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LNG IN KOREA

opportunities for growth

ABARE RESEARCH REPORT 03.4

ABARE

KEEI

Allison Ball Karen Schneider Jane Mélanie Robert Curtotti

Changwon Park Jaesung Kang Jaekyu Lim

proudly produced for:

Australian Government Department of Industry, Tourism and Resources

© Commonwealth of Australia 2003 This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Director, ABARE. ISSN 1037-8286 ISBN 0 642 76489 1 Ball, A., Schneider, K., Mélanie, J., Curtotti, R., Changwon Park, Jaesung Kang and Jaekyu Lim 2003, LNG in Korea: Opportunities for Growth, ABARE and KEEI, ABARE Research Report 03.4, Canberra. Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601, Australia Telephone +61 2 6272 2000 Facsimile +61 2 6272 2001 Internet www.abareconomics.com ABARE is a professionally independent government economic research agency.

Korea Energy Economics Institute 665-1 Naeson-Dong, Euiwang-Si, Gyunggi-Do, 437-713, Korea Telephone +82 3 1420 2114 Internet www.keei.re.kr Facsimile +82 3 1422 4958

ABARE project 2835

foreword
Natural gas has played an increasingly important role in meeting Korea’s rapidly growing energy demand since its introduction in the mid-1980s. This trend is likely to continue, with forecast strong growth in natural gas consumption over the next decade and beyond. With limited domestic reserves, Korea has relied exclusively on imports of liquefied natural gas (LNG) to meet its natural gas requirements. LNG will continue to meet the majority of Korea’s projected demand although, over the longer term, pipeline natural gas imports could provide a complementary source of gas supply. A critical issue for Korea is that natural gas supply plans have not kept pace with projected demand and a significant gap between demand and supply could develop over the next decade. Failure to resolve the issues surrounding long term LNG procurement soon could leave Korea vulnerable to gas supply shortfalls in the coming years. The key objective in this report is to assess the potential growth in natural gas demand in Korea and, in particular, the role that LNG could play in that market. Korea’s current and projected gas supply situation over the medium to longer term is also reviewed. To meet future Korean natural gas demand, potential sources of LNG supply in the Asia Pacific market are examined as is the feasibility of pipeline natural gas supply options. The study was undertaken jointly by ABARE and the Korea Energy Economics Institute.

BRIAN S. FISHER Executive Director ABARE August 2003

SANG-GON LEE President KEEI

LNG in Korea: opportunities for growth

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Tourism and Resources. the Korea Southern Power Company. ABARE and KEEI also gratefully acknowledge the support of ChevronTexaco.acknowledgments The authors wish to thank several colleagues for their valuable contributions during the preparation of the report: in ABARE. publication and launch of the Korean language version of the study in Seoul on 28 August 2003.4 . Perth. ChevronTexaco. in the Department of Industry. In particular.E. Paul Kay. the authors gratefully acknowledge the information and insights provided by Gavin Harper. Woodside Energy. In addition. Perth. ABARE’s contribution to the report was funded by the Australian Department of Industry. the Korea South-East Power Company. SK Corporation. North West Shelf Australia LNG and Woodside Energy for the translation. and LG International Corporation. Anthony Aspden. Industry and Energy. Damian Deveney and Rob Mitchenall. H. Shell Pacific Enterprises Limited. Colin Heseltine. Seoul. Jeff Feltham. Seoul. Australian Ambassador to the Republic of Korea. POSCO. LG-Caltex Oil Corporation. Seoul. Kim Hye-Young and Bill Brummitt. the Korea Electric Power Corporation. Sian Ferguson. the authors are grateful for contributions from the following: the Ministry of Commerce. iv ABARE research report 03. Tourism and Resources. Many organisations in Korea provided information and valuable comments on the study. the Korea Gas Corporation. North West Shelf Australia LNG. and in the Australian Embassy. and Sean Rodrigues. Vivek Tulpulé and Lindsay Fairhead.

contents Summary 1 Introduction Objectives in the study 1 8 9 11 11 17 21 27 31 31 33 34 36 45 45 51 57 57 62 67 67 72 73 76 82 v 2 Energy and natural gas consumption in Korea Energy consumption Natural gas consumption Natural gas supply Gas pricing 3 Factors affecting Korea’s future natural gas demand Environmental issues Security of energy supply New sources of demand Energy market reform 4 Projecting natural gas demand in Korea Analytical framework Reference case projections 5 Alternative policy scenarios Electricity and gas sector deregulation Impacts of a gas supply disruption 6 Natural gas supply considerations Pipeline natural gas Can pipeline natural gas compete with LNG? Natural gas supply and demand balance Supplying LNG to Korea 7 Conclusions LNG in Korea: opportunities for growth .

