Japan's ruined infra may delay energy demand revival

Japan is in urgent need to import coal, LNG and oil products to restore energy consumption, but damaged storage tanks, ports and refineries render the country incapable of absorbing all the fuel and raw materials foreign suppliers might want to rush in.

The world's No 3 economy is struggling to restore power supplies as electricity blackouts affect five million houses and to ramp up availability of gasoline to end queues of cars at fuel stations after the earthquake and following tsunami flattened buildings, factories and ports. The country has initiated measures such as reaching out to neighbour South Korea for fuel, seeking more liquefied natural gas cargoes and stepping up purchases from the spot market as it grapples with ways to repair the destruction estimated to be as high as USD 200 billion. But end-users remain out of reach because of damaged infrastructure, even if supplies reach ports. "We think recovery in general may not be seen in Japan for years as full recovery will require massive coordination across sectors - power, industry, residential, commercial and public infrastructure," said Erwin Chan, a consultant with FACTS Global Energy. "Restarting operations in some sectors could be done in a matter of days, but it will take time to scale up production to original levels." The country will be able to restore oil product output to 3.4 million barrels per day (bpd) by the end of March, a level above domestic demand, as idled refineries resume operation, but disruptions in distribution routes remain a major bottleneck, Akihiko Tembo, chairman of the Petroleum Association of Japan, said. The earthquake was the fifth most powerful to hit the world in the past century. It surpassed the Great Kanto quake of September 1, 1923, which had a magnitude of 7.9 and killed more than 140,000 people in the Tokyo area. Global companies from semiconductor makers to shipbuilders face disruptions to operations after the quake destroyed vital infrastructure, damaged ports and knocked out factories supplying everything from high-tech components to steel. "Undoubtedly, the short term is likely to see some adverse demand impact," said Amrita Sen, analyst with Barclays Capital. "With the main sources of genuine demand reduction being the shutdown of damaged thermal power plants, the loss of some petrochemical capacity, and the general reduction in activity caused by dislocations and damage to economic infrastructure." Banri Kaieda, Japan's trade minister, said the government has asked refiners located in the west to boost run rates to 95% or more to help stabilise demand and supply in the quake-hit areas of the east. Demand recovery Even after Japan's energy infrastructure stabilises, damage to the country's industries and a broader dampening of economic activity could continue to curb energy demand, analysts said. Major automakers and electronics manufacturers like Sony and Toyota Motor Co have stopped production at some of its facilities due to damage from the quake. This fall in industrial activity is also likely to partly mitigate any rebuilding led economic recovery, analysts said. "Although there may be diesel demand for recovery operations, lower consumption as a result of disrupted commercial activity is forecast to more than offset this," said analysts at energy consultancy Wood Mackenzie in a recent report. The Kobe quake of January 1995 is estimated to have cost around USD 100 billion and while manufacturing production fell by 2.7% in January, it climbed 4.4% over the following three months. But the level of power disruption from the recent quake and tsunami is likely to prevent a similar V-shape economic recovery and keep a lid on energy demand. "I think there is potential for demand destruction," said Tony Regan, analyst at Tri-Zen Capital in Singapore, adding that if Japan dips back into recession, it could see lower demand for LNG and could possibly shed the 7 million tonnes increased LNG demand it saw in 2010. Power cuts slash growth Tokyo Electric Power Co (TEPCO), the nation's biggest utility and operator of the stricken Fukushima nuclear plant, began rollover blackouts after the quake to curb consumption as it grappled with loss of supplies. Japan's nine prefectures affected by the rolling blackouts represent 40% of the country's gross domestic product (GDP), BNP Paribas said in a report. The blackouts aim to reduce power consumption in these areas by an average 25%, it said. "If this were to continue for a full quarter, GDP growth in 2011 will be reduced by about 3%," BNP Paribas said. "If the power rationing indeed stops in late April, the negative impact on growth in 2011 from supply constraints would be smaller, at about 2%. In any event, the economy will face major supply constraints moving forward." Prior to the earthquake, markets had been expecting GDP growth of around 1.7% in 2011. It has also declared force majeure on some coal vessel deliveries due to outages at its coal-fired plants, trade sources said on Wednesday. To help Japan cope, Royal Dutch Shell Plc Chief Executive Peter Voser said the company was planning to supply more LNG and low sulphur fuel oil, to help make up for the loss of nuclear generation. Countries such as South Korea, Russia and Indonesia have already pledged to supply the country with extra cargoes of oil, coal and LNG. Yet, a lack of sufficient handling capacity may mean that these supplies will take a while to reach consumers. "We need more infrastructure to transport LNG from the ports," said Takahide Kiuchi, an economist at Nomura Securities. "We need a lot of huge pipelines connected to the affected areas, so it could take a long time. Blackouts will likely last until at least the summer." Sendai City Gas said on Thursday it will likely take more than one month to restart its Shinminato LNG facility, which was damaged by the earthquake. The earthquake that struck the world's third-largest oil consumer caused the loss of around 9,700 megawatts (MW) of nuclear and 10,831 MW of thermal power generation. Crude, naphtha consumption falls Three Japan-bound naphtha shipping fixtures from the Middle East, totalling 205,000 tonnes, failed after last week's earthquake forced the shutdown of several crackers. The failed fixtures prompted talk that Japanese cracker operators were not able to take in cargoes arriving as far ahead as the second half of April, creating a build-up in prompt supplies. Similarly, crude consumption in Japan has declined as more than 30% of the country's refinery capacity, or 1.4 million bpd, has been shut because of the quake even as some get ready to restart operations. This has forced Japan to sell crude oil that it cannot process into refined products, while importing products where it is in deficit such as diesel and gasoline. SK Innovation, which owns South Korea's top oil refiner SK Energy, said on Wednesday it would purchase 2 million barrels of crude oil from quake-hit Japan and was also considering more crude purchases. The Korean firm will also supply 260,000 barrels of gasoline to Japan and agreed to supply 10,000 tonnes of fuel for power generation and fuel for fishing ships, the company said.