On March 11, 2011 Japan was struck by a massive earthquake and tsunami that devastated the northeastern part of the country. The quake and tsunami also damaged three reactors at the Fukushima Daiichi Nuclear Power Plant, triggering a nuclear crisis that led to the shutdown of nearly a third of the country’s energy production.
In the span of a little over a year, the progress that Japan has made to recover from the disaster is remarkable considering the extent of the destruction and upheaval. Nevertheless, the cost of reconstruction is staggering and on the road ahead there lies a host of challenges and uncertainties — not least, regarding the role of nuclear power in Japan and, by extension, the country’s energy future.
Indeed, Japan’s nuclear crisis is far from over. Not a single reactor has come back into operation after undergoing regular maintenance and stress tests. Entering the summer — the peak period of energy consumption — none of Japan’s 54 reactors will be online. Meanwhile, a report on an internal investigation, issued in March, revealed that the damage to the three Fukushima reactors was more severe than had originally been thought. The release of the report occurred against the backdrop of hardening Japanese public attitudes against nuclear energy and renewed interest in investment in renewable energy.
Japan is the world’s third-largest economy, a key American ally, and a major economic partner for Middle Eastern countries. How and how well Japan grapples with the energy challenges it faces is of great consequence.
AFTER FUKUSHIMA: JAPAN’S REPLACEMENT FUEL RESPONSE
Prior to the Fukushima Daaichi disaster in March 2011, nuclear generators had been the dominant source of electricity in Japan. Vlado Vivoda explains why:
One of the origins of Japan’s ambitious nuclear policy lies in the concerns of Japanese leaders who have interpreted history as a series of unreasonable assaults on an island nearly devoid of natural resources. They perceive Japan as exposed to inexplicable supply disruptions and argue that Japan would be too weak without recourse to an independent energy supply. Nuclear energy has been an integral part of Japan’s energy supply system.
But the Fukushima disaster resulted in the disruption of nuclear power operations. This, in turn, sent Japanese utilities scrambling to offset the shortfall in nuclear capacity, a feat which they have thus far accomplished primarily by swapping out nuclear fuel in favor of liquefied natural gas (LNG), crude oil, and residual fuel oil. Of Japan’s 58 principal thermal power plants (1,000 MW or greater), 20 are fueled by LNG, 22 by a combination of fuel oil and crude oil, and the rest by coal.
As depicted below, Japan’s 10 regional utilities’ consumption of crude oil, heavy fuel oil, and LNG increased markedly in 2011 over the previous year. Japan’s Tokyo Electric Power Company (TEPCO), for example, consumed 17% more LG and 68% more crude oil and fuel oil in fiscal year (FY) 2011–2012 than in FY2010–2011.
Source: Adapted from the IEA Oil Market Report (April 12, 2012), p. 11.
Residual Fuel Oil (RFO):
Residual fuel oil is used to run boilers for electricity generation, industrial processes, space heating, and as fuel for large ships. Japan had always bought some fuel oil for shipping and certain industrial processes. However, over the past year, Japanese power providers have ramped up imports of RFO.
However, obtaining RFO is not as easy as it once was. For one thing, global demand for RFO has been rising. For another, modern refineries have incorporated processes to upgrade the lower quality residuals into more valuable products. Therefore, at the very time when Japan’s need for RFO has become acute, there are fewer sources of supply serving the stronger market demand.
Low Sulfur Heavy Fuel Oil (LSFO):
Because of strict emissions regulations, most Japanese utilities, including TEPCO, the country’s largest fuel oil consumer, burn low-sulfur heavy fuel oil (LSFO) at their thermal power plants. In fact, only low-sulfur grades of crude oil such as Minas (Indonesia), Su Tu Den (Vietnam), Nile Blend and Dar Blend (Sudan), are permitted for direct burning in Japanese power plants.
During the July–December 2011 period, Japan imported 780,000 b/d of fuel oil, more than doubling the previous year’s volume. Indonesia, Japan’s top supplier of LSFO, helped meet Japan’s surging demand, as did increased purchases from Vietnam, Angola, and Gabon.
