The tragic events in Japan are having a massive effect on the global energy market and will continue to do so for many months to come. Of course not all products are affected equally and some will clearly benefit to a larger extent than others. Let us first start with an assessment of the damage done on the Japanese refining industry. At least six refineries have been shut down with both Platts and Reuters reporting that at least 1.4 million b/d of capacity are now offline, equivalent to around 30% of the country's total. Two of the shut down refineries are expected to be out of action for a longer period due to fire damage namely, JX' 145,000 b/d Sendai refinery and Cosmo Oil's 220,000 b/d Chiba refinery. Refiners are trying to compensate for the shortfalls by ramping up runs, but as it stands now, the country will have little option but to rely on higher product imports in the short term. Global product supplies will also tighten as around 500,000 b/d of Japanese product exports (mainly middle distillates and fuel oil) should largely disappear over the coming months.
Aside from the two fire-damaged refineries, we would expect offline capacity to return relatively quickly, possibly within days to weeks. TonenGeneral, for example, is already planning the restart of its 335,000 b/d Kawasaki refinery. The nuclear reactors, however, are another matter entirely. At present some 9,700 MW of nuclear power capacity, equivalent to 20% of total nuclear power capacity, has been shut down (Reuters). Of this some 2,030 MW may never return due to inundation with sea water, while the return of the remaining capacity will require lengthy inspection and many test phases before being brought back online. After all, the last earthquake to strike near a Japanese nuclear plant, back in July 2007, caused the total shutdown of Tepco's Kashiwazaki-Kariwa nuclear plant for 21 consecutive months.
With Japanese power generation and refining capacity severely limited, demand for imports of 0.3% fuel oil will sky rocket and bunker fuel is already being redirected away from the shipping sector into power generation according to reports from Platts. The choice of refinery feedstock will also gravitate towards low-sulphur, waxy crudes such as heavy-sweet Duri and lighter direct-burning grades such as Minas and Nile Blend. Moreover, these preferences are likely to be seen for the rest of the year, if not longer. Overall, we see an upside potential of up to 500,000 b/d, split roughly equally between fuel oil and crude. Additional feedstock for power generation will also come from LNG with some volumes already getting redirected from South Korea, while imports from Russia will increase as well.
The market for middle distillates meanwhile will tighten from fewer Japanese exports. This should give more support to already booming product cracks as Japan exported 200,000 b/d of gas oil in January and 140,000 b/d of jet fuel (METI). Japanese demand in the mid-term should also increase due to massive reconstruction efforts. Support for cracks will not be an Asian-only phenomenon, however, as the stringent product specifications required in Japan means that only South Korea and Singapore can supply them with further import requirements expected to be sourced from Europe and the US.
The impact on the lighter end of the barrel, however, is radically different. The outlook for naphtha looks bearish as around 23.5% of Japan's ethylene production capacity is currently offline (Platts) while the manufacturing industry has taken a massive hit with several companies shut down including Toyota, Sony and Toshiba. Gasoline meanwhile is likely to be affected the least as Japanese exports are comparably slim (40,000 b/d in Jan 2010) while any earthquake-related loss in driving habits will soon be counterbalanced by increased reconstruction activity.