Lower stocks y/y and high power sector gas demand in winter 2019-20 should boost Japanese LNG imports in late summer and early Q4 19. We forecast LNG takes in Q4 19 will rise by 1.05 Mt y/y (3%). We have maintained our forecast for H1 20 LNG imports at 42.1 Mt (+3.5 Mt y/y), but stress that the outlook remains uncertain owing to a lack of clarity around NRA counterterrorism compliance shutdowns, which could force 3.5 GW of nuclear capacity to go offline at various points next year.
Japan is approaching a winter that should involve a big jump in power sector gas demand owing to lower available nuclear capacity. LNG restocking demand will significantly boost LNG imports y/y in late summer and early Q4 19, or Japan runs the risk of finishing winter 2019-20 with unseasonably low stocks. Weak LNG imports in Q2 19 and a strong LNG stockdraw that quarter left Japanese stocks 0.5 Mt lower y/y at 3.3 Mt by the end of July, according to our balances. But the nuclear maintenance schedule shows monthly nuclear capacity down by an average of 1.9 GW y/y over September-March. We forecast a 1.3 Mt (4%) y/y rise in power sector gas demand over the period. Japan will need to raise imports over September-November by a total of 1.1 Mt y/y just to increase stocks to the more historically typical 4.5 Mt (-0.7 Mt y/y) we forecast for end-November, which is when winter withdrawals usually begin in earnest. Japanese LNG imports were flat y/y at 6.82 Mt (6%) in July and our balances indicate end-August LNG stocks at 3.3 Mt (-0.5 Mt y/y).
September marks the end of Japan’s weak 2019 power sector gas demand, with lower nuclear expected capacity y/y set to provide the largest boost to power sector gas demand in Q1 20. Unusually hot weather is likely to boost aggregate power demand this month, but the early return on 14 August of the 1.2 GW Ohi unit 4 has led us to forecast a 0.1 Mt y/y drop in gas into power to 5.3 Mt in August. Lower nuclear output following recent revisions to the maintenance schedule should raise power sector gas demand in September and October. We expect power sector gas demand to rise by 0.32 Mt y/y across the two months. The 0.9 GW Sendai unit 1 went offline on 25 July and was followed by the 1.2 GW Genkai on 15 August, with each unit expected to be closed for three months. Those closures mean there will be 1.2 GW less nuclear capacity available y/y in September and 2 GW less available y/y in October, compared to lower availability y/y by 0.57 GW and 1.6 GW previously scheduled, respectively.
|Fig 1: Nuclear generation, TWh||Fig 2: 2019 LNG imports & forecast, Mt, y/y|
|Source: Octonet, Energy Aspects||Source: METI, Energy Aspects|
Compliance shutdowns: the 2020 outlook is still murky
We anticipate nuclear shutdowns next year resulting from non-compliance with counterterrorism measures mandated earlier this year (see E-mail alert: Japanese nuclear reactors could be shut again on compliance deadline, providing upside to 2020 LNG demand, 24 April 2019). Our base case remains for around 3.5 GW of capacity to be taken off line next year as a result.
Lower nuclear availability should support thermal generation, including gas-fired output, next year. But there is a downside risk for power sector gas demand if the nuclear reactors remain operational. This could be through full compliance or if the government decides not to enforce the regulation. The government-affiliated think tank the Institute of Energy Economics Japan (IEEJ) has assumed in its 2020 reference case that all the reactors will be operational. The reference scenario shows annual gas demand easing by 2.0 Mt y/y (2%) and nuclear generation rising by 3.4 TWh (6% y/y), which seems unlikely if some nuclear plants are to be offline in 2020. Such a scenario would be consistent with all at-risk reactors remaining fully operational and there being incremental generation from the 0.8 GW Shimane unit 2, which we expect will be brought online in Q4 20.
The institute’s most severe scenario results in an 18.4 TWh drop in nuclear generation, compared to our base case of 4.3 TWh y/y. The institute did not provide further information on why no shutdowns are assumed in its reference scenario despite saying that it expects a slowdown in nuclear restarts because of counterterrorism compliance issues. This has led us to maintain our base case.
The IEEJ may have opted for a base case scenario of no compliance shutdowns on its expectation that nuclear operators will manage to meet the necessary 2020 compliance deadlines. There have been no further updates from Kansai Electric Power or Kyushu Electric—operators of the four units with the earliest 2020 compliance deadlines—since April, when they said that it would take at least one year to complete the necessary works. We said last month that we think it is possible that the Nuclear Regulation Authority (NRA) may grant utilities an extension (see Global LNG Monthly: Japan, 18 July 2019). Indeed, the IEEJ report said that the circumstances of each plant will need to be considered when evaluating the effect of the possible shutdowns, reinforcing our view that the NRA could grant deadline extensions to some plants so that they avoid shutdowns.