by sector LNG imports ABARE research report 03. by fuel City gas demand. by sector Monthly LNG consumption. by sector Motor vehicle registrations Final energy consumption in key sectors. by sector Projected natural gas consumption.Appendix A Structure of the global trade and environment model (GTEM) 84 91 24 28 38 39 43 58 63 70 75 81 2 3 4 6 11 13 14 15 15 17 19 20 20 21 References boxes 1 2 3 Korea’s LNG supply shortfall in winter 2002–03 Gas price setting procedures in Korea Economic reform under the Roh Moo-hyun administration 4 Assessing the costs of electricity generation 5 Entry of private LNG importers into the Korean gas market 6 Benefits of deregulation in the electricity and gas sectors 7 LNG supply disruption to Korea in 2001 8 A ‘gas-for-peace’ deal with North Korea – implications for pipeline projects 9 Alternative natural gas supply and demand balance 10 Australian LNG supply figures A B C D 1 2 3 4 5 6 7 8 9 10 vi LNG consumption. by fuel Energy imports. reference case Potential gas demand and supply balance Total primary energy consumption Fuel mix in primary energy consumption Final energy consumption.4 . by sector LNG monthly consumption. by sector City gas monthly consumption patterns.

2015 Gas consumption by sector following deregulation. reference case Projected unmet gas demand. by sector. 2000 Electricity generation costs Indicative long run marginal costs for power generation Deviation from the reference case in a GTEM simulation Alternative projections for share of gas fired power generation Residential consumption of coal. reference case. reference case Annual growth in gas consumption. 2001–15 Gas consumption. 2005 Change in sectoral output following a gas supply disruption. by fuel. 2015 Change in gas and electricity price following a gas supply disruption. Gas consumption following a gas supply disruption. 2005 Change in GNP following a gas supply disruption. 2005. reference case. 2015 Fuel mix in electricity generation following deregulation. 2015 Change in energy consumption following deregulation. reference case Total primary energy consumption by fuel. by sector. reference case Change in energy prices following deregulation. 2001–15 Primary energy consumption.11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 LNG import terminals and pipeline network Average LNG and crude oil import prices Fuel mix in district heating systems. 2015 Change in production and exports of energy intensive goods following deregulation. 2005 Possible gas pipelines to Korea Potential natural gas demand and supply balance Alternative natural gas demand and supply balance 25 27 34 40 41 47 48 50 52 52 53 54 54 55 59 60 60 61 62 64 65 65 66 67 74 75 LNG in Korea: opportunities for growth vii . gas and electricity Annual growth in energy consumption.

by fuel Electricity plants and capacity. 2000 Cost estimates for new generating plants Regions and sectors in GTEM in this study Projected share of electricity generation. Seoul area. 2015 viii ABARE research report 03.4 . 2002 Electricity generation. by end use City gas consumption. 2000 Total primary energy consumption. January 2003 Mid to long term projections for district heating supply Fuel costs for electricity generation. reference case Projected energy consumption following deregulation. by source Existing mid and long term LNG contracts LNG receiving terminals Planned expansion of LNG storage tanks Planned expansion of gas pipeline network Wholesale gas price for power plants.37 Proved recoverable reserves in countries exporting LNG to the Asia Pacific market. by fuel. 2001 Energy import indicators LNG consumption. reference case GDP and primary energy consumption. January 2003 Wholesale price for city gas. by region LNG imports. by source. reference case Revision of special consumption taxes on fuel sources Contracted gas supply and projected shortfall. January 2003 Retail price for city gas. 2002 77 2 3 5 12 12 13 16 16 17 18 19 22 23 26 26 26 27 29 29 35 39 40 46 49 51 53 56 61 tables A B C 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Total primary energy consumption. 2002 Projected natural gas demand and supply Major energy and economic indicators International comparison of major energy and economic indicators. 2002 LNG imports.

26 27 28 29 30 31 Sakhalin gas reserves Potential natural gas demand and supply balance Alternative natural gas demand and supply balance LNG trade in the Asia Pacific. 2001 69 74 75 76 78 79 80 LNG in Korea: opportunities for growth ix . Asia Pacific market LNG plants under construction and planned. 2002 Existing LNG plants. Asia Pacific market 32 Indicative LNG transport costs to Korea from various exporters.

