South Korea is taking but not using LNG

July 14, 1998 The owners of South Korea's 17-vessel LNG fleet believe there will be sufficient demand to ensure cargoes despite the plunge in domestic LNG usage.
However, orders for additional LNG vessels are out of the question with no additional orders by state energy concern Kogas until at least the end of next year.
Kogas has signalled it would prefer to deal with LNG vessel shortages in the future by tapping the spot market rather than ordering newbuildings.
"Judging from our updated (LNG import) projection, we do not see any difficulty meeting demand with our 17-vessel fleet - including those under construction. If there is any shortage of capacity around 2001, we can fill the gap with chartered ships," said a Kogas official.
Under the revised projection, Kogas will require 14.38 mm tonnes by 2000 and 21.86 mm tonnes by 2010. "We will depend more on the spot market than before to fill the void between unstable domestic demand and long-term contract supply," the Kogas spokesman said.
There are four 135,000 cm class LNG carriers now in operation and three 120,000 cm size chartered until the end of 2000 by Kogas for the carriage of fob LNG purchases.
Another 13 ships are under construction in Korean yards, with 6 ships for delivery in the second-half of 1999 and another 7 ships during the first half of 2000.
Of the 13 ships on order, 12 will be deployed in the Korea-Middle East trade. Under the contract with the Middle East supplier, about 7 mm tons of LNG has to be imported by Korea on fob trade terms.
Kogas was supposed to order an additional two 135,000 cm class ships this year from Korean yards but these plans have been abandoned.
Based on a past annual growth rate of 30 % in seven years through 1997, Kogas originally projected 12.28 mm tonnes as a demand for 1998 (up from 11.11 mm in 1997) but the worst recession since the IMF crisis forced Kogas to cut it back to 10.89 mm tonnes.
Kogas has even threatened dumping LNG imports into the air because storage facilities are full.
Korea Electric Power Corp (Kepco), which accounts almost half of LNG consumption in South Korea, suspended the LNG power plant operations with the intention of cutting its LNG purchase in 1998. Kepco is actually increasing their use of coal as a cheaper alternative.
For domestic consumption half of annual imports had been allocated for town gas consumption. The remainder was used by Kepco for LNG power generation.
However, the total quantity taken by Kepco this year has been far less than the contract and there is no sign of improvement within the near future.
According to the Ministry of Commerce, Industry and Energy, electricity consumption is expected to fall for the first time ever this summer, thanks to the unexpected push in corporate restructuring.
Demand is feared to fall even further when reduction in household consumption and industrial restructuring gains more momentum during the second half of this year.
In 1997, 5.38 mm tonnes of LNG were supplied to Kepco, but this year it planned to reduce its contract volume down to 3.53 mm tonnes only, while Kogas suggested an increase to 5.55 mm tonnes.
Through last minute negotiations, Kogas finally obtained concessions from Kepco to stay with 4.14 mm tonnes and buy 260,000 tonnes of LNG at cheaper than contract price.
By accepting Kogas' request, Kepco has to absorb additional cost burdens.
In addition to increasing coal usage, from Kepco's point of view, it is much cheaper to use bunker-C which cost only 48 % of LNG per ton. Earlier this month, Kogas cancelled 15 cargoes amounting to 600,000 tonnes from Indonesia, and another 170,000 tonnes from Malaysia, in addition to having limited imports from Qatar earlier in the year.
The government will encourage the use of LNG-fuelled cooling equipment and the introduction of cold air storage systems will be greatly encouraged during the summer season to increase town gas consumption.
Despite various efforts by Kogas to adjust imports and local consumption, it is feared that around 800,000 tons of LNG is likely to be accumulated by November in excess of storage capacity.
Under the contract of import and carriage, there are 'take or pay' and 'ship or pay' clauses by which, Kogas is obliged to pay the contracted price and freight regardless of actual taking or carriage.
Therefore, there is not much to lose from carrier's and supplier's point of view. The problem is how to dispose surplus of LNG in excess of storage facilities.
Kogas will renegotiate with supplying markets to delay the schedule of import. For long term strategy, Kogas has decided to split the existing 15-20 year long-term LNG import contract into medium and short-term contracts.
Under the medium and short-term contracts they are considering, it will be possible to adjust the inventory stock by incorporating obligatory and optional import system with flexibility to meet market situation.