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Massive Japanese quake rocks LNG market

Four nuclear reactors shut; Japan could import 3 to 5 more LNG cargoes a month; spot prices could reach $11/m Btu

A DEADLY earthquake has caused widespread infrastructure damage across Japan, shutting down at least four nuclear power plants and increasing the likelihood of extra LNG imports to make up for power-generation losses.

The massive 8.9 magnitude earthquake – the largest to hit the world's biggest LNG importer – struck near the city of Sendai on Friday. At the time of writing, more than 50 people were reported dead, with homes and offices damaged, roads destroyed and powerful 10-metre tsunamis sweeping away cars, trucks and buildings.

With the damage still being assessed, the number of shut nuclear reactors was unclear, with the International Atomic Energy Agency (IAEA) saying four were down, while Bloomberg reported 11 plants were closed. As well as nuclear reactors shutting down, an oil refinery was also on fire. There have been no reports of LNG terminals being damaged. The closest terminal to the epicentre is Shin-Minato, with a relatively small capacity of 0.80m tonnes a year (t/y).

The Japanese government declared a state of emergency at one nuclear power plant after problems with the cooling system, the national broadcaster NHK reported. Earlier in the day, prime minister Naoto Kan said that there was no radiation leak from any of the nuclear power plants.

"There will be some impact for sure, with Japan needing three to five more LNG cargoes a month, maybe more," one LNG trader said. "Spot prices could hit $11/m Btu," he added. This compares with around $9.5/m Btu reported earlier this week.

Traders said the increase in imports may depend on how the reactors were affected, with nuclear plant-restart periods taking as little as a few days, in the best case, or as long as several months if damage is more severe.

UK gas prices also traded up after the earthquake struck, with analysts saying Japan would outbid Europe for spot-LNG cargoes to offset the nuclear power plant outages.

"Such a reduction in nuclear capacity will increase demand for spot LNG, allowing further utilisation to gas-fired power capacity – provided there has been no damage to regasification terminals or gas-fired plants," say James Crandell and Kerri Maddock, analysts at Barclays Capital (BarCap). "Overall, the potential for increased Japanese LNG demand leads us to see upside risks to UK gas prices, as spare cargoes would likely head to Japan first, priced on oil-indexed basis at a premium to UK NBP prices."

BarCap estimates nuclear power supplies around 30% of Japan's electricity needs.

UK gas prices for winter 2011-12 jumped by £0.016 a therm to £0.0684 a therm ($10.90/m Btu), while Summer 2011 contracts increased by around £0.018 a therm to £0.05975 a therm ($9.60/m Btu) in early trading, according to one broker.

This article is part of a new LNG service coming soon from Petroleum Economist. Sign up to regular LNG news feeds today.

Contact Alastair Noakes: +44 (0) 207 7779 8007 or anoakes@petroleum-economist.com 

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