The halt in Japan’s nuclear power generation after the earthquake and tsunami that hit its coastline on 11 March will lead to price increases of liquefied natural gas (LNG), but these will be limited due to added production capacity.

After the earthquake and the tsunami, 27 per cent of the Japan’s nuclear generation capacity has been taken offline. While the affected reactors have been safely shut down, the authorities are battling to contain the overheating of the fuel rods and prevent a meltdown.

Prices remained steady at around $4 a million BTU after the natural disaster, according to Barclays Capital. Spot prices for shipments going into Japan rose only slightly, according to traders, while the US market largely remained unaffected, as the US imports only about 2 per cent of its LNG. Spot prices did spike in Europe, driven by concern that increased Japanese demand will divert shipments of LNG from Qatar.

Over the course of 2011, Japan will have to replace nuclear capacity with fossil fuel power generation. Barclays Capital estimates that this will necessitate an additional 800 million cubic feet a day (cf/d) of LNG in 2011, based on extrapolating the nuclear outage in 2007 to the current dimension. Should unaffected reactors be upgraded, that figure could rise.

The additional demand will tighten supply, believes Barclays Capital. The global market faces an oversupply of LNG however, after significant natural gas finds in the US, and the two new mega-liquefaction facilities in Qatar, which will be joined by a similar facility in Australia later this year.

While fossil fuel power generation has also been affected, conventional power plants are expected to resume operations sooner than nuclear reactors, however, as the safety protocol is not as extensive.

Japanese demand could be reduced if the damage to Japan’s industry has a prolonged effect on production, or if weather conditions are less favourable to consumption than in 2010.