Japan Wrestles with a California-Style Energy Crisis

Abstract: Japan may yet avoid rolling blackouts next month. But the world's second largest oil importer faces steep challenges that could force the island nation to compete for additional oil and gas in already tight global energy markets.

Analysis: If you think the horserace to replenish U.S. wintertime gas storage this summer is fascinating, you'll find the energy scramble underway in Japan of special interest.

The scramble does not involve natural gas. Rather the issue is nuclear power. The question is whether Tokyo can keep the lights on as the island nation enters its annual seasonal peak in heat and humidity over the next 30 days.

Actually there are two issues, of which getting through August is only the first. The second--and greater--issue involves viability for the nation's nuclear program.

As illustrated in the Jurassic Park analogy in which the beating of a butterfly's wings in Costa Rica eventually results in rain for New York City, events in faraway Japan can have a real, measurable, and significant impact on the U.S. energy picture.

If Japan, the world's second largest oil importer after the United States, were to run into continuing problems with its ambitious nuclear program, its oil imports could theoretically rise 30 percent, or 1.5 million barrels per day (Mbpd).

Considering the current tight state of the oil market, this development means one more bump in a global system that has been buffeted over the last year by Venezuela, Nigeria, and war in Iraq.

Actually, it appears Tokyo will squeak through the summer without California-style blackouts. Last week, Tokyo Electric Power Company (TEPCO), the world's largest privately held electric utility, restarted a fourth nuclear reactor and now says it has enough power to meet peak seasonal demand.

The utility previously restarted three nuclear reactors in mid-July. The fourth startup gives TEPCO 61.6 million kilowatts of capacity, which is still shy of the 64.5 million kilowatts consumed on hot summer days by the utility's 43 million customers. However, the utility can boost the supply to 65 million kilowatts through purchases of surplus power from other Japanese utilities, which tend to be vertically integrated by geographic region.

While TEPCO is not out of the woods yet, the situation is certainly more benign than it appeared just two weeks ago as the utility waited for local governments to sign off on its intent to restart some of the 17 reactors that had been shut down over safety concerns.

The cracks in Japan's nuclear power strategy have been growing larger over the last half-decade because of accidents and lax safety practices. Then last August, word surfaced that TEPCO falsified inspection reports on several of its nuclear reactors over a 15-year period. Most of the falsified maintenance records involved minor issues such as cracks in power plants.

The ensuing public outcry forced TEPCO to shut down its entire nuclear plant capacity. Since then, several of the plants have been re-inspected and repaired. The utility would like to reactivate eight to 10 units to guarantee adequate power for the customers it serves in the Tokyo geographic region, including the U.S. military base on the Kanto plain.

To make up for the power shortfall, the utility restarted shuttered thermal power units, which burn fossil fuels--nearly all of them imported. Additionally, both industry and consumers have been strongly encouraged to adopt conservation practices.

Although the TEPCO reactor problem impacts Tokyo and environs mostly, the problem is symptomatic of a much broader challenge.

Japan is the world's fourth largest energy consumer. Imported fuels account for 80 percent of the country's energy. Oil consumption remains almost 10 percent below its 1996 peak. A side issue of interest involves future competition for oil supplies between Japan and China, which observers expect will eclipse Japan in total oil consumption sometime this year.

Japan imported 5.3 Mbpd in 2002, with more than 75 percent originating in OPEC states. The nation has embarked on an aggressive program to diversify away from Middle Eastern oil. A central part of that program is expanded use of nuclear energy. In all, Japan has 53 nuclear power reactors. All were developed after the Arab oil embargo in 1973, which hit Japan particularly hard. Between 1985 and 1996, Japan doubled its nuclear power output, and nuclear power now supplies 14 percent of the nation's total energy, or about the same level as natural gas.

But the long-term issues facing nuclear energy are formidable.

The Japanese have yet to come up with a viable solution regarding what to do with spent fuel, a problem that bedevils the U.S. nuclear energy industry as well. The government is sponsoring a consortium of electrical utilities that have embarked on a program to build and operate a $17-billion, 800-ton-per-year fuel reprocessing plant known as Japan Nuclear Fuel.

The reprocessing plant faces a tight schedule. If it is not operational by July 2005, several nuclear reactors will be shut down because of the spent nuclear fuel problem. While Japan Nuclear Fuel insists the project will be online on time, it is currently six years behind schedule and is only now undergoing initial testing.

The main drawback to fuel reprocessing, besides high cost, is the creation of plutonium. Plans to use the plutonium in the world's first commercial fast breeder reactor have stalled after a court ruling earlier this year criticized the Japanese government's safety regulations at the prototype plant built to demonstrate the fast breeder reactor concept.

Despite those challenges, the Japanese government is pursuing a 30-percent expansion in the country's nuclear generation capacity by 2010, which means adding another nine to 12 nuclear reactors.

Getting there is another matter. The TEPCO scandal has brought construction programs at other Japanese nuclear power plants to a halt. Beyond the practical damage, the TEPCO event has shaken the Japanese public's confidence in nuclear power as a viable energy option and added to the nation's active anti-nuclear coalition, a group that garnered popular support following an incident that killed two workers at a nuclear power plant in 1999.

Without the nuclear option, Japan faces increased imports of foreign fuel. When TEPCO's nuclear power plants were shut down earlier this year, Japanese oil demand rose nearly nine percent, or a half-million barrels per day as compared to the previous year, despite a stagnant economy.

In the longer term, the nation is examining natural gas options as a partial solution, including either a pipeline connecting the nation to an ExxonMobil project on Sakhalin Island, or importing LNG from Shell's Sakhalin II project.

The Japanese government is negotiating with Russia about supplying financial aid for an oil pipeline connecting western Siberia to Nakhodka, a port on the Pacific, and is in deep discussions with Iran over development of a massive oilfield in Azadegan with its estimated 6 billion barrels of reserves.

The latter option has drawn the ire of the Bush administration, however.

Japan's energy challenges may be viewed as its own problem. But the solutions are going to impact the global energy picture for good or ill over the next three years.

That persistent background noise is the gentle flapping of a butterfly's wings in a faraway land.