Japan nuclear restart to hit oil usage hardest: survey

[TOKYO] Japan's reboot of nuclear power, expected to begin early next year, is set to punish oil imports the most as utilities slash the use of their highest-cost fuel and shut ageing oil-fired plants, a survey of Japan's nine biggest power companies showed.

Utilities in Japan are keen to close oil-burning units, not only because crude and fuel oil are their most expensive fossil fuels, but also because the plants are costly to maintain. This could see the world's No 3 oil consumer cutting use further just as weak global demand and ample supply are already pushing the international Brent benchmark to multi-year lows.

In the fiscal year ended March 31, Japan's big utilities burned 18 per cent less oil - mostly opting for cheaper coal - after oil for power use hit a 16-year high the previous year.

Units burning liquefied natural gas (LNG) and coal are more likely to be kept running, keeping imports of those two fuels near or higher than the records reached since the world's worst nuclear disaster in 25 years at the Fukushima power plant in eastern Japan in 2011.

Nearly half of the 92 oil-fired generators operated by the companies surveyed are more than four decades old. Many of them are in use only because all of Japan's nuclear reactors were eventually shut down after the Fukushima crisis. "We are concerned about the increasing risk of unplanned oil-fired plant shutdowns because of the high level of operations of ageing units," Chugoku Electric Power told Reuters in the survey.

None of the Japanese utility companies surveyed provided forecasts for fuel use for next year, citing the lack of any firm schedule for nuclear restarts. Last month, Japan's nuclear regulator approved the restart of two reactors on the island of Kyushu, but the units still need to clear final safety checks and win approval for reactivation from local officials.

Company responses in the survey indicate most would like to cut fuel oil and crude usage. Besides the probable return of at least a few nuclear reactors to operation, new gas- and coal-fired plants are also scheduled to come online.

Tokyo Electric Power - owner of the Fukushima power plants - burned 35 percent less crude and fuel oil in the most recent fiscal year, and said it would cut use of the two fuels if it restarted any nuclear reactors.

Kyushu Electric Power, the closest to getting a reactor restarted, said it wanted to rely on fuel oil and crude only for emergencies or peak periods "because they are the most expensive options for power generation".

Fossil fuel imports by utilities in the three business years since Fukushima have on average been about 3 trillion yen (US$28 billion) higher per year than the yearly costs before 2011, contributing to a string of record trade deficits.

Japan, which takes about a third of global LNG shipments, imported a record 87.73 million tonnes of the fuel in the year through March for both utilities and other uses, paying an all-time high of 7.34 trillion yen.

Thermal coal imports hit a record of 111.52 million tonnes after rising 5 per cent from the previous year.

Oil use for power fell nearly a fifth over the same fiscal period to less than 418,000 barrels per day (bpd), down from a 16-year high of nearly 510,000 bpd the previous year.

Japan's 48 nuclear reactors were all gradually shuttered after the earthquake and tsunami of March 2011.

Utilities have applied to restart 20 reactors, and last month the Nuclear Regulation Authority approved a restart of two units at Kyushu Electric's Sendai plant in southwestern Japan, expected to be scheduled for early 2015.

While power firms reduced oil use last fiscal year, their coal use rose nearly 20 per cent and LNG by less than 1 per cent.

That trend has held in the first eight months of this calendar year, with fuel oil and crude use falling about 15 per cent, while coal use rose 6 per cent and LNG 1 per cent.

With several new, more efficient gas and coal units coming online this year and next, further cuts in the use of high-cost oil capacity is likely on the cards.

Despite this week's fall in Brent crude futures to the lowest in more than two years, oil-fired power generation remains the most expensive.

Factoring in maintenance, repairs and other costs, oil-fired generation is more than twice as expensive per kilowatt-hour as the next cheapest fuel, which is LNG, according to the most recent evaluation from the Japanese government in 2011.

In the year that ended March 31, oil made up nearly 17 per cent of thermal fuel use by volume, while accounting for about 24 per cent of thermal fuel cost, according to Reuters calculations based on government data.

LNG had a slightly lower use versus fuel cost ratio, but coal made up 34 per cent of use last year and was less than 10 percent of the cost of thermal fuels.

This makes coal the obvious choice to replace any cut in oil use not accounted for by restarted nuclear plants. - Reuters