The end of Japan's nuclear era. A new opportunity for Russian gas?
It has been little over week since Japan was hit by a tsunami causing an unprecedented natural catastrophe in Japan. The disaster is of apocalyptic scale and will have many implications for the energy future of Japan. Its consequences are also reaching beyond Japan and affecting world's energy markets and the way policy makers are rethinking the price of a nuclear renaissance. In the case of Japan, already many believe nuclear energy will no longer be sustainable. Low carbon alternatives to nuclear energy are few. Since renewable energy cannot provide sufficient energy for decades to come, the only low carbon alternative seems to be gas. In this sense a new window of opportunity could emerge for the hydrocarbon development of Russia's Far East, a region abundant in gas and geographically near to Japan. Political relations have, however, been overshadowed by a dispute over the South Kuril Islands, a dispute that dates back to World War II. Russia remains the only country with whom Japan did not conclude a peace treaty after World War II. The EEO wonders whether this tragic chapter in Japan's history could result in an opening towards closer cooperation on hydrocarbon production between these two neighbours.
Energy apocalypse
The devastating tsunami, unprecedented in Japan's history, caused apocalyptic damage to the country's infrastructure, including its energy infrastructure. It damaged several of its nuclear power plants (NPP). Meanwhile eleven of its fifty nuclear reactors have been shut off. As a consequence, according to a press release by Energy Security Analysis Inc. (ESAI), it is estimated that 9,700 MW of nuclear power generation is offline. The situation concerning the reactors of Fukushima seems far from stable and new quakes could further deteriorate the situation. The natural disaster also caused some of Japan's gas storage facilities to set fire. Controlled explosions of LPG tanks at some refineries were still ongoing on Wednesday. Most of Japan's refineries have been shut down. The Japanese governments has ordered cuts in power supplies in order to manage the country's energy deficit. The prime minister personally addressed all Japanese in an SMS to reduce their energy consumption. There is even a shortage of batteries in Tokyo.
Nuclear energy denounced
Japan's energy security situation has always been a volatile one, but now faces even greater challenges. As one the world's leading economies, it is the world's fourth largest energy consumer. However, it is poor in natural energy resources. Japan has therefore heavily relied on nuclear energy as an important power source, covering almost a third of its total energy consumption. Moreover, the share of nuclear energy was destined to grow to 42% by 2017, according to some forecasts. After this nuclear catastrophe, it seems inevitable that Japan will have to denounce nuclear energy, since it will no longer be able to justify the risks.
The Japanese government is reportedly already withdrawing its authorisation for the construction of projected NPPs. Public opposition to the use of nuclear energy has been historically motivated. Yoshitsugu Otaka from Overseas Strategies at Japanese Cosmo Oil, speaking on his own behalf, explains that the Japanese people have had a strong aversion of nuclear energy due the nuclear bombing of Japan in World War II. Furthermore, even before the earthquake, there already existed great distrust not just towards TEPCO, but towards other power companies as well. All of them had been involved in covering up failures at their NPPs in the past, Otaka tells EEO.
Alternatives to nuclear
The only low carbon alternative to nuclear power that could meet Japan's energy need seems to be gas. Currently gas makes up 17% of Japan's energy mix with an annual gas consumption of approx. 80 BCM, all of which is imported as LNG. In this respect, incremental gas demand could be met with more gas from Russia's Sakhalin peninsula. Or in other words it could serve as an incentive to increase gas production in the region. Prime Minister Putin seems to believe in such an option and already ordered to Sakhalin hydrocarbon development to be speeded up.
Yoshistugu Otaka agrees that gas is the most realistic low carbon alternative, but underlines that this will require huge investments in new storage facilities and the conclusion of new long term contracts (LTC). Instead oil demand for power generation is likely to grow considerably in the near future and at the expense of LNG, according to Otaka. In this respect national security concerns are likely to outweigh environmental concerns, Otaka believes.
If earlier Japan's Ministry of Economy, Trade and Industry planned a reduction of its domestic refining capacity due to a decrease in demand for petroleum products, after the nuclear disaster, Otaka believes, this policy will be fully revised. ESAI estimates show that if nuclear power generation is to be replaced by oil-fired generation, then this would require an additional 370,000 b/d of oil. Substituting the loss in nuclear power supply by LNG, would require 14 mln tonnes of LNG per year. As to illustrate, currently Japan uses around 4 mln tonnes of LNG / year for power generation. Most likely the power shortage will be met by a combination of both oil and gas.
A new Russian role?
Already Japan has requested Russia to assist it with providing additional energy supplies. In response, Russian Deputy Prime Minister Igor Sechin, on 14 March, stated that his country was prepared to provide additional supplies of coal and gas. Negotiations on increasing coal supplies to Japan are reportedly ongoing.
Sakhalin Energy, in which Japanese companies Mitsui and Mitsubishi together have a 22.5% share, intends to supply Japan with an extra of 200.000 tonnes of LNG from its Sakhalin LNG plant in the near future. The volumes are rather symbolic. New larger volumes of additional supplies will require new contracts to be concluded first. Russian President Dimitri Medvedev stated that he deemed a revision of current LNG supply contracts as possible.