In January 2012, however, Japan encountered yet another problem when South Sudan suspended oil production, thereby taking Nile Blend ― a popular baseload for thermal power generation in certain Japanese plants ― off the market. The fact that some crude carriers had set sail for Japan before the suspension took effect softened the impact, at least initially.
Liquified Natural Gas (LNG):
The power sector accounts for two-thirds of Japan’s total LNG consumption.
Japanese utilities typically buy LNG under long-term contracts, but have increased short-term and spot purchases to meet incremental demand, and have obtained additional deliveries from existing long-term deals.
The volume of LNG imports in FY2011 swelled by 17.9% over the previous year. The spike in the volume was accompanied by a much bigger bill. Though partially offset by the appreciation of the yen, payment nonetheless increased by 37.5% in 2011 over the previous year.
JAPAN’S ENERGY IMPORT DEPENDENCE AND THE MIDDLE EAST
Over the past three decades, Japan has taken significant steps to reduce its dependence on fossil fuels and diversify its foreign sources of supply. Nevertheless, coal, oil, and natural gas have continued to dominate Japan’s fuel mix. Japan is the world’s third-largest oil consumer behind the US and China, constituting about half of Japan’s primary energy supply. Japan is also the world’s largest LNG importer. Furthermore, energy supplies from the Middle East, and from the Gulf in particular, remain critically important to the well-being of the Japanese economy ― all the more since the Fukushima disaster. As illustrated below, Middle Eastern countries account for 87% of Japan’s oil imports.
Source: Adapted from Japan METI Preliminary Petroleum Report (March 2012).
Source: Adapted from Japan METI Preliminary Petroleum Report (March 2012).
Traditionally, the bulk of Japan’s LNG has come from Asian suppliers. However, the Middle East is also a major source of Japanese LNG imports. In FY2010, for example, TEPCO imported about 30% of its LNG from Qatar and Abu Dhabi (UAE). In FY2011, about 60% of the LNG for Chubu Electric Power Company came from Qatar. (See chart below.)
Source: BP Statistical Review of World Energy 2011; and FACTS Global Energy.
JAPAN AND THE MIDDLE EAST AFTER FUKUSHIMA
Japan Refocuses Its Energy Diplomacy:
The Fukushima disaster and the energy challenges arising from it have prompted Tokyo to refocus its attention on the Middle East. On the diplomatic front, Japanese officials have worked assiduously to obtain assurances that Japan’s preexisting and incremental hydrocarbons requirements will be met. In his visit to the region last fall, Yukio Edano, who, as the head of Japan’s Ministry of Economy, Trade, and Industry (METI) also holds the energy portfolio, secured promises from the United Arab Emirates (UAE) and Saudi Arabia to provide a stable supply of crude oil. He also reached agreement with the Gulf Cooperation Council (GCC) to resume negotiations on a free trade pact as soon as possible. This past January, Foreign Minister Koichiro Gemba made an eight-day trip to Turkey, Saudi Arabia, Qatar, and the UAE to discuss regional and energy issues.
Japanese officials have also worked to avert a potentially calamitous military confrontation over the Iranian nuclear program. On the multilateral front, in fulfillment of Japan’s long-standing commitment to global nuclear non-proliferation, the locus of their efforts has been the International Atomic Energy Agency (IAEA). On the bilateral front, Foreign Minister Gemba has spearheaded Japan’s attempts to urge Tehran to show flexibility and Israel to refrain from taking military action against Iran.
However, the diplomacy surrounding the Iranian nuclear dispute reveals Japan’s role and influence to be rather limited and also somewhat controversial. The “P5 + 1” framework (i.e., the five permanent members of the UN Security Council plus Germany) — in which Japan has no role — has been the principal vehicle whereby the major powers, collectively, have addressed the Iranian nuclear challenge.
The work of senior Japanese diplomats has been supplemented — though some would say, subverted — by the mediatory efforts of former statesmen acting in their “private capacity.” Foreign Minister Gemba, for example, reportedly asked former Prime Minister Yukio Hatoyama not to go to Iran. Not only did the former Prime Minister’s four-day trip to Tehran take place as planned, but remarks critical of the IAEA attributed to him sowed confusion and caused embarrassment.
