South Korea's state-owned Korea Gas Corporation will buy fewer spot LNG cargoes for the foreseeable future in response to shrinking domestic demand, a senior executive told Platts Wednesday, November 19.
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The world's single-largest LNG buyer has deferred a number of deliveries in recent months as it battles with high stocks due to the country's slowing economic recovery and moderate temperatures.
"The situation has been resolved, but we will be reducing spot purchases to brace for weak domestic demand," said the official, who asked not to be named.
Kogas, which has a monopoly on domestic natural gas sales, sold 27.6 million mt of LNG over January-October, down 9.6% year on year.
The state utility attributed the decline in domestic LNG sales to the restart of some nuclear power plants, higher coal demand for power due to its relatively lower prices than LNG and weaker power demand due to unseasonably mild temperatures.
The state-run Korea Energy Economics Institute has forecast the country's LNG demand to rise 2.6% year on year to 42.14 million mt in 2015 before it starts falling steadily -- down 0.5% to 41.95 million mt in 2016, down 2.9% further to 40.74 million mt in 2017 and down another 2.3% to 39.81 million mt in 2018.
LNG is used intensively for heating and power generation in South Korea.
The executive said Kogas was seeking to change its LNG contracts to eliminate destination restrictions, which stipulate where the supply can be sold and make it difficult for buyers to resell imported volumes when their supply/demand situations change.
Contracts with destination flexibility and swap arrangements could ease South Korea's inventory concerns, the official said.
CURBING 'ASIAN PREMIUM'
Kogas plans to work with other Asian LNG buyers to phase out the "Asian premium" that has plagued the region in the past due to the lack of bargaining power and rigid pricing practices, he said.
LNG importers in South Korea, Japan and Taiwan have traditionally paid more for LNG cargoes due to oil-linked contracts and a lack of alternative energy sources.
"Kogas will push for joint purchase of LNG with Asian importers as part of efforts to ease the Asian premium," the executive said. "Importers in South Korea and Japan would have the same voices."
South Korea has proposed a working group of Asian importers to establish an LNG hub in Northeast Asia that will help erode the Asian Premium.
Kim Eun-Kyung, in the South Korean energy ministry's gas industry department, said progress was made on this front at the LNG Producer-Consumer conference in Tokyo on November 6.
"South Korea and Japan reached a consensus that they need to strengthen cooperation to ease seasonal and regional supply-demand imbalance by creating a natural trading market such as Henry Hub in the US and [National Balancing Point] in Europe, and facilitating LNG swaps and joint storage," Kim said.
"We have proposed to seek to bring a change to oil-linked LNG pricing by making it reflect prices of other competitive fuels, such as coal, nuclear and renewable sources," she said.
DIVERSIFYING BEYOND MIDDLE EAST
Seoul has also proposed to Japan to use South Korean LNG storage tanks.
"In line with efforts toward cooperation with Japan which has increased LNG imports, we have proposed that Japan could use our LNG storage tanks," Kim said, noting the two nations would have further discussions over the issues.
The Kogas senior executive said the company would make more efforts to diversify LNG supply sources beyond the Middle East to include North America and East Africa.
Kogas wants to avoid too much exposure to a single supply source, such as US shale gas, he said.
The official said Kogas is continuing efforts to improve its financial state by selling non-core assets overseas.
"Kogas aims to sell an additional 5% stake in LNG Canada by the end of this year, and the process is underway," he said.
Kogas currently holds a 15% interest in LNG Canada, after selling a 5% stake to Shell in May.
Shell now holds a 45% stake in the project, PetroChina and Japan's Mitsubishi each hold 20%, and Kogas has 15%.
In May 2013, Kogas and partners launched LNG Canada, a project to produce 12 million mt/year of LNG from two trains at Kitimat in British Columbia.