likely to keep 7.7-7.9% of spare capacity in coming summer. It could maintain 4.5-4.8% of spare capacity even in the heat wave case.

TEPCO has lost 3.8 million kilowatts supply at Kashiwazaki-Kariwa nuclear power plant it had in the last summer, while the company has raised thermal power and hydroelectricity capacity urgently. Its total electricity supply capacity seems to add 3 million kw compared to last August.

Meanwhile, pace of recovery in electricity demand in the eastern Japan area remains slow. TEPCO has rushed to set up new gas-turbines fueled by gas oil and natural gas after the earthquake. However, its current usual supply capacity of about 40 million kw without nuclear power generation seems not enough to support steady recovery of electricity demand.

No one knows how long TEPCO has to keep shutting its nuclear power plants. On the other hand, there is no open discussion on constructing new big thermal power plants or new liquefied natural gas unloading facilities in order to replace with nuclear power. Thus growth of electricity power supply in the metropolitan area seems to be gradual for long period.
Of course, possible global recession might prevent the region's electricity demand from steady recovery.