Gas will feel benefit from nuclear negativity

THE crisis at the Fukushima Daiichi nuclear plant in Japan is going to change global energy markets for good. Nuclear is a dirty word once more - and gas is likely to be the main beneficiary.

Gas prices have remained low for some time due to a global gas glut following the development of shale gas in the US, but new reservations about the safety of nuclear energy could increase demand for gas significantly. This also implies that electricity prices may have to rise.

The continuing drama in Japan has prompted China to suspend new nuclear plant approvals. The country has at least 25 nuclear plants in the pipeline and 12 under construction.

"Any hazards must be thoroughly dealt with and those that do not conform to safety standards must immediately cease construction," a Chinese State Council statement said last week.

This is significant as China was expected to be responsible for 40pc of the world's new nuclear build.

"We believe that events at Fukushima could change national energy policies in nuclear countries, with potentially both shut-downs of existing nuclear plants and fewer new nuclear installations," Robert Clover, HSBC's head of alternative energy said.

"However, we expect that nuclear's loss could be natural gas, energy efficiency and renewables' gain."

Mr Clover believes that there will be higher safety and other costs for new and existing nuclear facilities, which would render nuclear power less economic - or even uneconomic.

He also forecasts upward pressure on international liquefied natural gas (LNG) and EU gas prices as power generation is swung to gas turbines. He expects this will lead to a "re-evaluation of current planned energy policy in all nuclear countries with a greater focus on energy efficiency measures plus gas and renewable installations."

Adam Forsyth, an energy analyst at broker Matrix, believes public perception of nuclear energy in the UK may be changed by the disaster, although it is still very early to say exactly how this will affect the British power sector. However, he said the "potential for change should not be downplayed".

"Our speculative analysis of a number of global policy responses shows that the impact on the gas market in particular could be significant," Mr Forsyth said. "While many governments may have little practical alternative but to stick with nuclear for the time being, at the very least, we think it safe to say that the long-term policy impact is unlikely to lead to lower gas prices."

Mr Forsyth believes that any policy changes will lead to higher prices for UK consumers. "As production from the UK continental shelf declines, LNG is filling the gap. A market tightening could constrain LNG supply, putting upward pressure on prices," he explains. "With gas-fired power stations normally the marginal source of generation capacity in the UK, this is likely to result in higher electricity prices."

The concerns have already been seen in equity markets, with uranium share values plunging last week and some potential takeovers being put on the back-burner. Canadian group Cameco, the world's largest uranium producer, saw its shares slide by a third last week, while shares in NUKP, a UK-listed exchange traded fund that tracks a basket of nuclear-related companies from uranium producers to plant manufacturers, fell 14pc.

A subsidiary of Russia's atomic energy agency ARMZ said on Thursday it was withdrawing a $1.16bn (£714m) offer for Mantra Resources because of the situation in Japan. The shares fell by one third in Toronto.

Of course, the situation could not be as bad as feared and a solid long-term buy opportunity may have been created in uranium shares.

However, it seems likely that LNG groups such as BG Group and Royal Dutch Shell could benefit from the situation over the longer term. Indeed, Shell said on Friday that it had supplied two LNG cargoes to Japan from Brunei to meet local demand.

However, a change in energy policy across the world may mean rises in natural gas prices may become a long-term trend.

From The Daily Telegraph, 21 March, 2011