Japan’s Middle East Trading Partners Deliver:
Japan’s Middle East trading partners, particularly the GCC countries, have answered the call. Last year Kuwait donated five million barrels of crude oil to Japan to support the country’s recovery. Oman donated two relief cargoes of LNG as well. Responding to a formal request by Foreign Minister Gemba on the occasion of his visit (mentioned above), Qatar agreed to provide additional cargoes of LNG to Japan. In fact, the largest incremental growth in the volume of LNG supplies to Japan has come from Qatar. During a meeting with Trade Minister Edano in Tokyo in May, Saudi Oil Minister ‘Ali al-Naimi was quoted as saying that Japan can rely on Saudi Arabia for stable oil supplies as contingencies require.
The past year has witnessed changes in the trade flows and trade balance between Japan and the GCC countries. Petroleum and LNG has appreciably widened the GCC’s surplus in trade with Japan. Qatar, which was a negligible trade partner of Japan a decade ago, emerged as the third largest exporter because of a sharp rise in its LNG supplies. Meanwhile, much of Japan’s $32 billion deficit in 2011 came as a result of a 33% increase in petroleum and other imports from the GCC countries. (The March year-on-year figures in Table 1 below illustrate this trade imbalance.)
Table 1: Japan’s Trade with the GCC Countries ― March 2012 (in thousands of USD)
Source: JETRO, Trade and Investment Statistics, Table 2, Value of Exports and Imports by Country and Area (March 2012).
Japan’s post-Fukushima energy emergency has had far-reaching effects on global market dynamics, particularly on the LNG market, where Qatar occupies the dominant supply position. Qatar’s ready response to Japan’s call for additional cargoes (including by redirecting shipments from the UK to Japan) should be understood not only as an attempt to honor a long-standing commercial relationship but also as a move aimed at solidifying its position in the Asian LNG market. Given the slumping European LNG market, the onset of the US “shale gas revolution,” and the reassessment of the safety of nuclear energy, Qatargas can be said to have seized the opportunity presented by the Japanese crisis to promote LNG. According to Andrew Seck, assistant director of LNG marketing at Qatargas, the company hopes that its recent boost in LNG supplies to Japan would lead to more long-term supply commitments. How appropriate, then, that the tanker carrying LNG cargo from Qatar which arrived at Japan’s Futtsu terminal in April is named Expedient.
JAPANESE ENERGY INSECURITY: PRESSURE ON MULTIPLE FRONTS
Developments over the past year have revealed the degree to which Japan remains at the mercy of energy imports from the Middle East and susceptible to possible supply disruptions and price fluctuations stemming from turmoil there.
Japan’s purchase of LNG is a case in point. Although Japan buys most of its LNG from Asia, the price is tied to crude oil. Thus, when the price of crude oil on the world market rises in response to instability in the Middle East, for example, Japan pays a higher price for LNG, including for supplies originating closer to home.
Furthermore, Japan’s surging demand for crude oil, fuel oil, and LNG as replacement fuels for power generation has, if anything, accentuated the country’s exposure to possible price and supply “shocks” emanating from the region. The recent tightening of Western economic sanctions against Iran and the growing risk of a military confrontation has placed an additional burden on Japan. In February 2012 Japan cut purchases from Iran by 27.3% over the previous month even as overall oil imports rose 1.8%. In March, Japan qualified for an exemption from penalties for a renewable period of 180 days under the US National Defense Authorization Act, which includes a provision stipulating sanctions against Iran.
As a result of obtaining the US sanctions waiver, Japan has been able to continue buying Iranian oil, albeit a substantially reduced volume. However, this temporary relief has been offset by additional complications. The enactment of sanctions by the European Union (EU) banning insurance cover for vessels carrying Iranian cargoes is one of them. Japanese companies generally buy insurance from domestic insurers for crude oil shipments, but 80% to 90% of such insurance is sold in reinsurance markets. It is European insurers which provide cover for the majority of the world’s oil tanker fleet.
