South Korea’s sole gas importer Kogas is taking steps to source LNG at cheaper prices through its proprietary gas production. "We need to shift away from a conventional supply method of bringing LNG under high-priced long-term contracts from overseas,” CEO Lee Seung-hoon stressed.
Kogas is engaged in several overseas projects, such as a pipeline from Iran to LNG plants to be built in Oman, and the liquefaction of U.S. shale gas, Mr Lee said. Earlier this month, Kogas also signed an accord with the Mexican state government of Yucatan to build an LNG import terminal and gas pipelines, which could cost $1-1.5 billion.
Back at home, overcapacity has lowered the utilisation rate of Korea’s LNG-based power plants as low as 40% in the first half of this year, incurring losses for power producers like Kogas and grid operators. The government in 2014 feared a capacity crunch, so it pushed for the construction of around 6,000 MW of gas power capacity.
However, Korea’s latest economic slowdown has dramatically reduced energy demand – prompting gas importer to turn away from costly long-term LNG contracts to either snap up spot cargoes or source more proprietary gas through upstream projects abroad. South Korea has engaged in overseas E&P projects, however, some indebted state-run energy firms are now looking to divest some loss-making assets in a bid to streamline their businesses.
Shut-down of 10 coal power plants by 2025
Committed to reduce air pollution, the South Korean government is enforcing the shut-down of ten ageing coal-fired power plants by 2025 – flexible gas power plants and renewables are meant to fill the capacity gap. “The government will invest as much as 10 trillion won by 2030 to reduce carbon emissions,” energy minister Joo Hyung-hwan announced in late July.
Clean energy plans foresee to reduce the share of coal power generation from 28% last year to 26.2% by 2029. To that end, the minister announced the closure of two entire coal-fired power plants in Seocheon, two units at the Boryeong coal power station and a further two units each at the Samcheonpo, Honam units and Yeongdong power stations. Enforcing a gradual coal power exit is meant to reduce fine dust particles by 24%, sulfur oxides by 16% and nitrogen oxides by 57% by 2030, from last years’ levels.
Stringent rules for new-builds, as CO2 price ‘too low’
Though South Korea is the first Asian country with a national carbon trading scheme, prices hover around $10/t which is way too low to make gas the preferred fuel for power generation. More stringent emission rules for new-build fossil plants are hence the only way to curb emissions – and regulate a gradual shift to gas generation.
"To make coal-to-gas displacement economic, the price of carbon would have to rise to $50/ton as this year, [assuming the cost of importing thermal coal at $2.63/mmbtu]," Dr Ho-Mu Lee, research fellow at the Korean Economic Institute told Gas to Power Journal.
As for future energy demand, Mr Lee is more pessimistic due to Korea's stagnant economy and the overcapacity in the power sector. Gas demand used to rise about 8% for the last decade, with gas prices still widely linked to oil; but going forward he anticipates that sluggish economic growth will see gas demand from the power sector demand to shrink by 5.5% per year.