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Analysis: LNG, coal likely to fill vacuum if Japan's nuclear woes drag on

Highlights

12 reactors on deadlines to upgrade safety measures by end-2022

Platts Analytics expects potential nuclear shortfall to aid thermal fuels

Too early to project incremental demand to plan cargo buying: traders

Singapore — Potential delays in the restart of some nuclear plants in Japan because of maintenance and upgrading security requirements may open up a window of opportunity for the country to boost imports of thermal coal and LNG, according to analysts.

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Any potential boost to Japanese LNG imports will help support prices, as Japan has eschewed spot LNG purchases in recent months on stagnating demand, and regional markets are oversupplied with cargoes from new projects in Australia and the US.

Japan's nuclear regulator, the Nuclear Regulation Authority (NRA), tasked the operators of several nuclear plants to "terror proof" their facilities, but they have warned that they could miss the deadlines to finish work.

NRA has said in a recent order that operation of the reactors could be suspended if the work was not completed on time.

"Our electricity balances for Japan have been assuming that the work would be completed during routine refueling and maintenance, but Kyushu Electric has just announced they will shut the Sendai #1 reactor on March 17 and the Sendai #2 unit on May 21," S&P Global Platts Analytics said in a research note.

"Based on official data, the reactors will remain shut until December 2020 and January 2021, respectively. Both units have a capacity of 890 MW. The downward revision in nuclear output will clearly translate into higher demand for thermal fuels -- both coal and gas will be impacted," the note added.

A source at a Japanese utility said Thursday it was too early to estimate the impact it might have on incremental demand for coal and LNG.

"There is a possibility for LNG and coal procurement increasing but there is no impact in the prompt market as of now. We do not know whether plants will shut down yet so we cannot move on the procurement end to buy additional cargoes," the source added.

However, Platts Analytics estimated that power generation by coal-fired plants will increase by 3 TWh for the year, and gas-fired generation by 6 TWh. For gas, this means an increase of 3.6 million cu m/d on average from March through December, which is equivalent to slightly more than one cargo of LNG per month.

"It should be noted that Kyushu Electric's shutdown of the nuclear plants coincides with Japan's peak coal-fired generating period between June and February," Matthew Boyle, lead coal analyst at Platts Analytics, said.

"Kyushu Electric also provides electricity to other regions, including Shikoku and Chukoku. Therefore, we expect coal-fired plants also supplying electricity into these regions to also increase utilization rates to ensure continued power supply. There is some latent coal-fired capacity in the Kansai region which could help meet some of this shortfall." he added.

Japan's LNG and coal demand trend

CAPACITY ADDITION

Kyushu Electric is expected to ramp up its 1,000 MW Matsuura Power Station Unit 2 ultra-super critical power station by the end of the year. On the assumption that it will operate at its nameplate thermal efficiency of 46% and a coal calorific value of 6,000 kcal/kg NAR, Matsuura 2 will consume around 1.8 million mt of thermal coal annually, Boyle said.

"As Matsuura No. 2 will come online ahead of the shutdown of Kyushu Electric's Sendai nuclear plants, we have already incorporated this additional coal-burn into our forecast. Japan will import and consume 113.4 million mt of thermal coal in 2020, down 0.7 million mt year on year," Boyle said.

By the end of 2022, 12 reactors are facing deadlines to upgrade safety requirements. Kansai Electric's Takahama #3 and #4 units have deadlines in August 2020 and October 2020, respectively.

The company has said it was working to try and meet the deadlines.

"Our current assumption is for no further shutdowns to occur, but we are monitoring this situation carefully," Platts Analytics said.

Japan relies on LNG imports for most of its natural gas supply. Isshu Sugawara, the Japanese minister of Economy, Trade and Industry, said recently that Japanese companies would commit $10 billion to finance LNG projects in Asia for supporting the growth of the regional market.

Nine large utility companies dominate the power sector in Japan, and while they can all switch some generation from coal to gas, the switching potential varies greatly among the different firms.

"Despite the short-term gains, the longer-term trend for Japan's thermal coal imports is expected to trend slightly downwards, driven by ongoing nuclear restarts," Australia's Department of Industry said in its September Resources and Energy Quarterly report.

"However, the outcomes of safety reviews, potential delays in implementing counterterrorism measures, and ongoing community opposition could lead to delays in reactor restarts," it added.

Japan is expected to gradually pivot away from coal. Construction of a 1.3 GW coal-fired power project -- originally due to commence in August 2019 -- has been delayed, and may not proceed at all. The delay brings the total number of canceled or delayed coal-fired power projects to three in 2019 alone, the September report said.

-- Sambit Mohanty, sambit.mohanty@spglobal.com

-- Masanori Odaka, masanori.odaka@spglobal.com

-- Deepak Kannan, deepak.kannan@spglobal.com

-- Edited by Manish Parashar, manishparashar@spglobal.com --Platts Natural Gas Alert--

New horizons: The forces shaping the future of the LNG market

As significant additions of elastic LNG supply and demand challenge traditional business models, and the trend towards LNG commoditization gathers pace, what lies ahead?

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