Japan utilities ask refiners for extra oil amid surging LNG prices -PAJ

FILE PHOTO: A worker riding a bicycle passes the Fuji Oil Co.
FILE PHOTO: A worker riding a bicycle passes the Fuji Oil Co.'s Sodegaura Refinery in Sodegaura, Japan February 8, 2017. REUTERS/Issei Kato

By Yuka Obayashi

TOKYO (Reuters) - Japanese utilities have asked oil refiners for extra supplies to generate power as they try to switch from expensive liquefied natural gas (LNG), the head of the Petroleum Association of Japan (PAJ) said on Wednesday.

The petroleum executive's comments come after Japan's government warned that electricity supplies this winter may be at their tightest since the Fukushima disaster, amid a surge in global energy prices that is hampering recovery from the pandemic.

With the northern winter around the corner, rising prices for LNG, along with coal, are pushing utilities around the world to switch to oil from gas, which has been boosting refiners margins.

"Spot LNG prices have risen considerably and we have received requests from electric utilities that want to use oil as a substitute," PAJ President Tsutomu Sugimori told reporters.

Asia spot LNG prices are off record highs but remain elevated as European utilities compete with those in Asia to boost their low gas storage levels while hopes fade for more gas supplies from Russia.

"We are not sure if we can respond to all requests as our supply chains, including ships, tanks and staff, for the utilities have shrunk considerably as demand has been dropping," said Sugimori, who is also chairman of Eneos Holdings Inc.

Oil typically accounts for only 3% of fuels used by the utilities, he said.

"But we'll try to respond as much as possible," he added.

Japan's biggest power generators operate stations with 22,000 megawatts of capacity that can burn crude in at least some of their boilers, but burning oil to generate electricity - usually expensive and polluting - is generally a last resort.

Sugimori said oil prices, at seven-year highs, could rise further if major producers such as the Organization of the Petroleum Exporting Countries and allies like Russia, a group known as OPEC+, do not boost supply.

"We hope OPEC+ will decide to increase output ... in response to a request from Japan," Sugimori said.

Prime Minister Fumio Kishida said earlier this month Japan would urge global oil producers to increase output and take steps to cushion the blow to industries hit by the recent spike in energy costs.

(Reporting by Yuka Obayashi and Aaron Sheldrick; Editing by Christopher Cushing and David Evans)

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