Impact of Japanese Earthquake on Global Energy Markets

Impact of Japanese Earthquake on Global Energy Markets-

Analyst Briefing

Ravi KrishnaswamyVice President – Energy and Power, Asia Pacific

September 2011

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Introduction

• The recent earthquake and nuclear crisis in Japan led to ripple effects in the global energy markets. It not only affected the nuclear power market but also other energy markets.

• This analyst briefing outlines the immediate developments in various energy markets such as nuclear, oil, LNG, and renewable energy both at the domestic and global levels. It also discusses the possible future developments in these markets.

• As the shutting down of nuclear reactors has led to severe power shortages, especially during summer, this market insight discusses the impact of the crisis on the Japanese power rental market.

• “Short-term development” refers to the immediate developments following the earthquake within a horizon of a year, while “long-term development” refers to a forecast period of 2013-2015.

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Importance of Nuclear Power in Japan

Japan’s ‘Energy Policy’ aimed at making nuclear power contribute up to 50.0% of total power requirements by 2030

Source : Electricity Review Japan - Federation of Electric Power companies, Japan

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Nuclear Power - Drivers and Restraints

Drivers Restraints

• Nuclear power technology expected to grow due to increasing investments to make this technology safer

• Nuclear safety-related industries likely to witness enhanced demand

Demand restraints are likely to have a more pronounced impact in the short-term. Safe nuclear power is a key demand driver for technology investments.

Nuclear power is most likely to face stunted growth than expected prior to the earthquake.

• Governments relooking at energy policies and reconsidering nuclear power investments

• Stringent policies/extensive redundant safety features likely to make nuclear power costly

• Financing for nuclear ventures anticipated to become difficult

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Snapshot - Nuclear Power Developments

• ‘Energy Policy’ review

• New nuclear plans shelved

• Possibility of nationalization of TEPCO.

• Huge revenues from decommissioning

• Credibility of Japanese nuclear reactor builders affected

• Japanese nuclear reactor makers and nuclear related industries could lose sales

• Surge in nuclear safety constructions and construction of back up power facilities

• Countries reassessing nuclear safety measures

• Decommissioning and safety-related activities

• Fall in stock value of nuclear / nuclear related companies

• Uncertainty over nuclear demand• Effects on overseas projects by

Japanese nuclear technology providers

• Careful considerations for nuclear power development

• Regulatory regimes to be made more stringent

• Development in other industries for safe nuclear operations

• Resurgence of nuclear power

• Rise in costs of nuclear power

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Oil Market – Drivers and Restraints

Demand Drivers Demand Restraints

• Crude/Fuel oil consumption likely to increase as utilities operate oil-fired plants to tackle power shortages

• Crude oil consumption set to rise as the nation rebuilds its power infrastructure

• Economic slowdown leading to minimum activity in industrial/transport sectors is likely to reduce the oil demand

• Shutdown of large refining capacities leading to lesser crude oil consumption

• Large-scale usage of LNG lessens oil demand

Short-term impact of drivers and restraints is more pronounced than that in the long-term because of the reduction in refining capacity rather than the drive for additional power.

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Snapshot – Oil Energy Sector Developments

• Increase of oil-generated power

• Increase of crude oil and oil product imports

• Rethink on scaling down of refining capacity

• Resumption to current situation in terms of power plants/refining capacities

• Possible increase in backup refining capacity/number of oil-fired power plants

• Volatility in oil exports from the Middle East

• Global increase of refinery utilization rates and margins

• Dampened effects on oil prices

• Likely status quo in terms of oil’s importance to energy mix

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Demand Drivers Demand Restraints

• Most of the facilities that were shutdown because of the earthquake were oil-fired while only one LNG fired plant was shutdown.

• LNG import terminal survived the earthquake. Hence, it was the ideal and cleaner alternative.

• Easy availability of LNG

• Decline of economic activity following the natural disaster leading to lesser power requirements

• Transportation infrastructure for LNG not yet developed; has to be transferred only through tankers

As a replacement to nuclear power, LNG has been largely preferred over oil and coal. This is expected to set a precedent for the long-term requirements as well.

