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South Korea’s LNG market cooling down

Hydrocarbon Engineering,

According to Business Monitor International (BMI), South Korea’s LNG imports have fallen 8.2% year on year in the first 10 months of 2014 (10M 2014) compared to 10M 2013. This is also the second lowest level of LNG imports into South Korea for four years.

LNG imports saw a steep year on year fall particularly in May, August and October. This was in spite of lower prices from August due to the weakening of crude oil prices, which affected oil indexed LNG contracts. It is a contrast from Japan, where lower prices saw imports rise as buyers stock up on supplies over this period.

Nuclear returns

South Korea’s lack of domestic gas resources, and the absence of a gas import pipeline, has made it the world’s second largest importer of LNG after Japan. LNG imports have trended upwards since 2011, as gas demand from the power sector soared due to safety concerns leading to the shut down of several nuclear reactors. High profile corruption scandals exposing safety negligence in the country’s nuclear sector had put the country’s nuclear reliance into doubt, at a time when the world was revisiting the merits of nuclear in the wake of Japan’s Fukushima fallout in 2011.

The fall in LNG imports in 10M 2014, however, shows an easing of this appetite. Despite lower import volumes than in 2013, particularly in the months from May to October, state owned Kogas – the country’s sole buyer of LNG – reported that it has pushed back LNG deliveries due to high stocks. Therefore, real gas consumption is likely to have seen a greater year on year fall than LNG import volumes imply.

A cooler summer has helped in part to alleviate South Korea’s gas and power demand, as it has in Japan. Another key factor is an increase in nuclear over gas in the country’s power generation mix. Majority state owned Korea Electric Power Corporation (KEPCO), which has an 87.2% market share in the country’s power market, saw nuclear rise from 32.2% in Q3 2013 to 37.0% of its generation mix in Q3 2014. This 4.8% increase has mainly come at the expense of LNG, which saw its share in KEPCO’s generation mix fall from 19.1% in 2013 to 15.7% over this period.

The near term market

In the short term, South Korea’s dependence on LNG will weaken more significantly than Japan, according to BMI. Unlike Japan, social and political resistance against nuclear is weaker and regulatory checks needed to restart plants are more quickly completed. The considerable cost savings to KEPCO and other Korean utilities will support nuclear where possible.

For instance, despite contributing to less than 20% of the country’s total power mix in Q3 2014, LNG accounted for almost 50% of KEPCO’s total fuel cost. This is even after a fall in LNG import prices over the summer, and with a stringer KRW over the US$ during this period.

With state owned companies such as Kogas trying to cut the debt-to-equity- ratio, cost cutting measures will see the country reduce use of LNG where possible. BMI has adjusted forecasts for South Korea’s gas consumption in 2014 and 2015 to reflect the country’s weaker appetite for LNG.

Long term growth expected

In the longer term, South Korea’s LNG demand will continue to tick upwards as the government seeks to increase the country’s power supply so as to avoid a repetition of the country’s power crisis experienced in September 2011. By 2017, an additional 5060 MW of new gas fired combination cycle plants are expected online, which could require approximately 2.05 million tpy of LNG (2.79 billion m3 of gas) if these plants run at 70% of their full capacity. As such, BMI forecasts South Korea’s gas consumption to rise from a forecast of 49.7 billion m3 in 2014 to 53.24 billion m3 in 2018.

Nonetheless, BMI has adjusted South Korea’s gas consumption growth after 2020, when it is expected to stagnate as nuclear continues to expand its position in the power market. The government has plans to add another 11 nuclear plants to the country by 2024. Although the government adjusted its policy such that nuclear is now expected to only contribute to 29% of the country’s total energy mix by 2030 as opposed to the original target of 4.1%, this is still a 3% increase from the share of nuclear in South Korea’s energy mix in 2013.

Adapted from a report by Emma McAleavey.

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