Over the past few months, Japanese buyers have sought to adjust to these circumstances by turning to alternative suppliers (e.g., UAE and Indonesia) and by securing force majeure clauses in contracts with Iran that can be invoked if sanctions prevent or limit their execution. Yet, supply diversification and risk mitigation measures can go only so far. Japan remains caught in the Middle East.
NEXT-GENERATION ENERGY OPTIONS AND CONTRAINTS
How sustainable is the practice of boosting the power that Japanese utilities generate by relying on costly imported fossil fuels? Is Japan entering a post-nuclear age? Thus far, Japan has shown remarkable resilience and agility in responding to the challenges of powering the economy without the benefit of nuclear power. There is little to suggest that, in the short term, Japan’s current replacement fuel approach will falter.
However, the “short term” might last a lot longer than one might hope or expect. The Japanese electricity sector is fragmented. The authority to restart nuclear operations is highly decentralized. And public skepticism in Japan about the safety of nuclear power remains very high. Given these facts, it is difficult to imagine that nuclear-powered electricity generation can, or will approach the pre-Fukushima crisis level any time soon.
Nor is the ramping up of renewable energy in the fuel mix a simple matter, given the nuclear industry’s vested interests, stifling regulations, a power grid ill-suited to solar and wind energy, and the huge investment costs of building solar or geothermal plants.
This leaves LNG ― cleaner than coal, cheaper than oil, and more readily available than renewables. Japan’s new national energy policy, which is expected to be released in July, is likely to call for a significant increase in the role of LNG in the fuel mix (estimates of Japan’s LNG demand are depicted below).
Table 2: Japanese Demand for LNG in 2012 and 2013 (in millions of tonnes)
Source: “Table: Japanese Demand for LNG in 2012 and 2013,” Reuters (May 4, 2012).
Indeed, natural gas is rising in importance globally as an energy source. Over the past few years, global liquefaction capacity — of which Qatar possesses one quarter — has expanded dramatically. Indonesia, Malaysia, Australia, and Algeria have established themselves as major LNG exporters. Recently, Russia, Yemen, and Peru, too, have entered the LNG market as suppliers. Mozambique and Tanzania are also looking to join their ranks. There are other tantalizing possibilities as well: Australia could surpass Qatar as the world’s largest LNG producer and, by virtue of proximity, enjoy a comparative advantage in supplying Japan, not to mention the rest of the Asian LNG market.
However, before Japan enters what some expect will be the “Golden Age of Natural Gas” it will first have to pass through a period that marked by a tightening supply-demand balance. The phase-out of Japan’s nuclear plants since the Fukushima disaster in March 2011 has shifted the global LNG market from a glut and price slump in 2009–2010 to a tighter market — with Japan paying a premium.
On the supply side, Indonesia reduced LNG export volumes under long-term contracts with several Japanese companies last year to meet rising domestic energy demand. The expansion of Qatar’s liquefaction capacity for the time being has ceased, with a moratorium on the enormous North Field reservoir in effect until 2015 and the country diversifying revenue and investments away from LNG. And new capacity in Australia and North America will take some time to come on-stream.
Meanwhile, on the demand side, the Asian LNG market — already the largest demand center — is growing fast and evolving rapidly. Demand for LNG from China, India, and Taiwan is rising. Thailand, which started importing LNG in June 2011, is likely to be followed in the next few years by Indonesia, Vietnam, Malaysia, and Singapore. The Middle East — though widely expected to represent a growing share of global LNG production in the longer term — also includes new buyers which are likely to be responsible for tightening the market in the short term. In fact, with the exception of Qatar, the GCC countries could turn the region from a net LNG exporter to an importer.
In the face of these challenges, Japanese buyers have not been standing idle. Japan’s two largest trading houses, Mitsui and Mitsubishi, which together account for two-thirds of the country’s LNG imports, have bought a stake in the Browse LNG project in Western Australia. Mitsubishi has approached Royal Dutch Shell, as well as Chinese, US, and South Korean firms in an effort to gain flexibility in supply arrangements. Japan’s Tohoku Electric reached agreement with Chevron on the delivery of one million tonnes of LNG per year for 20 years from its Wheatstone plant in Western Australia. Osaka Gas, Japan’s second-largest gas utility, is exploring the possibility of jointly importing LNG in order to reduce costs through purchasing larger volumes. The same company is also looking into possible shale gas-based LNG projects in Canada ― a potential source with a low level of geopolitical risk and a shipping time half that from the Middle East to Japan.