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Oil is the main source of energy in Korea. An important issue for Korea is that gas supply plans have not kept pace with projected demand and a significant gap between demand and supply could develop over the next decade. potential sources of LNG supply in the Asia Pacific market are examined. driven by rapid growth in economic output and rising personal incomes. Korea’s current and projected gas supply situation over the medium to longer term is also reviewed. natural gas has played an increasingly important role in meeting rapidly growing energy demand in the Republic of Korea (Korea). Procurement of LNG supplies over the longer term remains uncertain in Korea as the government is delaying entering into new long term contracts until plans to liberalise Korea’s domestic gas market are progressed. This trend is likely to continue. LNG will continue to meet the majority of Korea’s projected demand. in particular. as well as options for pipeline natural gas supply to Korea from the Russian Federation. the role that LNG could play in that market. compared with 44 million tonnes of oil equivalent in 1980. Total primary energy consumption in 2002 reached 209 million tonnes of oil equivalent.summary Since its introduction in 1986. With limited domestic reserves. Korea has to date relied exclusively on imports of liquefied natural gas (LNG) to meet its natural gas requirements. although its share has been declining in recent years. accounting for 49 per cent of primary energy consumption (table A). In this context. with forecast strong growth in natural gas consumption over the period to 2015. The key objective in this report is to assess the potential growth in natural gas demand in Korea over the period to 2015 and. although pipeline natural gas imports could provide a complementary source of gas supply over the medium to longer term. LNG in Korea: opportunities for growth 1 . Failure to address this issue soon could leave Korea vulnerable to gas supply shortfalls over the medium term. Energy overview Energy consumption in Korea has increased by more than 7 per cent a year over the past two decades.

3 14. City gas LNG accounted for 11 per cent of 10 total power generation in 2001 and is used primarily as a peak load 5 fuel. The city gas sector accounted for 62 per cent of Korean LNG consumption in 2002.7 23. albeit from a small base. 49.0 billion cubic metres). increasingly.0 Coal Oil LNG Nuclear Renewables Total Source: KEEI (2003a).Korea depends on imports for more than 97 per cent of its non-nuclear energy requirements. natural gas was introduced into the Korean market in 1986 in the form of imported LNG. while electricity generation comprised 33 per cent. In this context.4 . Electricity generation figure B). and represented more than 11 per cent of primary energy consumption in 2002. this has led to a strong emphasis on energy security and supply diversification policies.1 million tonnes (25.1 102. In 2002.9 209. the majority of demand is from the residential sector and is LNG consumption. In the electricity sector. natural gas consumption was 18.6 29. space cooling. figure A). 2002 Korea Mtoe % 23. 2003a.9 100. Rapid growth in city gas consumption in Korea over the past decade is the main source of the sharp rise in LNG demand (KEEI 2003a.1 Natural gas consumption in Korea Natural gas use in Korea has grown at an average annual rate of 19 per cent since 1990. A Currently all natural gas demand in Korea is met by imported LNG 2 Mt 1986 1990 1994 1998 2002 ABARE research report 03. Within the city gas sector. expansion in gas infrastructure.2 1. The rapid growth has been a result of active government policies to encourage natural gas use.1 11. and rising personal incomes that have induced a shift in preferences to clean and efficient fuels. by sector driven by strong demand for heatKorea ing and. including gas distribution networks and electricity generation plants.5 49.8 3. A Total primary energy consumption. This has led to strong seasonal fluctuations in LNG consumption 15 Other in Korea (KEEI 2002a. In conjunction with its reliance on oil.

0 Factors affecting future natural gas demand While natural gas demand is expected to continue to grow strongly in Korea. mental considerations.5 Mt Monthly LNG consumption.9 28. a range of issues will 17.8 0. From late 2003.0 4.2 22. including environ.Sources: KOGAS (2003).0 affect the extent and profile of Total future demand. some form of liberalisation is likely to occur over the medium term.3 0.0 0.5 1. domestic gas supply will begin from a small field in the East Sea but supply from this project will meet only around 2 per cent of Korea’s current gas demand.0 2. Based on fuel costs alone.0 1. by sector Korea Other Electricity generation City gas 2000 Dec 2001 Dec 2002 Dec B LNG imports.1 2.3 1.2 0. Malaysia and Brunei (table B). by source. While the deregulation and privatisation plans for these sectors developed by the previous government have stalled under the current administration.9 4.8 12. However. LNG is generally less competitive than other energy sources. Electricity market liberalisation is likely to increase competitive pressures on power generators and provide incentives for cost minimisation. B 2. This suggests a more robust future for gas use in power LNG in Korea: opportunities for growth 3 Qatar Indonesia Oman Malaysia Brunei Australia Other 5.and Korea is the world’s second largest importer of LNG after Japan. One of the most important factors will be the anticipated liberalisation of domestic electricity and gas markets. 2002 Korea Mt % 28.8 100. Korea also uses the spot market extensively to meet winter demand peaks and any shortfalls in contracted supply. BP (2003). energy security issues and new sources of gas demand.2 5.3 . The majority of LNG imports are on the basis of long term take or pay contracts from Indonesia. gas fired electricity generation could compete more effectively when the total cost of generation is considered because of its lower capital and operating costs. the Middle East.

