Massive fuel restrictions underline Japan's LNG supply vulnerability

Recent massive-scale fuel restrictions at JERA's multiple thermal power plants in Tokyo Bay have underlined Japan's vulnerability once again in facing LNG shortages in a short time period from a sharp demand increase and delays in ship arrivals.

JERA, Japan's largest power generation company, imposed rare massive-scale fuel restrictions affecting as much as nearly 7 GW of a gas-fired power generation capacity in Tokyo Bay over March 27-29, as the country's LNG inventory fell to the lowest level since January 2021.

JERA's fuel restrictions-led capacity outage rose to as much as 6.72 GW on March 29, from 4.98 GW on March 28 and 5.95 GW on March 27 as a result of weather and oceanic phenomenon, the company said in filings to the Hatsuden Joho Kokai System.

JERA imposed the fuel restrictions March 27-29 as a preemptive step from delays in LNG carrier arrivals caused by high waves in mid-March that had prevented ships to berth for a few days at a time when LNG inventory declined from increased demand, a JERA spokesperson said.

The fuel restrictions took place as the Tokyo area was expected to have a reserve power supply capacity of more than 10%, a level seen sufficient to ensure electricity supply, over demand during the three days.

Despite the fuel restrictions over March 27-29, Japanese refiner, gas utility and LNG supplier did not receive emergency requests for supplying low sulfur fuel oil, LNG cargoes to JERA, given expectations of easing fuel shortages after expected arrivals of LNG carriers in coming days, according to sources familiar with the matter.

Tokyo Gas, meanwhile, received LNG carriers over mid- to late March, in line with its procurement plan at its Negishi, Ohgishima and Sodegaura terminals in Tokyo Bay, where it jointly operates the Negishi and Sodegaura terminals with JERA, a Tokyo Gas spokesperson said.

Depleted inventory

JERA's March 27-29 fuel restrictions came after Japan's LNG stocks held by power utilities dropped 5% on the week to 1.52 million mt on March 24, the lowest since end-January 2021, when they stood at 1.49 million mt, according to data from the Ministry of Economy, Trade and Industry.

LNG inventory accelerated declines in March as a result of robust demand for power generation in most parts of the country following colder-than-usual temperatures, according to METI, compared with 2.70 million mt on Dec. 31, 2023, the highest for end-December in the last five years.

The latest fuel restrictions underscored that Japan's LNG security could be threatened in a span of several weeks as a result of experiencing stronger-than-expected demand, outages at other power generation sources and delays in the arrival of ships.

In the event of LNG shortages in such a short time span, there are scarce options available for Japanese LNG importers to secure alternative cargoes as the lead time to procure LNG from abroad requires about two months.

Without having LNG supply contingency plans and a storage capacity that stabilizes LNG supply, "there is a risk of electricity supply disruptions from power plants being shut from fuel restrictions as a result of fast depleting LNG stocks from such unexpected situations as delays in LNG ship arrivals and increased demand from lowered temperatures," said Takayuki Nogami, chief economist at Japan Organization for Metals and Energy Security, or JOGMEC.

LNG inventory plummeted to as low as 1.48 million mt on March 31, the lowest since end-December 2020, a level that led local power utilities to restrict gas-fired power generation due to depleted LNG stocks in January 2021.

Low LNG stocks in January 2021 triggered fuel restrictions at gas-fired power plants that had tightened the country's power supply-demand balance nationwide, following intermittent cold spells that significantly boosted power demand and reduced LNG inventory.

Policy response

As a policy response to January 2021 LNG shortages, METI formulated its fuel guidelines, under which major power utilities are expected to ensure "appropriate" LNG stocks from both tank operations and procurements, especially during high demand seasons to avert tightening the supply-demand balance.

The fuel guidelines also call for major power utilities, which have roughly 90% of Japan's LNG thermal power capacity, to make an effort to secure "appropriate" LNG inventory levels and procurements because any act of influencing the price fluctuations process would be seen as market manipulation under the Guidelines for Proper Electric Power Trade, even when the utilities tend to minimize fuel stocks more than necessary.

"In light of the fuel guidelines, the [recent] implementation of fuel restrictions was undesirable," a METI official told S&P Global Commodity Insights. "We intend to scrutinize why it happened" because the 5-7 GW of gas-fired capacity outage from fuel restrictions could have had "significant impact."

"We have an awareness of the issues as in whether the current framework is sufficient to secure the fuel in a stable manner," the official added.