Nevertheless, Japan faces more questions than answers in seeking to achieve what is likely to be a key objective of its forthcoming national energy policy: Will gas discoveries in East Africa yield supply opportunities? Will India and China, which have only recently begun importing LNG, be prepared to invest? How quickly and with what volume will some of the new buyers enter the LNG market? For that matter, can Japan rapidly expand its oil-storage and processing capacity, as well as the distribution networks needed to utilize a substantially larger volume of LNG for power generation?
Japan’s New National Energy Strategy of 2006 aimed to increase the share of nuclear energy in the fuel mix to at least 40% by 2030. However, in the wake of the Fukushima disaster, the Japanese Cabinet approved in October 2011 an Energy White Paper calling for the reduction of nuclear power in the energy mix. Prime Minister Yoshihiko Noda has promised to reduce Japan’s reliance on nuclear power over time. First-stage stress tests have been endorsed by the Nuclear and Industrial Safety Agency (NISA) for two reactors. However, none has yet been approved for restart. For Japan to remain economically competitive almost certainly necessitates that a significant part of any future short-to-medium term expansion in its power production capacity come from more imported fuel oil and LNG. As a result, for better and for worse, Japan will remain tethered to developments in the Middle East.
 Mari Iwata, “Japan is Left with Only One Working Reactor,” The Wall Street Journal (March 26, 2012).
 Hiroko Tabuchi, “Japan Nuclear Plant Might Be Worse Off Than Thought,” The New York Times (March 29, 2012).
 Vlado Vivoda, “Japan’s Energy Predicament in the Aftermath of the Fukushima Disaster,” Journal of Energy Security (December 2011), http://www.ensec.org/index.php?option=com_content&view=article&id=335:ja....
 The Federation of Electric Power Companies of Japan (FEPC), http://www.fepc.or.jp/english/energy_electricity/location/thermal/index.html; “Diversifying Japanese Energy Sources,” The Japan Times (March 23, 2012), http://www.japantimes.co.jp/text/ed20120323a1.html.
 Mari Iwata, “Japanese Utilities’ Oil, LNG Consumption Surges,” The Wall Street Journal (April 15, 2012), http://www.marketwatch.com/story/japan-utilities-oil-lng-consumption-sur....
 “Japan’s Tepco to Use 60% in 2012–12 than in 2011–12,” Platts (March 30, 2012), http://www.platts.com/RSSFeedDetailedNews/RSSFeed/ElectricPower/7433638.
 Michael Hsueh, Mark Lewis, and Soozhana Choi, “Global Energy One Year After Fukushima,” Deutsche Bank AG, Commodities Weekly (March 16, 2012), pp. 6–9.
 Jonty Rushforth and Takeo Kumagai, “Japan’s 2012 LSFO Demand for Power Could Rise,” Platts Oilgram Price Report (March 5, 2012).
 Jacob Adelman, “Japan Oil Imports for Power Surges as South Sudan Supply is Lost,” Bloomberg Businessweek (March 30, 2012), http://www.businessweek.com/news/2012-03-30/japan-oil-imports-for-power-....
 Takeo Kumagai and Pradeep Rajan, “Japan Not Affected So Far by Sudan Oil Cutoff,” Platts Oilgram Price Report (February 3, 2012).
 “Japan TEPCO April LNG Use Climbs 15.1 Percent in April,” LNG World News (May 14, 2012).
 “Japan March LNG Imports Near Record High,” Reuters (April 18, 2012), http://www.reuters.com/article/2012/04/19/energy-japan-mof-idUSL3E8FJ0YH....
 Hiroshi Hashimoto, “Asian Premium on Gas Strikes LNG Importing Countries,” Energy Perspectives (April 12, 2012), http://www.siew.sg/energy-perspectives/global-energy-trends/asian-premiu....
 The Federation of Electric Power Companies of Japan (FEPC), “Japan’s Energy Supply Situation and Policy,” http://www.fepc.or.jp/english/energy_electricity/supply_situation/index.....
