South Korea

Published at 09:55 18 Mar 2019 by . Last edited 11:53 18 Mar 2019.

South Korean LNG imports totalled 3.8 Mt last month, a 0.75 Mt (16.5%) reduction y/y.  Weak demand, with Kogas sales down 0.55 Mt (13%) y/y, suggests only a modest draw on stocks and has left the country at the end of February with LNG stocks about 1.9 Mt higher y/y. We expect another strong y/y decline in March LNG take and for that weak demand to remain lower y/y until at least July due to those high stocks as well as incremental losses in power sector gas demand. We still think weak demand will persist owing to higher nuclear availability and less coal plant maintenance, although some support could come from air quality issues. We forecast that Korean LNG imports over summer 2019 will be down by 1.9 Mt (10%) y/y, but we do expect that they will be up by 0.6 Mt (3%) y/y over the subsequent winter period on a return to more normal winter weather.

We entered this winter with a clear expectation that South Korean power sector gas demand would fall y/y owing to higher nuclear capacity. As such, weather was left as the primary demand-side driver for South Korean LNG demand this season, and an exceptionally mild winter has only exacerbated gas demand losses. February HDDs were down by 14% y/y, 6% below the seasonal average. High temperatures continued into March, with HDDs on track to be 11% lower y/y—impressive given that March 2018 was already quite mild—putting them about 18% below the past five-year March average. Every winter month bar October has been milder y/y, leading to a notable 1.5 Mt y/y drop in domestic Korean gas demand across November–February.

Sluggish demand paired with rising liquefaction capacity has left South Korea on course to finish winter with about 2.95 Mt in storage, 1.3 Mt higher y/y. Even with strong y/y decline in LNG take through Q2 19, given the headwinds facing gas-fired power generation, we do not expect to see stocks fall to last year’s levels until we get through to September. After that, we expect LNG imports will start to ramp up to rebuild stocks for the start of winter. If Korean buyers have a bigger stock draw over Q2 19, so levels get normalised faster, then the amount of restocking required in September–October will need to be higher.

South Korean LNG imports totalled 3.8 Mt last month, a 0.75 Mt (16.5%) reduction y/y.  Weak demand, with Kogas sales down 0.55 Mt (13%) y/y, suggests only a modest draw on stocks and has left the country at the end of February with LNG stocks about 1.9 Mt higher y/y. We expect another strong y/y decline in March LNG take and for that weak demand to remain lower y/y until at least July due to those high stocks as well as incremental losses in power sector gas demand. We still think weak demand will persist owing to higher nuclear availability and less coal plant maintenance, although some support could come from air quality issues. We forecast that Korean LNG imports over summer 2019 will be down by 1.9 Mt (10%) y/y, but we do expect that they will be up by 0.6 Mt (3%) y/y over the subsequent winter period on a return to more normal winter weather.

Fig 1: Nuclear cap. & gas into power, GW, Mt Fig 2:  Korean LNG stock movement, Mt
Note: Bars and left-hand axis are y/y change in unavailable capacity
Source: KHNP, Kogas,, Energy Aspects
Source: JODI, Energy Aspects

 

Higher nuclear generation and the oil-indexed price formula of Kogas-supplied LNG are considerable head-winds to LNG taking a bigger market share of Korean power. However, air quality issues continue to grow in importance. South Korea did pass in early March a series of emergency measures aimed at tackling air pollution, including bills giving authorities access to emergency funds for measures such as the mandatory installation of high-capacity air purifiers in classrooms and encouraging sales of liquified petroleum gas (LPG) vehicles, which produce lower particulate matter (PM) emissions than petrol or diesel.

None of the most recent measures do more to directly encourage gas use in power, but these do follow previous measures that include plans to shut off six (3.1 GW) coal-fired plants in March–June, the planned closure of two (1.2 GW) coal plants by the end of 2019, allowing municipal areas to instruct coal plants to turn down on high particulate matter (PM) days and revising the fuel taxation rates to be in favour of gas compared to coal. The tax changes on 1 April 2019 will move the levy on coal-fired generation to 46,000 won per tonne (KRW/t) from 36,000 KRW/t, while the tax on LNG-fired output will fall to 23,000 KRW/t from 91,400 KRW/t. 

The new taxation regime begins on 1 April, and while it will improve the competitiveness of gas in power, the impact will be somewhat marginal if the Genco’s continue to buy most of their gas from Kogas rather than sourcing it at prices closer to the JKM markers. Of all the Genco’s, only Komipo tends to buck the trend and actively engage in the LNG market. Komipo directly imports around 0.85 Mtpa, with around 0.4 Mtpa coming in under a 10-year LNG supply deal with Vitol. The rest tends to come through shorter-term tenders, although the company has been fairly quiet after it had gone out to tender in October for three to four cargoes per year to be delivered over the 2020–24 period. In late February, it did announce it was looking for offers for an April cargo. Around the same time, Komipo did announce an MoU with Vitol that involved, amongst other things, a promise to cooperate on LNG business.      

over 10 GW in April–June. While summer maintenance of coal plants will still happen, some of the coal plant outages of 2018 were due to 47 coal-fired units being fit with kit to remove SOx and NOx from flue gas emissions. The government plans similar upgrades at 35 units, although these are only to be completed by 2030, suggesting the pace of environmental improvements has slowed (although given the emergency measures, it is unclear if that slower pace will be tolerated). We do think there will be less downtime of coal plants; coal fleet utilisation could be improved through the year, adding more headwinds to LNG uptake in 2019 and 2020.

We do note that while air quality is a high-profile political issue in Korea, there is plenty of internal debate in Korea suggesting that the poor air quality is blowing over from China. We doubt this will dull the appetite for domestic action.

Korean nuclear plant updates

Nuclear outages averaged 7.0 GW over February (3.1 GW, 31% lighter y/y), and together with the mild weather, will have helped curb thermal generation. The 730 MW Wolsong unit 3 came back online on 26 Feb after an unplanned outage which began on January 21st due to the failure of a coolant pump.

March outages are set to be even lighter at 5.1 GW (6.6 GW, 57% lighter y/y), and April is set to follow with an even lower 3.4 GW of capacity offline (7.4 GW, 69% lower y/y). March thus far has seen the restart of the 1015 MW Hanul unit 1 and the 950 MW Hanbit unit 2 from planned maintenance, with the units reaching full capacity on 3 March and 18 March respectively. In addition, the 950 MW Hanbit unit 1 and the 1050 MW Hanul unit 2 are set to return on 20 March (delayed from 16 March) and 31 March.

One downside has been the unexpected outage at the 1055 MW Hanbit unit 5, with the KHNP website currently displaying the reactor as in partial shutdown with reactor output at 31% capacity. The reactor apparently entered automatic shutdown at 1:20 pm Korean time on 15 March, reportedly due to a fault with the transformer of the turbine generator. Even if we assume the reactor will be offline for the remainder of March and April, the scheduled nuclear outages will still be both considerably lighter y/y.

 

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