Kogas adopts new LNG pricing method to try keep S Korean utilities off imports

Seoul — South Korean power utilities are likely to be less tempted to import LNG directly from overseas suppliers bypassing Korea Gas Corp., or Kogas, as the state-run gas company has decided to adopt a new domestic natural gas providing format, a senior Kogas official said Friday.

Kogas has long provided imported LNG to local power utilities at same prices on the basis of the state company's average import costs, dubbed as an "average tariffs" formula.

But under new tariffs, Kogas will charge different prices to utilities through negotiations with each power utility, called an "individual tariffs" system.

"Kogas will implement the individual tariffs formula as it has won approval last week from the Ministry of Trade, Industry and Energy," the Kogas official said.

"The new individual tariffs system is expected to make local power utilities refrain from seeking to import LNG directly from overseas suppliers because they can get volumes at lower prices from Kogas through negotiations," he said.

The change in gas tariffs formula will apply to power utilities whose contracts with Kogas expire from January 2022 and also to those who enter the gas power market from January 2022, according to the official.

As the direct importers buy LNG at lower prices than offered by Kogas, which relies on existing deals signed when prices could be higher, more companies are rushing to import directly from overseas suppliers.

"The prices offered by Kogas under averages tariff formula have become higher than market prices, which have prompted local power utilities to seek direct LNG imports, rather than purchasing from Kogas," the Kogas official said.

DIRECT IMPORTS TO CONTINUE RISE

Direct buyers imported a total of 6.14 million mt of LNG in 2018, accounting for 14% of the country's total imports of 44 million mt, sharply increasing from 1.88 million mt in 2015 and 1.73 million mt in 2010, according to the official.

"The volumes of direct imports are expected to keep rising to reach 7.77 million mt in 2020 and 10.87 million mt in 2025," the official said.

"Under the new individual tariffs system, however, power utilities are less likely to seek direct imports, and instead they would want Kogas with bigger purchasing leverage to import LNG on behalf of them, though which they can buy at lower prices," he said.

Kogas, one of the world's biggest LNG buyers, imported 24.32 million mt for the first three quarters in 2019, down 12.4% from 27.77 million mt a year earlier, due to declining LNG demand for power generation amid restarts of some key nuclear reactors.

Kogas sold 24.18 million mt in the first nine months of 2019, down 7.9% from 26.24 million mt in the year-ago period.

Of the total, LNG sales to power generators dropped 12.8% year on year to 10.76 million mt, while LNG sales to retail gas companies for households and businesses also fell 3.5% year on year to 13.42 million.

-- Charles Lee, newsdesk@spglobal.com

-- Edited by Manish Parashar, newsdesk@spglobal.com