 “Diversifying Japanese Energy Sources,” The Japan Times (March 23, 2012), http://www.japantimes.co.jp/text/ed20120323a1.html.
 Hideyuki Ioka, “Sewing Up Stable Oil Supply,” The Daily Yomiuri (October 13, 2011).
 “Japan Foreign Minister Leaves for Eight-day Visit to Middle East,” Kyodo News Agency (January 5, 2012); Ghazanfar Ali Khan, “Japan Assured of Steady Supply in Face of Iran Crisis,” Arab News (January 9, 2012).
 “Japan Urges Israeli Restraint Over Iran’s Nuclear Programme,” The Daily Yomiuri (May 2, 2012).
 Toko Sekiguchi, “Close Encounters of the Diplomatic Kind: Ex-Premier Hatoyama Eyes Iran Trip,” The Wall Street Journal (April 5, 2012).
 “Hatoyama to Visit Iran Despite Government Opposition,” Japan Today (April 6, 2012).
 “Oman LNG Revenues Soar in 2011,” Oman Daily Observer (May 14, 2012).
 “Japan, Saudi Arabia Agree to Cooperate in Energy Sector,” Kyodo News Service (May 8, 2012).
 Hiroko Tabuchi, “Rise in Oil Imports Drives a Rare Trade Deficit in Japan,” The New York Times (January 25, 2012).
 Japan — Qatar’s first LNG customer in 1996 — has remained a major destination ever since. During this time, Qatargas has had long-term supply agreements with Japan’s Chubu Electric Power Company and seven other Japanese power and gas companies. Chubu Electric, which serves the Tokai region, imports about 60% of its LNG from Qatar. See “Increased Reliance on LNG Poses Potential Energy Security Threat,” The Nikkei Weekly (March 5, 2012).
 “Increased Reliance on LNG Poses Potential Energy Security Threat,” The Nikkei Weekly (March 5, 2012).
 “Qatar Looks to Double LNG Supply to Asia,” Gulf Times (September 22, 2011).
 “Japan Cuts Iran Crude by 27 Pct,” Reuters (March 29, 2012), http://www.reuters.com/article/2012/03/29/crude-japan-iran-idUSL3E8ET0A4....
 “US Exempts Japan, 10 Nations from Iran Oil Sanctions,” Bloomberg (March 21, 2012), http://www.bloomberg.com/news/2012-03-20/u-s-exempts-11-nations-from-ira....
 Mari Iwata, “Iran Oil Sanctions Exemption Cheers Japan,” The Wall Street Journal (March 21, 2012), http://online.wsj.com/article/SB1000142405270230463640457729510427317536....
 Takeo Kumagai, “Japan Wins More Iran Force Majeure Clauses,” Platts Oilgram Price Report (April 2, 2012).
 “Japan Buys State in Australia LNG,” UPI.com (May 2, 2012), http://www.upi.com/Business_News/Energy-Resources/2012/05/02/Japan-buys-....
 “Japan’s Mitsui, Mitsubishi Ink US Gas Deal,” Agence-France Presse (April 17, 2012).
 Ben Sharples and James Paton, “Chevron Sells 80% of Wheatstone Gas after Deal with Tohoku,” Bloomberg (May 13, 2012).
 “Osaka Eyes Joint LNG Purchase via Short-, Long-Term Contracts,” Platts Oilgram Price Report (April 4, 2012), http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/7450848.
 Jacob Adelman and Yujo Okada, “Oil Consumption Hits Four-Year High as LNG Use Peaks to Cover Reactors,” The Japan Times (March 30, 2012), http://www.japantimes.co.jp/text/nb20120330n1.html.
 Kazuaki Nagata, “Fukushima Meltdowns Set Nuclear Energy Debate on its Ear,” Japan Times (January 3, 2012); Justin McCurry, “How Fukushima is Leading towards a Nuclear-Free Japan,” The Guardian (March 9, 2012).
 Tsuyoshi Inajima and Yuji Okada, “Nuclear Promotion Dropped in Japan Energy Policy Following Fukushima,” Bloomberg (October 27, 2011).