08-05-01 Korea Gas Corp. (Kogas) wants to diversify its suppliers of LNG, and is seeking shorter LNG gas term contracts, to help it cope with supply disruptions, the company's top official has said.
"Some questions arise with just long-term contracts," said Kim Myung-Kyu, the chairman, president and CEO of Kogas. "We should reduce the term contracts to at least mid-terms, such as 10 years," Kim said.
Current long-term LNG contracts of about 20 years have provided gas developers with large amounts of investment funds while securing a stable LNG supply to the buyers, Kogas said. As LNG industries are becoming more liberalized and competitive, LNG buyers should be able to react to rapidly changing market situations through a combination of short-term and long-term contracts and diversified sources, Kim said.

Since mid-March, South Korea has been scrambling for substitute supplies of LNG to make up for shortfalls caused by supply disruptions at the Arun gas field in Indonesia's Aceh province. The Kogas official said the Arun problem reinforced the importance of ensuring security of supplies in the future. The political stability of its suppliers should also be considered when making LNG supply agreements, he said.
Kim reaffirmed the program for Kogas' privatisation and noted that the plan called for very speedy implementation. The liberalization involves spinning off Kogas' LNG import operations into three separate companies in 2001. One will remain affiliated with Kogas and the other two will be sold by 2002. The government then plans to privatise Kogas' retail operations in 2003. Kogas will retain ownership of its LNG facilities, receiving terminals and pipelines.
"We are still on schedule... but in the case of other advanced countries, their gas industry restructuring was done gradually," Kim said. "When you do (deregulate) everything at once, many problems could arise," Kim added. South Korea should approach the gas industry restructuring step-by-step and examine the problems along the waybecause "in a country where 100 % of LNG is imported, securing stable supply is very important" Kim said.

As a part of the privatisation is a plan to sell a 15 % stake in Kogas to a foreign investor. Kogas has preselected Shell Group (RD) as the primary negotiator. This is because of all the other interested companies, it meets the most of the requirements for acquiring a stake in Kogas, Kim said.
Talks with Shell and other companies started in August last year, and Kim hopes these can be finalized this year, although "nothing has been decided yet." Other companies involved include Exxon Mobil, BP and TotalFinaElf.
Kogas hopes to raise between $ 400 mm and $ 500 mm from the sale. The talks with Shell were held up when the South Korean government expressed concerns about Shell's request for Kogas to buy LNG from one of Shell's gas fields.
"In principle, the government agrees with our plan (of selling the stake to Shell)," Kim said. According to Kim, if the LNG purchase agreement requested by Shell was in the form of a long-term contract, Kogas would need to study the deal further, as its privatisation plan isn't finalized yet.
Shell's request that Kogas sign an LNG supply agreement has alarmed South Korea's government, which is already wrestling over how to split up existing LNG contracts as part of the restructuring and privatisation of Kogas.

As part of its efforts to diversify gas supplies, Kogas is involved with a gas exploration and production project at Irkutsk in Russia. In November, it signed an agreement with Rusia Petroleum and China National Petroleum Corp. for a feasibility study on developing a gas deposit in Siberia and on a route for a 4,000 km pipeline snaking through Russia, China and into South Korea. The Russian field has proven reserves of 1.2 tcm.
The study is due to be completed by March or April 2002. Quizzed about the gas pipeline route from the Kovykta gas field to South Korea, Kim said one option, for it to pass through North Korea, seems unlikely. "We had sent a letter to North Korea (on this matter) but didn't get a reply," Kim said, adding that Kogas has ruled out North Korea from the deal.
China is urging that the pipeline bypass Mongolia and instead go around the eastern edge of that country and follow a route on to Manzhouli in north-eastern China, then cross into North Korea before terminating in South Korea. "The final route will probably be from Irkutsk to China and to South Korea via a sub-sea pipeline", Kim said.
Kim said Kogas also intends to participate in ongoing exploration and production projects at oil and gas fields in Russia's Sakhalin region, but no decision has been made. "Sakhalin has many merits because it is close to South Korea," Kim said, referring to lower transportation costs.