Natural gas is projected to remain one of the fastest growing fuels in Korea.4 .9 billion cubic metres) 4 30 25 20 15 10 5 Mt Electricity Residential Commercial Industry 2003 2006 2009 2012 2015 ABARE research report 03. In Korea there is some uncertainty surrounding the role that natural gas may play in power generation over the outlook period. competitive market. However. Projecting natural gas demand in Korea The analysis of the potential demand for natural gas in Korea over the period to 2015 presented in this report is based on results from ABARE’s global trade and environment model (GTEM). The projections are also based on assumptions relating to the projected fuel mix in electricity generation. the share of gas Projected natural gas consumption. At 2015. reference case is 11 per cent.3 million tonnes (45. especially to meet peak demand. The assumptions used in this study are from the Korea Power Exchange (KPX 2002a). the delay in implementing gas market reform is having some serious implications for Korea’s long term gas supply security. Similarly. total primary energy consumption is projected to expand by 3. The energy demand projections are based on an assumption that GDP growth in Korea will average 5 per cent a year between 2001 and 2015.0 per cent growth a year over the period 2001–15 to reach 33.5 per cent a year to reach 319 million tonnes of oil equivalent in 2015. averaging 5. the expected transition to a more efficient and competitive structure in the gas market has the potential to increase the relative competitiveness of natural gas and stimulate new demand.generation in a deregulated. C Korea On the basis of these assumptions. The share of gas in total electricity output is assumed to rise over the first half of the outlook period but to fall between 2007 and 2010 as a result of strong expansion in nuclear and coal fired output. This is because the Korean government is postponing entering new long term LNG supply contracts until the issue of reform has been progressed.

cargo swaps with other countries such as Japan.0 0. there are two options for Korea to meet the anticipated gas supply shortfall –– to sign new LNG import contracts and to import pipeline natural gas. The Korean government considers that supply from the Irkutsk pipeline could begin from 2008–10 and that it could deliver 7 million tonnes of natural gas a year for thirty years. Based on existing LNG import contracts.C Projected natural gas demand and supply Korea 2005 Mt 2010 Mt 24. supply in 2015 could be around 20 million tonnes lower than projected natural gas demand.0 0.4 1.0 Projected gas demand.2 14.4 20. with supply to begin in late 2003.4 3. The fall in overall natural gas use between 2007 and 2010 reflects the assumed fall in gas fired power generation over this period (figure C). Additional short term solutions include increased LNG spot market purchases.1 or around 13 per cent of total primary energy consumption. US$11 billion pipeline would have to begin rapidly to be operational within this timeframe.3 11. The strongest growth in demand for natural gas is expected to be in the residential and industry sectors.9 1.9 19. it is expected that there will be a gas supply shortfall of around 3 million tonnes in Korea in 2005 (table C). However. construction of the 4100 kilometre. Taking into account the expiry of some existing contracts. reference case KOGAS LNG contracts POSCO/SK LNG contract Projected domestic supply Projected gas supply shortfall 23. The commercial viability of the project also depends to a large extent on the commitment of China LNG in Korea: opportunities for growth 5 . and midterm LNG contracts.4 8. Two midterm (seven year) contracts were recently signed with Australia and Malaysia. there is potential to develop pipeline natural gas supply to Korea. Natural gas supply considerations In the absence of significant domestic reserves.0 0.6 1. Over the longer term. A pipeline from Irkutsk in eastern Siberia through northern China to Korea is currently the subject of a feasibility study.2 2015 Mt 33. the results of which are expected by September 2003.

Economic factors aside. The balance assumes that 0. are emphasised in the decision making process.to the pipeline –– without demand from China. Korea has sought pipeline prices that are believed to be competitive with LNG and that would enable the project to proceed on a commercially sound basis. can also be expected to increase the attractiveness of LNG. Other recent trends. especially in an environment of declining international LNG prices (Platts 2003a.b). pipeline natural gas may still form a part of Korea’s gas supply mix in the medium to longer term if noneconomic factors. Irkutsk Donghae gas field supply POSCO/SK LNG contract KOGAS LNG mid term contracts KOGAS LNG long term contracts 2006 2009 2012 2015 D 30 25 20 15 10 5 Mt 2003 6 ABARE research report 03. Potential gas demand and supply balance Korea Gas supply shortfall/possible additional LNG Pipeline natural gas supply. It also assumes that pipeline natural gas supply from Irkutsk will begin from 2010. However. including greater flexibility in the terms and conditions on which LNG is available. some analysts have expressed doubts that pipeline natural gas could compete in Korea with LNG over such distances. Indicative gas supply and demand balance A potential natural gas supply and demand balance for Korea is provided in figure D based on the demand projections developed in the report and current and known planned gas supply.4 million tonnes a year of gas will be delivered from Korea’s Donghae project and that the by POSCO/SK contract for around 1 million tonnes of LNG a year from 2005 will proceed. including an ability to meet seasonal demand patterns. including energy security and geopolitical concerns. Korea’s decision to use pipeline natural gas will depend significantly on its competitiveness with imported LNG. there is unlikely to be sufficient gas to justify construction of the pipeline on commercial grounds.4 .

