To attract US spot cargoes going to North East Asia, instead of Europe, JKM would have to rise substantially above their current premium of $0.50/MMBtu to the TTF. Rising demand in Asia, both from Korea as well as China and potentially Japan, could increase the JKM premium to take account of higher shipping costs from the Atlantic Basin.
But price direction on global gas markets will also largely depend on Henry Hub, which is currently torn between falling domestic demand due to coronavirus effects and associated gas production winding down in response to the crash in global oil prices.
Korea demand could tighten gas market
The extend of the fuel switch largely depends on the price flexibility of thermal coal price in Asia, which are seen having “only limited downside in the event of coal being squeezed out of South Korea’s power sector.” Moreover, commercial Korean fuel switching would take time to implement on a large scale, so it would happen too late to bolster Asian gas prices in summer 2020 and only have an effect starting from October.
KOGAS’ substantial amount of spare gas-fired power generation capacity could, in the event of a fuel switch, substantially tighten global LNG markets. Utilizing all spare gas-fired capacity would boost Korea’s would add 1.9-2.8 million tons of demand year-on year in South Korea, according to Energy Aspect calculations. The aggregate Northeast Asia fuel switch would be up to 7.4 million tons per month if Japan also switched.
At current prices for Australian thermal coal, the price of feedgas for generators would need to be around $6/MMBtu in South Korea and $3/MMBtu in Japan, with analysts noting a major Japanese fuel switch is “mostly out of reach” due to the lower switching price.
Fuel taxes favour gas over coal
The higher fuel switching price in Korea than in Japan is caused by a different tax system for thermal fuels. The South Korean government in April 2019 reset taxes to favour gas over coal in the power sector and also levied a price on carbon emissions.
Factoring in these taxes, Energy Aspects estimates that for Korean oil-indexed gas contracts to drop below the fuel-switch level, crude prices must average below 27 $ per barrel over the indexation period. For Japan it would be 15 $ per barrel.
Brent forecasts indicate that KOGAS’ oil-indexed gas prices would be sufficiently low for a fuel switch in the period between September 2020 and January 2021. Maximum coal-to-gas switching in this period would push up Korea’s LNG demand by about 11.6 million tons, with 7.0 Mt of that in the fourth quarter, analysts forecast.
For US LNG shipments, the rising gas demand in Korea in the autumn could help offset some lost shipments for this June – reportedly up to 25 cargoes.