Sample News Story
Kogas restricts gas to power stations in face of LNG supply crisis
28/12/2002
It never rains but it pours – especially as winter approaches. Just as Japan, the world’s largest LNG consumer, has started scrabbling around for any LNG cargoes it can lay its hands on, South Korea, the world’s second-largest consumer, has been doing the same, in a struggle to cope with its own emerging energy crisis. The most critical time for Korea is expected to be early February.
LNG consumption for power generation in South Korea has recently been higher than expected by the Korea Gas Corporation (Kogas) and the power generation companies. To help cope with an emerging LNG supply crisis, the Ministry of Commerce, Industry and Energy (MOCIE) and Kogas had asked the power generators for voluntary co-operation in restricting their use of gas. The tactic was not effective.
Finally, and with the consent of the government, Kogas announced that it intended to reduce supplies to the generators step-by-step.
Until mid-year, power generators had been avoiding using gas because it was more expensive than oil and coal. But in July the situation changed – the price of fuel oil rose above that of gas. Consequently, all the power generation companies, KEPCO's subsidiary companies and IPPs, switched from fuel oil to gas.
This in turn meant that gas consumption by the end of November was 1.2 million tonnes more than had been agreed at the start of the year. From October 1 to November 26, LNG consumption for power generation was 1,283,000 tonnes, 81% higher than the 710,000 tonnes consumed during the same period of last year.
To make the situation worse, cold weather has come to Korea a month earlier than on average – so gas consumption in the city gas sectors increased in November. City gas consumption from October 1 to November 26 was 2,040,000 tonnes, a 36% increase on the 1,500,000 tonnes used in the same period of last year.
According to MOCIE, because of the earlier cold weather, electricity consumption from October 1 to November 26 increased by 11.5 % on the same period of last year and LNG consumption was up 51% on the same period of last year.
Kogas has therefore been looking for additional LNG cargoes, but has secured only 35, including three from Algeria via Gaz de France, rather than the 48 that it estimates it needs for the winter season. It is still looking for cargos, even through traders in the US and Europe. However, Kogas is not being helped by the fact that gas prices in the US are higher than they have been for some time, with Henry Hub going above $5/MMBtu in the week that Gas Matters was going to press. Koreans must now be hoping that they will be helped out by a relatively mild winter, though the weather in Korea so far this year suggests otherwise.
So the world’s two largest LNG consumers are competing with each other for scant supplies, a situation not helped by difficulties at the Bontang LNG complex in East Kalimantan.
And Korea’s energy crisis is not just a short-term issue. Kogas has been trying to arrange new long-term and medium-term LNG supply contracts but has been prevented by the government because of the ongoing restructuring of the gas business.
Unfortunately, the bill for this restructuring was not passed in the National Assembly this month, as had been hoped earlier in the year – so Kogas is reported to be looking for a medium-term LNG sales and purchase agreement (SPA) for 2-3 mtpa, from next winter to 2010, and a long-term “one-train” SPA starting 2007. There are some who believe that even these volumes are less than what will be needed because sales forecasts underestimate the likely level of future demand.
One glimmer of hope is that the restructuring bill now looks to have a fair chance of being passed in the next session of the National Assembly, following the recent election of South Korean president from the ruling party.
But for now, the immediate problem for South Korea will be all the factors that have overlapped this autumn that are making it difficult for Kogas to maintain smooth gas supplies to customers.
And winter – which in Korea can be harsh – is only just beginning.