LNG from Qatar is probably one of the few that is currently able to provide a substantial share for Japan's incremental demand. Nevertheless, Japanese energy industry sources believe that Russian gas eventually will become increasingly important in meeting Japan's future gas demand as an alternative to nuclear power. However, there is the assumption that the dispute over the South Kuril Islands would have to be resolved beforehand, which would smoothen the way towards increasing Russian gas imports, possibly via a to be built sub sea gas pipeline.
Russia is the fourth biggest oil supplier to the Japanese market and it is currently assessing the options to divert additional oil supplies via the newly built East Siberia - Pacific Ocean (ESPO) oil pipeline. ESPO was taken into use last year. Although Japan is in need of additional energy, including fuels, ironically it cannot refine the oil it needs, since some its refineries suffered from the earthquake and will have to import petroleum products. According to data from Wood MacKenzie, Japan's refining capacity has approx. dropped by 25% or 1 mln b/d. Before refining capacity was at around 4 mln b/d.
Although the additional energy supplies provided by Russia are modest, it should nevertheless be regarded as an indication that Russia is open to increasing exports to Japan. As mentioned, on 15 Mar., Russian Prime Minister Putin ordered the development of hydrocarbons in Russia's Far East, in particular Sakhalin-3, to be speeded up. The potential of cooperation seems enormous. On the one hand Russia sees an even greater gas market emerging close to its eastern border, on the other hand Japanese companies could join in speeding up hydrocarbon production by providing technology and know how, creating complementary regional energy cooperation by both producers and consumers.
Vladivostok LNG plant
Currently, Russia has only one LNG plant operating in its Far East, located on the Sakhalin Peninsula. It has an annual production capacity of 9.6 mln tonnes. Mid January of this year, Japan's Agency for Natural Resources and Energy together with Gazprom signed a preliminary agreement on the joint construction of another LNG plant near Vladivostok. The agreement foresees a joint feasibility study on the transportation and chemical processing of gas in Vladivostok area for Asian Pacific markets. It is likely that both sides will have an even stronger interest now to speed up the project.
New prospects for connecting infrastructure?
In addition to oil, coal and gas, Russia's Far East could theoretically export electric power to Japan, provided that there is a power connection between the two. According to Deputy Prime Minister Sechin, around 6.000 MW could be freed up for export to Japan in the near future. He noted that plans to connect Russia's Far East power grid to Japan's already exist and that the construction of a sub sea power cable between the two countries could be ready within two years. Sechin added that the Russian side would soon draft several proposals for Japan.
As mentioned, Japan imports all of its gas as LNG, but given its close geographical vicinity to Russia, the construction of a sub sea pipeline does not seem an unlikely idea. Such an idea is not new and has been suggested in the past. It is known that plans for a sub sea gas pipeline have been a topic of discussion between the two countries. Somehow both sides have up to now been unable to find a common interest in constructing such a gas pipeline.
In Russia's Far East Gazprom is constructing the Sakhalin-Khabarovsk-Vladivostok (SKhV) gas pipeline, which has a planned annual capacity of 36.5 BCM. Its construction is commissioned in 2011, however developing the resource base will require more time. In theory the SKhV pipeline could be extended by a sub sea leg to Japan. Since China seems to be preferring Central Asian gas and is not prepared to pay Gazprom a European price, the Japanese market becomes an even more attractive alternative.
A Norwegian solution?
Last year Norway and Russia reached an agreement on demarcating the Barentz Sea, an issue which had remained unsolved for decades. Its settlement resulted in closer cooperation on the development of hydrocarbons in the Barentz Sea. Although the situation with Japan is more grave, an analogy with Norway is still visible.
The dispute over the South Kuril Islands, which Japan lost to the Soviet Union after it was defeated in World War II, has since then remained an obstacle in normalising relations between Russia and Japan. Japan still regards the South Kuril Islands as occupied territory and has never concluded a peace treaty with Russia. In recent months, relations between the two countries seemed to be heading towards another setback. The Japanese government dismissed a visit by Russian President Dimitry Medvedev to the South Kuril islands on 1 Nov. as a provocation and temporarily withdrew it ambassador. Tensions and irritations continued into 2011 with Russia vowing to improve its defences on the South Kuril islands.
Russia, at least, seems prepared to regard the catastrophic events in Japan as a possible new starting point to improve mutual relations. Russian Foreign Minister, Sergey Lavrov, when meeting Japanese Foreign Minister in Paris, on 14 Mar., stated that Russia is prepared to discuss a peace treaty with Japan. However, one sided demands or ultimatums from the Japanese side would not be accepted, Lavrov added. He was most likely referring to Japan's demand to return to it the South Kuril Islands.
To resume, settling the dispute over the Kuril Islands and reaching formal peace could result in stronger cooperation between the two countries, in particular in the area of hydrocarbon development in Russia's Far East. Cooperation could eventually be broadened to other areas as well. There are many challenges that Russia faces in its Far East. Within the framework of Russia's drive for modernisation, Japanese technology and experience could prove very useful.