LNG – Drivers and Restraints

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Snapshot- LNG Market Developments

• Tightening of Asia Pacific basin• LNG exporters benefit due to

increase in demand• LNG supplies are diverted to

Japan• LNG logistics experiencing a

sharp increase in prices and supply

• Acceleration of gas projects

• Efforts will be taken to ensure high efficiency of gas turbines

• Development of LNG transmission network to reduce LNG costs

• Utility companies likely to intensely scout for overseas LNG projects

• Japanese utilities increasingly shifting to LNG

• Rise in LNG imports

• Japan buying Pricey Spot cargoes of LNG

• Short-term LNG power solutions

• LNG projects in emerging countries such as Russia, China, and India poised for growth

• Expansion in support infrastructure of the LNG supply chain – liquefaction and regasification

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Demand Drivers Demand Restraints

• In the aftermath of nuclear power crisis, renewable energy has become highly relevant with its very less emissions and low safety concerns.

• Increasing cost of nuclear power could make RE more comparable in terms of price.

• Longer development time in terms of technology development and installation

• It is more of a long-term plan than a short-term plan.

Long-term impact is likely to be very high, as RE is more of a long-term energy source. Its advantage as a cleaner source of energy is a key demand driver.

Renewable Energy – Drivers and Restraints

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Snapshot – Renewable Energy Developments

• Supply chain of major solar power equipment firms disrupted

• Major rethink on Japan’s renewable energy policies

• Feed-in-tariff legislation for renewable sources is receiving more mileage

• Japan’s vision of 20.0% renewable power generation capacity by 2020 likely to gain fruition

• Widespread adoption of solar and other RE sources

• Government policy shift

• Alternative energy stocks surge

• Diversification by power systems businesses

• Renewable power likely to cost less

• Large-scale R&D in renewable power support infrastructure

• Acceleration of smart grid system implementation

• Possibility of achieving grid parity with RE sources

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Nuclear Energy Oil Energy LNG Renewable Energy

Relook on policy

Technology development

Infrastructure growth

Government support / Investments

Supply constraints

Increase of demand

Effect on prices

Impact on Energy Markets

Impact of Japanese Earthquake

Impact of the Japanese earthquake and nuclear crisis is expected to be very high in the renewable energy (RE) and nuclear power sectors. The impact on the LNG sector would be higher than that on the oil sector, as LNG is a cleaner fuel of the two and is expected to replace nuclear both in the short- and long-terms.

Source: Frost & Sullivan Key: Very High High Medium Low No Impact

Energy Market: Impact of the Earthquake in Key Energy Sectors (Japan), 2011-2015

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Power Rental Market Overview

CAGR: 2.5%

Power Rental Market: Revenue Forecast (Japan), 2005-2015

Note: All figures are rounded; the base year is 2008. Source: Frost & Sullivan

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenue ($ Million)

16.708 17.278 17.88 17.5 16.8 17.07 17.56 18.136 18.828 19.69 20.798

Revenue Growth Rate (%)

NaN 3.4 3.5 -2.1 -4 1.6 2.9 3.3 3.8 4.6 5.6

2.5

7.5

12.5

17.5

22.5

(5.0)

(3.0)

(1.0)

1.0

3.0

5.0

7.0

Revenue (

$ M

illion)

Revenue G

row

th R

ate

(%

)

Pre-crisis Forecast

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Revenue Forecasts – Post-Fukushima Crisis

The power rental market in Japan witnessed a steep hike in 2011, and it is likely to remain high during the forecast period because of the following reasons:

• The revamp in disaster recovery plans by companies including power rental firms that have witnessed a need to improve their emergency responses

• Large-scale investments in reconstruction efforts during the forecast period

• Hampered transmission and distribution networks before complete rebuilding occurs

• Entry of multinational companies in the power rental market.

• Increase of rental revenues due to the heightened demand

• Capital expenditure likely to be deferred, as firms are yet to fully recover from the disaster

Post crisis, the power rental market is expected to generate a revenue of US$99.4 million in 2011 and reach about US$287.5 million in 2015.

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For Additional Information

Donna JeremiahCorporate CommunicationsAsia Pacific+603 6204 [email protected]

Carrie LowCorporate CommunicationsAsia Pacific+603 6204 [email protected]

Ravi KrishnaswamyVice PresidentEnergy & Power Systems+65 6890 [email protected]

Jessie LohCorporate CommunicationsAsia Pacific+65 6890 [email protected]