given the time required to bring new developments to the market. Indeed. The need for additional LNG contracts could be greater if the Irkutsk project is delayed beyond 2010 or is not able to supply 7 million tonnes of gas a year. By waiting.On the basis of these assumptions. Korea would need to secure additional LNG contracts of around 3 million tonnes by 2005 and further term contracts to meet the projected shortfall in the remainder of the outlook period. Korea is potentially missing the opportunity to secure favorable terms and conditions that are currently being offered under long term contracts in the international market. waiting for gas reform plans to be implemented before committing to new LNG contracts is exacerbating the gas shortfall issue. when stronger growth in natural gas demand is forecast than in the earlier part of the outlook period. Further. it is not necessarily in Korea’s best interests to put pressure on the reform process to hasten the signing of new LNG contracts. or vice versa. it will be important for Korea to commit to new supply contracts as soon as possible if it is not to face an increasingly difficult gas supply situation in the medium term. However. This shortfall is likely to be met by new LNG import contracts. LNG in Korea: opportunities for growth 7 . A key issue in this context is the government’s preference to delay entering into new LNG supply contracts until decisions have been made regarding the reform of the gas market. However. The current competitiveness of the LNG supply industry and its responsiveness to changing market conditions will also ensure that Korea’s long term energy security objectives are met.0 million tonnes at 2015. Because gas market reform is complex and requires good planning to implement effectively. there are currently a number of LNG supply projects in the Asia Pacific region –– existing and planned –– that have the capacity to meet Korea’s long term gas requirements. In these circumstances. there is projected to be a natural gas supply shortfall of 13. the size of Korea’s long term gas requirements is sufficient to justify additional investment in production capacity by LNG suppliers. however. Failure to contract additional medium to long term gas supplies is likely to leave Korea vulnerable to gas shortages and to exacerbate the difficulties it has experienced in recent years. The supply gap becomes more significant after 2010.

This is equivalent to around a quarter of Asia Pacific LNG trade. This strong economic performance has been underpinned by large scale and often government-directed industrial development. The sustained shift from primary industries to more energy intensive sectors. Primary energy consumption has grown at more than 7 per cent a year since 1980. In this context.1 introduction The Republic of Korea (Korea) has achieved remarkable economic progress over the past fifty years. a key characteristic of the Korean economy is its dependence on imports for more than 97 per cent of its energy requirements. With such high import dependence likely to continue. primarily under long term contracts with suppliers from Indonesia. With limited indigenous energy resources. Korea is the fourth largest energy consumer in Asia. limited natural resource endowments and climatic factors. LNG imports have increased in line with the rising consumption of gas. natural gas (in the form of imported liquefied natural gas or LNG) was introduced into the Korean market in 1986 and has since played an increasingly important role in the fuel mix. Malaysia. excluding nuclear power. Korea imported nearly 18 million tonnes of LNG. including iron and steel production and ship building. In 2002. reaching 209 million tonnes of oil equivalent in 2002. moving from a low income agrarian economy to an internationally competitive and highly industrialised economic system. 8 ABARE research report 03. along with rising incomes. Natural gas represented 11 per cent of Korea’s total primary energy consumption in 2002. and Korea is now the world’s second largest importer of LNG after Japan. security of energy supply can be expected to remain one of the key pillars of energy policy in the foreseeable future. From an energy policy perspective. Brunei and the Middle East. has played a key role in shaping energy consumption patterns in Korea. In particular.4 . Korea’s strong economic growth and expansion of energy intensive industries has led to a rapid rise in energy consumption. this import dependence has led to a strong emphasis on energy security and strategies to diversify fuel supplies. with its fuel mix heavily biased toward oil.

However. Objectives in the study The key objective in this report is to assess the potential growth in natural gas demand in Korea and. Korea’s gas importing monopoly. a critical factor in the overall assessment of such projects will be their contribution to energy security and diversity of energy supply. the fuel mix in power generation and other factors that will influence energy sector outcomes. This trend is being reinforced by strong investment in new gas distribution networks. Korea’s first contract with Indonesia will expire in 2007. as gas offers a competitive and clean alternative fuel for a range of end uses. The feasibility of a long distance gas pipeline from the Irkutsk region in the Russian Federation is currently being considered by government and industry in Korea. Also important will be proposed reforms in Korea’s electricity and gas industries that are likely to introduce more efficient and competitive energy markets. To date. in particular. KOGAS has addressed the anticipated supply shortfall by increasing its use of the spot market and by entering into midterm LNG contracts with Australia and Malaysia. While KOGAS. has mid and long term LNG contracts for volumes of 19 million tonnes a year. to ensure that its gas requirements over the coming years can be met cost effectively and without risk it will be necessary for Korea to consider entering into further mid or long term LNG supply contracts in the near future.The role of natural gas in meeting Korea’s energy demand is likely to continue to expand over the next decade. a shortfall in contracted LNG supply is expected to expand over the period to 2015 as more long term contracts expire and Korean natural gas demand increases. pipeline natural gas could provide an additional and complementary source of gas supply to the Korean market. Over the longer term. Korea’s limited domestic gas resources mean that any growth in gas consumption will need to be supplied either by increased LNG imports and/or the introduction of pipeline natural gas. the role that LNG could play in that market. Further. The likely demand for natural gas is analysed on the basis of assumptions related to economic growth. These include policies LNG in Korea: opportunities for growth 9 . This likely gas shortfall is emerging as a serious issue for Korea as KOGAS has delayed signing new long term LNG contracts until plans to reform the gas market are progressed. In addition to cost effectiveness.

