Refiners dust off fuel oil supply chains

Crisis avoided: LNG storage tanks and a tanker are seen at a power station in Futtsu. Japan narrowly averted blackouts last winter as LNG demand and prices soared during a cold snap. — Reuters

TOKYO: Japanese refiners are dusting off unused supply chains for fuel oil and getting coastal vessels and storage tanks ready after receiving requests from electric utilities to supply more fuel oil this winter amid a global crunch for power generation fuels.

Japan narrowly averted blackouts last winter as liquefied natural gas (LNG) demand and prices soared during a cold snap, and the situation this year may get even tighter as strong use and restocking in Europe and Asia draws down supplies and props up prices near record highs, executives and analysts said.

Highly polluting fuel oil, used mainly to power ships, is being considered as a backstop in case of gas shortages for the first time since the aftermath of the Fukushima disaster in 2011.

The nation’s top two refiners Eneos Holdings and Idemitsu Kosan are getting higher orders for fuel oil from electric utilities for this winter to ensure adequate power supply during the peak demand season, their executives said.

“We have received orders from several utilities for double the amount of fuel oil that we have shipped in January and February this year,” Idemitsu president Shunichi Kito said.

The move comes after the government warned that electricity supplies this winter may be at their tightest in a decade, and asked energy companies to secure adequate fuels to avoid any potential power crunch.

Recent cold snaps that brought temperatures well below normal in Japan, South Korea and northern China have made utilities nervous about weather models turning progressively colder as winter approaches.

But Japan, a former refining powerhouse, has cut outdated fuel-making capacity so severely in recent years that it may now lack the ability to produce as much fuel oil as needed, said Fereidun Fesharaki, chairman of Facts Global Energy.

“If there is a problem with one of the nuclear plants you can’t switch on to fuel oil like last time to save the Japanese economy,” Fesharaki said, referring to the post-Fukushima scramble for power supplies a decade ago.

Last winter, Japanese LNG users frantically competed with Chinese and South Korean buyers for cargoes in a tight spot market as freezing conditions hit the region, sending Japanese electricity prices to global records.

Japanese utilities also sought extra fuel oil at the time to boost run rates at their oil-fired power stations, but refiners struggled to accommodate the demand surge, Kito said.

“The requests came so suddenly and it took a while for us to arrange coastal vessels and other things. So we are now making preparations ahead of time just as utilities are doing,” he said. — Reuters

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