After the Fukushima disaster led Japan to shut down its nuclear power sector fuel oil became one of the country's largest sources of electricity generation, yet now it seems that this demand is set to fall to levels not seen since before 2011 as Tokyo Electric Power Co. (Tepco) leads the country's energy utilities to switch to the cheaper fuels of coal and natural gas.
Some industry analysts have speculated whether this drop in demand from Japan, Asia's largest importer of fuel oil, could flood an already oversupplied Asia-Pacific market, forcing prices to fall and hitting producers margins, which Reuters claims are already low due to refinery expansions in China and the Middle East.
After Japan's nuclear reactors were shut down for safety checks the country's fuel oil use rose to an 18 year high of 336,000 barrels a day for the last fiscal year which ended in March 2013. Japan became the largest importer of fuel oil in Asia, with a demand twice as high as the next largest, South Korea.
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However, starting last year Japan's demand for fuel oil began to fall as the country turned to coal and natural gas. The Institute of Energy Economics, Japan (IEEJ) confirmed that "factors including the rise in burning of LNG and coal, as well as the restart of nuclear power, will increase the pace C-type fuel oil use declines."
By July 2015 Japan's energy utilities are expected to develop 14 new natural gas-fired power plants, and two new coal-fired power plants have just recently begun operations, with a combined capacity of 1,600 megawatts. Yet it is the possibility of Japan restarting its nuclear reactors that will have the largest impact on their demand for fuel oil.
Speaking to Reuters an official from one Japanese refiner explained that "coal and LNG will make up a bigger share, but oil will still be the cushion for demand fluctuations until nuclear power comes back."
The current government is considered pro-nuclear, and industry officials are trying to apply pressure for the safety checks to be completed soon so that plans can be made to begin restarting the reactors. It is thought that the first reactors will be brought back online in the next financial year, which begins at the beginning of April.
The IEEJ predicts that if Japan manages to bring online 16 reactors, an ambitious ask, then fuel oil demand may well fall by 57% to around 143,000 barrels a day by March 2015.
By. Joao Peixe of Oilprice.com
Joao is a writer for Oilprice.com More