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South Korea’s LNG demand unlikely to rebound in 2018



2018 Oil & Gas Outlook: Asia

By Edwin Loh, Shi Yun Fan, Abache Abreu


South Korea's LNG demand is unlikely to rebound in 2018 because the new government has softened its stance against the country's heavy reliance on coal and nuclear for electric power generation.


President Moon Jae-In, who took office in May, had vowed to pave the way to make the country "free of coal and nuclear" during his five-year term by shutting several coal and nuclear power plants.


Moon's initial plan called for South Korea, the world's second-largest LNG importer, to raise the share of LNG in power generation capacity to 38% in 2030 and boost actual production to match capacity, from around 20% over the past few years.


However, following a backlash from several industries opposing hikes in electricity tariffs, Moon has scaled back its efforts toward the energy transition.


The government's long-term Basic Blueprint for Power Supply released December 14 showed regasified LNG would account for 38.6% of the country's power generation capacity by 2030, up from 34.7% in 2017.


But actual LNG-fueled power production is only forecast to reach 18.8% by 2030, up from 16.9% this year, because of sluggish power demand growth and policy directives aimed at cutting electricity consumption.


The blueprint revised down the country's forecast of electricity demand to 100.5 GW in 2030 from the previous outlook of 113.4 GW, citing the country's slowing economic growth.


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Under the new plan, the share of coal in power production would fall to 36.1% in 2030, from 45.3% in 2017, and nuclear would also decline to 23.9% in 2030, from 30.3% this year.


"The government will pursue the energy transition only in a gradual manner," Paik Un-Gyu, Minister of Trade, Industry and Energy, said earlier in December.


GRADUAL ENERGY SWITCH

The government originally aimed to convert nine coal-fired power plants under construction into LNG-based ones, but Paik said only one of the nine is now likely to be switched into gas due to protests from private utilities.


"The government cannot force private firms to convert them," Paik said, noting the switch would take place in a voluntary manner.


Instead, the minister said the government would pursue higher taxes and tough environmental regulations on coal as part of efforts to encourage power generators to switch to LNG.


The government has decided to raise consumption taxes on coal to Won 36($0.03)/kg from April from Won 30/kg.


"The government will also impose additional charges on coal and toughen regulations on carbon emission to curb coal consumption," the minister said.


Moon has also pledged to shut down 10 aged coal-fired power plants with the capacity of 3.35 GW before his five-year term ends in May 2022.


He has also canceled plans to build six nuclear reactors, and vowed to shut an additional 10 aging reactors after their initial 30-year lifespan expires by 2031.


"The government will press ahead with energy transitions from coal and nuclear to renewable sources and LNG," Paik said, noting that South Korea has long adopted an energy policy focused on minimizing costs, which has resulted in heavy reliance on coal and nuclear.



ADDITIONAL LNG STORAGE

In line with the government's power mix policy, state-owned Kogas has increased LNG imports despite sluggish domestic demand.


Kogas imported 24.43 million mt of LNG for the first nine months this year, up 11.7% from 21.87 million mt a year earlier.


However, downstream sales by the gas monopoly fell 3% year on year to 22.42 million mt over January-September, from 23.11 million mt in the same period of 2016.


In June, Kogas started commercial operations at three large-scale gas storage tanks each with a capacity of 270,000 kiloliters.


The company plans to build a new LNG terminal with a capacity of 2 million kiloliters by 2031, bringing the state-owned company's infrastructure to five terminals with a combined capacity of 13.47 million kiloliters.


But South Korea's LNG demand is unlikely to rebound because operating rates at coal power plants and nuclear reactors are likely to remain high, given the country's electricity trading based on "cost-based pool."


Coal-fired power plants and nuclear reactors owned by state utilities are considered baseload and often operated at full capacity because of their lower production costs.


"Power producers based on LNG have been suffering from worsening performance under the cost-based trading formula that does not reflect environmental costs," said Yang Seong-Bae, chief of the Power Planning Department of the state-run Korea Power Exchange.


"Tax incentives are needed to boost price competitiveness of LNG-based power plants," he said, noting one of three LNG power plants remains idle. "In addition, the government needs to ease regulations on LNG imports so that private utilities can import cheaper LNG."



FURTHER MARKET LIBERALIZATION NEEDED

Kogas has maintained a monopoly on LNG imports and domestic sales since its establishment in 1983.


The monopoly was slightly eased in 1998, when the government allowed domestic companies to import LNG directly, but on the condition that they secure storage facilities and use imported natural gas for its own consumption and not to resell in the domestic market.


Last year, the government decided to gradually lift the regulations on resale of imported LNG in the domestic market from 2025.


But Yang said the regulations needed to be fully lifted as soon as possible, so that LNG-based power utilities can boost price competitiveness.


Without incentives for natural gas, the country's LNG demand is likely to keep sliding in 2018, according to the Korea Energy Economics Institute.


The state-owned think tank forecast LNG demand to decline 1% in 2018 due to a 5% decline in power generation, following an estimated 0.7% decline in 2017.


The country's LNG demand has been on the decrease over the past few years.


"Despite the government's push for energy transition, coal power generation capacity would increase by 15.3% next year, with operation of six new big coal power plants and upgrades of two existing plants," the KEEI said in a recent report.


Furthermore, new nuclear reactor Shin Kori-4, with a capacity of 1,400 MW, is scheduled to start commercial operation in September, which would undercut LNG-based power plants, it said.







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