Japanese LNG imports fell by 0.35 Mt (6%) y/y to 5.2 Mt in June, marking the fifth month of y/y drops so far this year. Higher nuclear capacity has been the main bearish driver on Japan’s gas demand and we expect that to continue through August. That trend will reverse in Q4 19, however, when maintenance is scheduled to cut average monthly available nuclear capacity by 1.4 GW y/y, providing a y/y boost to power sector gas demand. Nuclear capacity losses are then slated to ramp up through Q1 20, supporting LNG demand in winter 2019-20. For now, we expect Q3 19 LNG exports to fall by 0.14 Mt (-1%) y/y, while winter 2019-20 imports will rise by 2.2 Mt (5%) y/y. However, more support for gas demand could materialise in 2020, as issues with regulatory compliance could yet force a total of 3.5 GW of nuclear capacity to shut down at various points next year.
Japan’s sluggish LNG demand has been a key driver of the loose global supply-demand balance and the resulting weakness in JKM prices this summer. Still, Japan’s weak H1 19 LNG demand was widely expected given that the summer 2019 nuclear maintenance schedule indicated that nuclear capacity would average 1.8 GW higher y/y each month, helping to cut power sector gas demand. Unusually mild summer weather—forecast to continue through August—has only exacerbated those y/y losses by reducing peak demand for gas from power. As a result, we expect that summer 2019 LNG imports will total 36.9 Mt, down y/y by 1.3 Mt (3%).
Come Q4 19, however, the bearish trend will reverse, and winter 2019-20 will be a better season for Japanese LNG demand. Once again, the driver will be changes to nuclear capacity, with maintenance scheduled to cut available capacity by an average of 1.4 GW y/y each month over the quarter, ramping up to an average monthly loss of 2.4 GW y/y in Q1 20. While the Japanese nuclear schedule is prone to frequent revisions, the fact that these outages remain on the schedule with Q4 19 just a few months away suggests that they are unlikely to be significantly changed. As such, we have revised our forecast for Japanese winter 2019-20 power sector gas demand up to 28.3 Mt (+1.2 Mt y/y) and hiked our outlook for LNG imports to show a 2.2 Mt y/y (5%) rise (up from a 1.1 Mt y/y rise previously).
2020 NRA compliance shutdowns: the clock is ticking
Last month, Nuclear Regulatory Authority (NRA) commissioners approved implementation rules regarding some possible nuclear compliance shutdowns that were first identified in April (see E-mail alert: Japanese nuclear reactors could be shut again on compliance deadline, providing upside to 2020 LNG demand, 24 April 2019), but there is still plenty of uncertainty regarding the impact on gas demand. In June, the NRA agreed that if back-up centre construction is not completed six weeks before each nuclear unit’s deadline, operators will have a chance to explain why they have not met the deadline. If the unit is still non-compliant a week before the deadline, NRA can then order that operations be halted.
In April, both Kansai and Kyushu—operators of the four units with the earliest 2020 compliance deadlines—said that it would take at least one year to complete the necessary works. If both operators can successfully stick to the one-year timetable, only Kyushu’s 0.89 GW Sendai 1 plant will fail to make the 2020 compliance deadline (it would be six weeks behind). Even then, we think it is plausible that Kyushu could successfully obtain a short extension, as the NRA has created a process that allows operators to explain delays six weeks before the compliance deadline. For now, the biggest driver behind this month’s upward revision to our summer 2020 LNG import forecast is restocking efforts resulting from the winter 2019-20 scheduled nuclear maintenance.
That said, we will be carefully watching construction progress on the four Kansai and Kyushu units. It should be noted that in April Kyushu and Kansai had sought to postpone the compliance deadline by one to three years, citing major construction works, which suggests to us that completing the works within one year may be achievable, but ambitious. We therefore maintain that there is upside risk to our LNG import forecast for 2020, depending crucially on whether units are completed on time and/or if the NRA decides to close any reactors failing to meet the deadlines.
NRA mulls new safety measures
An expert committee operating under the NRA proposed a policy this month that, if adopted, would create even more stringent safety requirements for reactors. The report recommended that nuclear operators be obliged to assess the safety of reactors against ‘unknown earthquake fault lines’. Utilities have asked the NRA to consider setting a grace period for utilities to come into compliance with the proposed policy, if it is enacted. Kyushu projected that it would take six to seven years to examine the possible effects from unknown fault lines and complete the necessary reinforcement works. It is too early to determine what effect this new policy might have on nuclear capacity, but it is another sign that NRA compliance policies remain an obstacle for nuclear units to return to service.
|Fig 1: Japanese reactors at risk of shutdown||Fig 2: 2019 gas into power, Mt, y/y|
|Source: Energy Aspects||Source: METI, Energy Aspects|