Sources of LNG supply in the Asia Pacific market and their key characteristics. Also analysed are options for pipeline natural gas supply to Korea. with a focus on the feasibility of long distance pipelines from the Russian Federation.associated with liberalisation of the electricity and gas markets. 10 ABARE research report 03. including resource availability.4 . production capacity and security of supply are examined. nuclear power policies and environmental issues. security of energy supply. The study also assesses the emerging natural gas supply gap faced by Korea and reviews the options available to meet this shortfall. and their potential competitiveness with LNG.

energy consumption was 209 million tonnes of oil equivalent.2 energy and natural gas consumption in Korea Energy consumption Primary energy consumption in Korea has grown rapidly over the past two decades. Energy intensity. at an average rate of 7.1 per cent in 1998 –– it has since recovered rapidly (KEEI 2003a). Korea accounted for 8 per cent of Asia Pacific energy consumption in 2002 (BP 2003). or energy consumption per unit of economic output. compared with 44 million tonnes of oil equivalent in 1980 (KEEI 2003a. reflecting robust domestic consumer spending and growth in export sectors.1 per cent since 1980. remains high in Korea.4 tonnes of oil equivalent per thousand won in 2002 (table 1).3 per cent in 2002.5 per cent as a result of the sluggish world economy. The Korean economy has grown at an average annual rate of 7. at 0. Economic growth in 2003 is expected to slow to around 3. Economic growth fell sharply in 1998 as a result of the Asian financial downturn but recovered quickly to reach 6. LNG in Korea: opportunities for growth 1 200 150 100 50 Mtoe Total primary energy consumption Korea Renewables Nuclear LNG Oil Coal 1982 1986 1990 1994 1998 2002 11 . Driving the rapid growth in energy consumption has been Korea’s strong economic performance. steel and shipbuilding. This reflects the fact that economic growth has been led by expansion in energy intensive industries.4 per cent a year. including petrochemicals. While Korea’s energy intensity has declined since 1997 as a result of industrial restructuring. In 2002. While the Asian financial downturn in the late 1990s had a significant impact on the Korean economy –– energy consumption fell by 8. it remains one of the highest among OECD countries (table 2). with gross domestic product (GDP) valued at 596 trillion won (US$477 billion) in 2002 (table 1). figure 1).

7 5.6 110. Fuel mix in primary energy consumption Total primary energy consumption is the total energy used by an economy.1 -0.2 Energy consumption per person in Korea has also grown rapidly.23 0.4 tonnes of oil equivalent in 2002 (table 1).8 5.9 4.3 0.4 47.9 1.20 0.5 8. Current levels are similar to those of Japan and Germany.6 524.64 Korea Japan Chinese Taipei China United States Germany Australia OECD average non-OECD average 193.4 4.4 6.6 0.9 47.4 43.4 1981 1991 2001 –91 –2001 –02 % % % 8. Sources: KEEI (2003a).4 2.75 4.2 5 316.35 4.5 1 142. from 1.4 560.1 Major energy and economic indicators Korea Annual growth 1981 1991 103.7 0. although lower than in Australia and the United States (table 2).74 0.1 5. 12 ABARE research report 03.6 327.2 tonnes of oil equivalent in 1981 to 4.32 Energy consumption b per person 4.4 2 299.13 3.22 0.3 6.4 4. 2000 Primary energy consumption Mtoe Energy intensity a toe/’000 US$ 0.26 0.9 1.1 596.6 -0.3 7. Primary fuels include coal.7 Energy consumption Mtoe Real GDP a trillion won Population million Energy intensity toe/’000 won Energy consumption per person toe a in 2002 prices.b). Sources: IEA (2002a.4 .10 4.5 c a Tonnes of oil equivalent per thousand 1995 US$ PPP.7 139. b Tonnes of oil equivalent per person. 45.30 0.5 0.91 8.17 0.2 2002 209.7 339.2 38.7 11.4 2001 198.24 0.13 5.4 1. crude oil and net imports of petroleum products 2 International comparison of major energy and economic indicators. c Total.3 0.74 0. KNSO (2003).18 0.9 c 6 251.3 0.

