Sept. 12 (Bloomberg) -- Premiums for oil burned in power stations are forecast to extend a three-month advance as the shutdown of Japan’s last nuclear reactor leaves utilities little choice but to increase use of the fuel.
Analysts at SMBC Nikko Securities Inc., Elements Capital Inc. and Citigroup Inc. are among those who say the cost of crude typically used in Japan’s power stations, such as Indonesia’s Duri or Vietnam’s Su Tu Den, may advance. The premium for Duri cargoes above benchmark prices rose a third month to an average of $4.93 a barrel in August, the highest since March, according to data from the Platts pricing company.
Japan’s oil consumption is rising as Prime Minister Shinzo Abe attempts to cut an unprecedented trade deficit spurred last year by the cost of replacing energy supplies lost as a result of the 2011 Fukushima nuclear disaster. The nine utilities with atomic plants, including Kansai Electric Power Co., which will shut Japan’s last operating reactor on Sept. 15, lost about 1.6 trillion yen ($16 billion) combined in the year ended March 31.
“It clearly can be constructive for premiums,” Seth Kleinman, the head of energy strategy at Citigroup Inc. in London, said in an e-mail. “These are small, niche crudes with small, niche markets, so when you get a big new buyer in the room like the Japanese, these premiums can respond pretty impressively.”
Japan buys low-sulfur, or sweet, oil from Africa and the Asia-Pacific region that meets its specifications for use in power generation. Imports of crude including Duri, Su Tu Den, South Sudan’s Nile Blend and Gabon’s Rabi almost doubled to more than 245,000 barrels a day in 2012 compared with 2010, according to government data. Purchases rose 25 percent from the previous year, compared with a 2.7 percent gain in total oil imports.
Duri traded at an average premium of $4.30 a barrel more than Dated Brent crude this year, compared with $6.65 in 2012 and $2.41 in 2010, the year before the Fukushima disaster, according to Platts. Su Tu Den’s premium was $3.56 a barrel in August and averaged $3.36 this year compared with $1.28 in 2010.
Brent crude, the London-traded benchmark for more than half the world’s oil, rose to the highest in six months in August, trading at $117.34 a barrel on the ICE Futures Europe Exchange. October futures were at $111.55 in Singapore today.
Oil-fired power generation is the most expensive among thermal power sources, costing 36 yen per kilowatt hour, according to Japanese government estimates. The cost for nuclear power is at least 8.9 yen per kilowatt hour, while coal and liquefied natural gas are estimated to be 9.5 yen and 10.7 yen, respectively.
Kansai Electric’s 1,180-megawatt No. 4 reactor at the Ohi plant in Osaka and the country’s other nuclear reactors must remain closed pending safety reviews by the Nuclear Regulation Authority, a process that the regulator said may take six months. The NRA received the first applications from four utilities including Kansai Electric on July 8, meaning after the shutdown of the Ohi the country will be without nuclear power for at least the rest of the year.
“For peak winter demand, Kansai will probably have to rely on thermal power plants that burn crude,” Takashi Hayashida, the chief executive officer of Elements Capital, said from Tokyo. “Premiums for these crudes over the benchmark index could be supported by Kansai’s buying if weather gets colder than usual. Kansai and other utilities will start making deals for December loading crude soon.”
Utilities boosted crude and fuel oil use since 2011 more than cheaper alternatives such as liquefied natural gas or coal. Consumption in the year ended March 2013 almost tripled from two years earlier while LNG use rose 34 percent and coal slightly declined, according to data from the Federation of Electric Power Cos.
While oil use is higher than before the Fukushima disaster, utilities have cut back on consumption in power stations in recent months. The country’s 10 regional power producers used 25 percent less crude and 29 percent less fuel oil in the three months ended June 30 compared with a year earlier, according to data from the FEPC.
“It’s a natural choice for power companies to reduce the use of oil-fired power plants, if they can, because of higher generation costs,” Akira Yanagisawa, a senior economist at the government-affiliated Institute of Energy Economics, Japan, said by phone from Tokyo. “Power companies contributed the most to the growth of Japan’s oil demand in the past two years as reactors were shut one by one.”
The loss of Kansai’s reactors might not have a significant impact on Japan’s crude demand, Eugene Lindell, an analyst at JBC Energy GmbH in Vienna, Austria, said in an e-mail. Lindell said he was “cautious” about seeing increased use of oil as the country tries to consume more LNG and coal.
