The intense heatwave that swept across Asia in July-August helped boost South Korean cooling demand again last month, pushing August LNG imports up by 0.32 Mt (12%) y/y to 2.9 Mt. Despite higher nuclear generation capacity, the unusually hot weather and associated rise in power sector gas demand led the region to post another y/y LNG storage draw last month. With the heating season now on the horizon, LNG import demand should remain higher y/y for the rest of the year, as imports are needed to replenish stocks. We forecast Q4 18 LNG imports will be 1.45 Mt higher y/y.
With available nuclear capacity in Q3 18 much higher y/y in South Korea, normal weather patterns would likely have dented power sector gas demand and LNG imports this summer. Instead, high aggregate power demand has continued to push gas into power, even as nuclear generation has risen, drawing down implied LNG stocks to 1.32 Mt by the end of August, down by 2.3 Mt y/y and the lowest since May.
Peak summer heat has now dissipated, with September CDDs broadly in line with the seasonal average. Still, gas into power could find some limited support this month from a small y/y increase in nuclear capacity constraints, with 6.3 GW expected to be offline in September (+0.37 GW y/y). With LNG stocks posting such a large y/y deficit, LNG imports will need to remain brisk throughout October and November to replenish stocks ahead of the peak heating season. Cargo-tracking data from Kpler indicate that September LNG imports are on course to be roughly 0.78 Mt (32%) higher y/y, which should support a storage build of some 0.7 Mt.
As we move through September, power sector gas demand should ease y/y, provided that available nuclear generation continues to grow y/y. The Korea Meteorological Administration is forecasting that there is a greater chance of above-average temperatures in October compared with normal or below-average temperatures. If the current forecast holds, that should delay the start of the heating season and shrink early winter gas demand. We forecast LNG imports in October will be up by 0.5 Mt y/y and by 0.9 Mt in November as the country looks to quickly build stock levels, but that y/y growth rate will start to recede after that as stocks get back to healthy levels and gas demand in power starts to recede because of more pronounced increases in y/y nuclear power availability.
Gas-fired generation in July—the latest date for which data are available—was up by 1.2 TWh (10%) y/y, helping meet a 1.6 TWh (3%) increase in total power sector demand. Nuclear generation rose by 0.8 TWh (7%) y/y. The 0.46 TWh (-2%) y/y drop in coal-fired generation suggests that Korea may have been enforcing generation restrictions on coal plants owing to poor air quality, although this only led to a small curtailment.
In terms of longer-term developments, Kogas announced this month a raft of plans to push towards using cleaner fuels, primarily gas. The plans include: building LNG bunkering facilities at major ports and cargo terminals by 2020; entering a joint venture with Tata Daewoo to develop LNG-fuelled road vehicles; boosting sales of hydrogen-powered vehicles by building about 100 fuelling outlets and distribution centers over the next four years; and promoting the use of gas-fuelled cooling equipment in large buildings. Kogas sees its new investments creating 2.0 Mtpa of additional gas demand in South Korea by 2025, with bunkering demand delivering growth of 0.3 Mtpa by 2022 and 1.36 Mtpa by 2030.
For 2019 as a whole, we expect that total gas demand will fall by 0.7 Mt y/y, owing largely to assumed significant increases in available nuclear capacity. We expect the Korean parliament to approve a recent proposal to increase taxes on thermal coal and reduce taxes on LNG (see E-mail alert: South Korean tax changes to further support gas demand in 2019, helping keep the JKM-TTF spread wide, 1 August 2018). Such a change will significantly shift the relative breakeven price for thermal plants, pushing more gas-fired units into merit over coal-powered plants. This could boost LNG demand at the expense of coal, although by how much will depend on the relative global market prices for those two commodities.
|Fig 1: Korean LNG storage levels, Mt||Fig 2: Korean LNG stock movement, Mt|
|Source: JODI, Energy Aspects||Source: JODI, Energy Aspects|