8 3.5 49. While coal demand has been strong in recent decades.6 29. 2002 Korea Mtoe % 23. at 49 per cent in 2002 (table 209. natural gas. as have government efforts to reduce Korea’s dependence on imported oil supplies. Coal is also an important energy source in Korea. While demand for oil has Total grown by more than 6 per cent a Source: KEEI (2003a). is a result of active government policy initiatives encouraging LNG use and the expansion of gas infrastructure LNG in Korea: opportunities for growth Coal Oil LNG Nuclear Renewables 49. 3 Total primary energy consumption.3 14. However. its share of primary energy consumption has declined steadily since 1994 (KEEI 2003a. LNG consumption has grown at an average annual rate of 18. High crude oil prices in recent years have contributed to the declining share of oil.1 100. nuclear power and renewables (hydropower and others such as wind and solar power). compared with 3 per cent in 1990. to reach 11 per cent of primary energy consumption in 2002.0 3).9 2 80 60 40 20 % Fuel mix in primary energy consumption Korea Renewables Nuclear LNG Oil Coal 1982 1986 1990 1994 1998 2002 13 . anthracite has to a large extent been replaced by imported bituminous coal –– the share of anthracite in total primary energy consumption was 2 per cent in 2002. Anthracite coal is the main domestic energy resource available in the Korean territory and was the major energy source before being replaced by oil in the 1970s.7 per cent over the past decade. This rapid growth. representing 23 per cent of primary energy consumption in 2002. a significant change in the composition of coal consumption has occurred over this period. Natural gas has led the growth in energy consumption in Korea since LNG was introduced into the market in 1986. year on average over the past decade.1 102.9 Oil constitutes the largest share of primary energy consumption in Korea.1 11. albeit from a small base.(hereafter referred to as oil). figure 2).2 1.7 23.

transport.4 . which encourages the installation of waste incineration facilities to generate heat and power and residential solar hot water systems. This large expansion in the use of nuclear power reflects government policy responses to Korea’s growing reliance on imported energy. This sector has also been one of the fastest growing users of energy in recent years. In 2002.2 per cent of primary energy consumption in 2002. Supportive government policies.throughout the country. Energy consumption in the residential and commercial sectors has grown more slowly and represented 22 per cent of final energy consumption in 2002. including the New and Renewable Energy Development and Promotion Act. although use of nonhydro renewables has been growing in recent years. LNG consumption is discussed in more detail later in this chapter. Renewable energy. residential and commercial services sectors but does not include the energy used in conversion (principally electricity generation and petroleum refining) and distribution activities. by sector Korea Public/others Residential/commercial Transport Industry 1982 1986 1990 1994 1998 2002 ABARE research report 03. figure 3). to reach 14. It includes energy used by industry. including hydropower. The industry sector is the largest final energy user in Korea. final energy consumption in Korea was 161 million tonnes of oil equivalent (KEEI 2003a. at 2 per cent in 2002. constitutes a marginal share in primary energy consumption. Final energy consumption Total final energy consumption is defined as the total amount of energy used by final consumers. Use of nuclear power has also grown rapidly since the commissioning of Korea’s first nuclear power plant in 1977. at around 55 per cent in 2002. The transport sector has become more visible over the past decade as a 14 3 140 120 100 80 60 40 20 Mtoe Final energy consumption. have been introduced as a means of reducing Korea’s dependence on imported fossil fuels and to provide clean energy.

The largest sectors. The share of coal in the residential and commercial sectors. There has been substitu4 tion away from heavy fuel oil and 2 coal toward natural gas and electricity in the industry sector. at 39 per cent in 2001 (table 4). figure 5). and now accounts for 21 per cent of final energy consumption. Electricity generation Electricity consumption in Korea has grown more rapidly than overall energy use over the past two decades. rapid economic growth and rising incomes have led to a shift in consumer preferences away from coal to more convenient and clean fuels such as natural gas and electricity.2 per cent a year. to reach 278 Final energy consumption in key terawatt hours in 2002. representing 27 per cent of total electricity generating LNG in Korea: opportunities for growth 40 20 % 1982 1990 2002 Industry Petroleum Coal 1982 1990 2002 Residential and commercial 15 . and the commercial sector Electricity (26 per cent) (KEEI 2003a). million reflecting the advantages of these 1982 1986 1990 1994 1998 2002 fuels in terms of environmental and inventory costs. for example.result of the rapid expansion in vehicle ownership (KEEI 2003a. 4 12 10 8 Motor vehicle registrations Korea Trucks Buses Passenger cars Within these sectors. by fuel Korea electricity consumers in Korea are the industry sector. 60 5 City gas Nuclear power constitutes the largest source of electricity generation in Korea. there have 6 been notable changes in fuel choices. accounting for more than half of electricity use in Other 80 2002. fell from 23 per cent in 1992 to 2 per cent in 2002. Korea currently has sixteen nuclear units in operation at four sites. In the residential and commercial sectors. at 10. figure 4) and transport volumes in Korea. while the share of gas rose from 8 per cent to 30 per cent over the same period (KEEI 2003a.