The resumption of exports from South Sudan, whose Nile Blend crude is favored by Japanese utilities, may also curb crude premiums, according to Kleinman. The country, which holds sub-Saharan Africa’s third-biggest oil reserves, said it may take three months to restore production to maximum capacity after a dispute with neighboring Sudan shut oilfields.
An agreement with Sudan last week allowing cross-border flows to resume will enable South Sudan to return production to full capacity of 350,000 barrels a day, Petroleum Minister Stephen Dhieu Dau said Sept. 9 in the capital, Juba.
“Sudan was sorely missed when Japan was buying up all light sweets and low-sulfur residue in the Pacific basin,” after the Fukushima disaster, Kleinman said. “It looks like Sudan is coming back. If you have 200,000 barrels a day of Sudanese crude, that somewhat negates the loss of the two reactors.”
An increase in fossil fuel imports would cause a third consecutive annual trade deficit in the 2013 fiscal year, according to the IEEJ. Fuel import costs may rise 9.6 percent to 27 trillion yen in the year ending March 31, according to the IEEJ’s estimate. Japan paid about 18 trillion yen to purchase crude, gas and other fuels in the year ended March 2011, according to data released by the Ministry of Finance.
“There is no doubt that Kansai Electric will be forced to consume more crude than it originally planned” as the company doesn’t have much excess coal and gas power generation capacity to make up for lost nuclear output, Osamu Fujisawa, an independent energy economist in Tokyo, said by phone.
Maximum utilization at thermal power plants ranges from 70 percent to 80 percent because of maintenance, equipment faults and a lack of fuel-receiving capacity, Mitsuo Fujiyama, a Tokyo- based analyst the Japan Research Institute, said in a May 2012 report.
Kansai Electric, Japan’s second-biggest power company, originally planned to start two reactors at its Takahama nuclear plant in July, followed by its No. 3 and No. 4 Ohi units in November and December, according to a November 2012 plan. It applied for NRA approval for all four units in July, meaning they are unlikely to restart before the end of the year.
Even with the earlier assumption that the four nuclear reactors would begin restarting from July, Kansai Electric’s utilization rates of coal and gas power plants in the six months ending March 2014 were estimated at 62 percent and 68 percent, respectively, the company’s Osaka-based spokesman Keisuke Wakasa, said by phone. The utility at the time assumed a utilization rate of 41 percent at its oil-fired plants, Wakasa said. He declined to comment on the company’s maximum utilization for each type of thermal power plant, citing the sensitivity of the information.
Coal-fired generators owned by Japan’s 10 regional utilities operated at 74 percent in June, while utilization at LNG-fired plants was 66 percent, according to data from the FEPC and the Ministry of Economy, Trade and Industry. There are no data available for last year because the ministry started compiling power output data by fuel type in April.
In addition to the limited spare coal- and gas-generation capacity, there are restrictions on how much LNG and coal Kansai Electric can consume per year, Wakasa said. The utility can only about 4.5 million metric tons of coal and 7.3 million tons a year of LNG because of constraints related to fuel receiving facilities and other factors, Wakasa said in an e-mailed response to questions.
Kansai Electric planned to consume 3.7 million tons of coal and 7.2 million tons of LNG in the year ending March 2014 even if the four reactors are restarted by the end of 2013, it estimated in November 2012.
These constraints leave Kansai Electric few choices to meet demand for electricity in the coming winter, Fujisawa said. If the company has to substitute only oil-fired power plants for the two Takahama reactors, it would need to burn more than 45,000 kiloliters a day of additional crude, or 280,000 barrels a day, Fujisawa said.
“If Kansai Electric’s utilization rate of oil power plants starts rising, prices of direct-burning crude and fuel oil for power generation could be affected” because the market size for the fuels is relatively small, said Hidetoshi Shioda, a senior energy analyst at SMBC Nikko.
Japanese utilities would need about 400,000 barrels a day of crude and fuel oil with no nuclear reactors running, according to Kleinman’s estimates. That drops to about 300,000 barrels if two of Kansai’s reactors resume, he estimated.
The two Ohi reactors may be restarted as early as January after a group of seismologists appointed by the NRA agreed this month that an earthquake fault under the plant is inactive, Shioda said in a Sept. 3 report. The start of the Takahama reactors may be delayed as the NRA requires the utility to improve defense measures against tsunamis, he said.
While Kansai Electric would likely prioritize use of coal- and gas-fired capacity as much as possible in the absence of nuclear power generation, it will be forced to rely on more expensive oil-fired output if colder-than-usual temperatures boost demand, Shioda said.
--Editors: Alexander Kwiatkowski, Justin Carrigan