LNG in World Markets Special Feature: World Gas Conference 2022
SOUTH KOREAN BUYERS SEEK LONG-TERM VOLUMES
South Korean state-owned power generating companies (gencos) and direct importers are expected to issue tenders for long-term supply starting from the mid-2020s. The issuers will include the country’s five state-owned gencos, Korea Western Power (Kowepo), East-West Power (EWP), Korea Midland Power (Komipo), Korea Southeast Power (Koen) and Korea Southern Power (Kospo).
At the same time, these buyers could purchase a part of their required volumes from state-owned Kogas, allowing them to secure terminal capacity access. Direct importer S-Oil may issue a long-term tender early next year for its own requirements.
While South Korean buyers are seeking to cover their long-term requirements for supply, there are very few price reference points for negotiations for deals starting in 2026, as not many deals are being done on a Brent-linked or hybrid pricing formula basis in that period.
Some of the gencos are also in talks with Kogas and may eventually choose to buy more supply from Kogas under the new individual gas tariff scheme (IGTS). Kogas is likely to secure a competitive price as an existing buyer versus new buyers in an extremely tight-supply environment. Kogas introduced IGTS in 2020 as downstream buyers felt that the existing South Korea weighted average cost of gas (Wacog) price is too high at a 14.85% slope of Brent due to legacy contracts. Kogas has access to terminal capacity while new buyers must secure capacity from existing terminal capacity holders. South Korean buyers could also choose to go for a greater price weighting against Henry Hub in their hybrid-linked pricing formula amid rising oil prices.
Buyers’ requirements from the mid-2020s
Kowepo is expected to issue a tender for up to 1 MMt/y of long-term supply starting in 2026 later this year. The long-term LNG supply tenders are to replace Taean coal units one to four with new gas-fired power plants over 2025-2030. Kowepo is still in final sales and purchases agreement (SPA) negotiations for a three-year supply deal with GS Energy that will start in 2022 for 400,000 t/y using a hybrid price formula of Brent and the Henry Hub gas price for its Gimpo power plant.
EWP is likely to seek a second tranche of long-term supply of around 300,000 t/y for its Eum Sung gas-fired power plant in Ulsan starting in 2025. EWP will also require an additional long-term supply for the replacement of Danjin coal units 1 to 4.
Koen did not award its long-term buy tender issued last year for 550,000 t/y of LNG starting in 2026 or 2027 for its new 1.2 GW gas-fired power plant which will be constructed in Samecheonpo. It is now in bilateral talks with Kogas. Depending on the outcome of these negotiations, Koen may issue a new and larger long-term tender this year beginning in 2026. Some of the additional volumes are to replace Samcheonpo coal units 3-6.
Kospo is expected to issue a new long-term supply tender of 500,000- 600,000 t/y starting in 2026 and secure term volumes from state-owned Kogas. Kospo is likely to purchase long-term supplies from Kogas under the IGTS. It is planning to convert its Hadong 1 and 2 coal units to a combined cycle gas-powered plant. A separate tender will be issued to purchase LNG supply to replace its Hadong 3 and 4 coal-fired units.
S-Oil will launch a long-term tender to buy up to 1 MMt/y beginning in 2026, likely in early 2023 after the refiner makes a final investment decision by the end-2022 on a new petrochemical project. S-Oil is looking to build a new power plant for the petrochemical project, although it remains unclear if it will be gas-fired or dual-fuel. The Saudi Aramco affiliate has an existing long-term supply deal with Petronas for 700,000 t/y for 15 years starting in 2018 into Posco’s Gwangyang terminal. A price review will take effect in 2023 for the hybrid formula comprising JCC and Henry Hub. S-Oil is also leasing a storage tank in Gwangyang.
Several deals inked this year
EWP signed a SPA with TotalEnergies for 300,000 t/y on a delivered basis for 10 years starting in 2024 for its Eum Sung power plant in Ulsan, while Hanwha Energy is expected to wrap up its SPA in the near term with TotalEnergies. TotalEnergies also signed a SPA with Kogas for back-to-back supply to GS EPS for three years for its existing Dangjin no 1 power plant starting in 2022. The latest deal GS signed is under Kogas’s IGTS and an extension of an existing contract. GS Energy also signed a three-year supply deal as the 528 MW power plant is aging and could be decommissioned after the latest contract.
New president-elect unlikely to deter procurement plans
South Korea’s president-elect Yoon Suk-yeol is widely expected to bring significant changes to energy policies. Yoon has previously indicated it would scrap the policy of phasing out nuclear power, a reversal of previous president Moon Jae-in’s policy to phase out the country’s existing 24 nuclear units and not build new ones. However, Yoon’s new energy policies are unlikely to affect the planned LNG procurement as the proposed power plants have been approved in the previous power plan.
Yoon has also emphasized the importance of nuclear power plants, which are perceived to be essential to energy security and aids in the reduction of greenhouse gas emissions. The new government is expected to resume the suspended construction of two nuclear reactors, Shin-Hanul 3 and 5 in Uljin. Both reactors were placed on hold in 2017. The latest policy U-turn is expected to have an impact on South Korea’s LNG demand as nuclear and coal power are baseload in the country’s power dispatch order. Coal-fired capacity accounts for 40% of the country’s domestic power generation mix. Nuclear accounts for 27%, LNG is 24% and renewables are 6%.
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