By George Friedman

Energy demand in Japan is nearing that of before the country's March 2011 nuclear disaster, but its power generation, largely dependent on nuclear energy, is still low. Liquefied natural gas may be Japan's second-best option, but its adoption will be subject to severe limitations and will increase Tokyo's energy security vulnerability.

The aftermath of the March 2011 nuclear disaster in Japan caused a sharp decrease in the country's energy demand. The damage to the country's nuclear reactors, supply chains and energy infrastructure led energy consumption to drop by 10 percent year-on-year in November 2011. Nearly a year after the incident, Japan's energy demand is nearing previous levels, but its output remains low, forcing it to look to other energy sources to meet domestic demand.

Japan appears to be looking to natural gas, specifically liquefied natural gas (LNG), to compensate, increasing LNG imports by 27 percent year-on-year in January 2012 and receiving imports from new sources such as Qatar and Russia. However, there remain serious limitations for natural gas-derived power to supplant Japan's reliance on nuclear energy. Moreover, despite current debates on the viability and safety of its massive civil nuclear power industry, nuclear energy will remain a fundamental pillar of Tokyo's energy independence and security strategy.

Importance of Nuclear Power

Before the disaster, nuclear energy was fundamental to Japan's energy security. As a resource-poor island, the difficulty in importing energy adds to already high prices. Also, Japan's supply chain of the requisite radioactive chemical element and isotope inputs for nuclear power was relatively secure, with allies such as the United States, France and the United Kingdom being major suppliers of the uranium necessary to fuel Japan's civil nuclear power program. Japan was only meeting about 16 percent of its energy demand through domestic production before the disaster, and 30 percent of that production came from nuclear energy.

The nuclear disaster cut Japan's total power-generating capacity, which includes nuclear, coal, petroleum and natural gas, by almost 25 percent. Only two of Japan's 54 power-generating nuclear reactors are currently online, and aging nuclear plants are still up for review, with all of the country's reactors set to go offline by April. Moreover, short- and long-term plans to increase Japan's nuclear power generation, such as increasing nuclear power's share of electricity generation to 50 percent by 2030, are likely to be pushed back amid strong public opposition to nuclear energy. Such opposition has led to talk of implementing a 40-year operational cap on older plants.

Thus, Tokyo is facing the need to diversify its energy import sources, but there are strong limitations and vulnerabilities to substantially increasing Japan's use of natural gas, crude and thermal coal.

Benefits and Limitations of LNG

Japan's imports of LNG have increased more than other energy sources since the nuclear crisis. It is likely that spot and most likely contract-based LNG supply will continue to be the main energy source to compensate for lost nuclear power generation, with good reason: Around 40 LNG import terminals remain online in Japan, and only one small regasification terminal shut down as a result of the disaster.

However, serious limitations remain in supplanting nuclear power with LNG power generation. Japan produces only 4 percent of its consumed natural gas, making it heavily reliant on suppliers such as Malaysia, Indonesia and Australia. Japan recently has bought Qatari and Russian natural gas on spot markets, but these prices remain relatively high, and settling supply on a contractual basis will likely be less favorable to Japan on pricing arrangements. Despite the natural gas glut, LNG use in Japan remains more expensive than nuclear energy and coal as an energy source. The government has projected that costs would still be higher for LNG as opposed to nuclear energy by 2030. This makes LNG less appealing at a time when increased energy imports at higher prices contributed to Japan's first trade deficit since 1980.

Also, despite Japan's being one of the world's largest natural gas importers and its numerous import terminals, its domestic natural gas pipeline network is limited, hindering its ability to efficiently move natural gas to higher-demand regions. This is partly due to geographical constraints imposed by the country's mountainous terrain, but it is also the result of previous regulations that limited investment in the sector.

Domestic politics also play a role in limiting the potential of LNG use. The powerful nuclear lobby, led by Tokyo Electric Power Co. (TEPCO), has engendered a strong nuclear dependence and limited natural gas networks. The lobby has been successful in making nuclear dependence a reality in Japan's energy strategy, limiting Japan's natural gas dispersal infrastructure.

Adding to the limitations are inefficiencies in Japan's energy networks and infrastructure. The country has two power grids, one in the southwest and one in the northeast, which are incompatible with one another. Pipeline networks may have resolved the inefficiencies in the power grid, but Japan has few natural gas-fired power plants, so its capacity for natural gas power generation is limited to 6 million tons per month -- a cap it is nearing.

Sustained LNG use for power generation is a viable option only if Tokyo addresses entrenched nuclear interests and invests in necessary infrastructure, and there are signs that this may be occurring. The nuclear lobby lost considerable clout after the disaster, and TEPCO may need to be bailed out by the Japanese government, which would see a subsequent government takeover, clearing one political obstacle for broader LNG use.

Meanwhile, Japan's Ministry of Economy, Trade and Industry is studying the possibility of installing extensive natural gas pipelines linking major cities in Japan to address network weaknesses. However, under the current circumstances, in which the supply chain, infrastructure and costs of the nuclear power industry are significantly beneficial for Japan's energy security and independence, it will be difficult for Tokyo to make such changes that could increase its energy vulnerabilities beyond its current problems.


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Japan's Energy Vulnerability After the Nuclear Disaster is republished with permission of STRATFOR.

Japan's Energy Vulnerability After the Nuclear Disaster | Global Viewpoint