16 5 Electricity plants and capacity.5 per cent in 2001.7 4.9 Source: KPX (2002b).0 8.2 6.1 118. This is because LNG is used primarily as a peak load fuel in Korea.2 Sources: KEEI (2001).7 100.1 100. reflecting their smaller size and peak load application. ABARE research report 03.0 TWh 20.5 112.5 8. capacity (table 5). 2001 Korea Number of units Capacity GW Share % 30.8 – 7. by fuel Korea 1981 TWh % 6. to 10 per cent in 2001.2 30.6 1991 % 17.2 9. Oil accounted for the majority of energy imports.5 27.9 10.5 100.8 25. at around 80 per cent in value terms.3 28.5 13.9 8.5 32. while LNG imports accounted for 13 per cent. as has hydropower.5 billion in 2002 and represented 21 per cent of Korea’s total import bill.7 9.3 5.0 TWh 110.1 – 2.4 . There were 104 LNG fired units in 2001.2 50.7 40.2 285.9 2. Energy imports Korea’s dependence on energy imports has grown significantly in the past two decades.9 56.0 Coal Oil LNG Nuclear Renewables Total 38 21 104 16 200 379 15.0 22. in 1980 to more than 97 per cent in 2002 (table 6).1 27.2 2001 % 38.3 1. while 30 per cent of capacity is coal fired.5 4. KPX (2002a).3 79. to 1. Coal also accounts for approximately 39 per cent of power generation in Korea.0 Coal Oil LNG Nuclear Renewables Total 2. LNG represented 11 per cent of electricity generation in 2001 but accounted for 25 per cent of capacity. excluding nuclear power. from 74 per cent of energy requirements.7 39.4 47.4 Electricity generation. Energy imports were valued at US$31.1 4.3 100. Oil fired power generation in Korea has declined significantly over the past two decades.0 13.5 4.

8 a Excluding nuclear power.6 10. 2003a). from 33 million tonnes of oil equivalent in 1980 to 215 million tonnes of oil equivalent in 2002 (KEEI 2003a. This is lower than in 1980.4 73.6 97.3 million tonnes (3. Korea remains highly 100 dependent on the Middle East for its supplies of crude oil. While LNG was introduced as a means of diversifying energy consumption away from oil. This issue is discussed further in the following chapter.4 Energy imports Overseas energy dependence a Oil share in energy imports b LNG share in energy imports b Middle East share of crude oil imports b US$b % % % % 6. natural gas consumption was 18.7 per cent a year over the past decade. at an average rate of 18.5 73. Korea has also depended entirely on imports for its natural gas supply.8 2002 31. at 73 per 50 cent in 2002 (table 6).2 83.5 97.6 Energy import indicators Korea 1980 1990 10.2 billion cubic metres) in 1990 (KEEI 2003a). b Dollar value.9 82.5 92. figure 6).7 12. compared with 2. however.0 billion cubic metres).1 76. Such rapid growth in energy imports and import dependence has raised concerns in Korea over diversity and security of energy supply sources.7 73. In 2002. 6 200 150 Energy imports.4 2000 37. Energy imports have grown rapidly in line with energy consumption. Sources: KEEI (2002b. by fuel Korea LNG Oil Coal In addition.1 million tonnes of LNG (25.9 87.3 79. Natural gas consumption Natural gas consumption in Korea has grown rapidly since LNG was first imported in 1986. MOCIE (2003). LNG in Korea: opportunities for growth 17 .5 4.3 – 98. and reflects Mtoe diversification away from Middle 1982 1986 1990 1994 1998 2002 Eastern oil following the oil price rises of the late 1970s and early 1980s.

7 1986 1990 1995 1996 1997 1998 1999 2000 2001 2002 LNG consumption. In the initial stage of the natural gas industry in Korea. LNG demand for electricity generation in October and November 2002. largely as a result of relatively high LNG prices. Demand for LNG in electricity generation in recent years has remained steady.4 . 2003a). including Japan and Chinese Taipei. While LNG prices are linked to international crude oil prices. with the expansion of the pipeline distribution network and rising personal incomes. 18 ABARE research report 03. This is in contrast with other countries. most LNG was consumed in power generation. where electricity generation is the main user of LNG. consumption of city gas has grown significantly. The city gas sector accounted for 62 per cent of total LNG consumption in 2002. LNG consumption by the city gas sector has grown at an average annual rate of 28 per cent. was 86 per cent and 68 per cent greater than their 2001 levels respectively (KEEI 2003a).Gas consumption. by end use Korea District heat kt – – 150 173 178 159 177 335 630 540 Electricity kt 45 1 741 3 412 4 448 5 197 4 029 4 591 4 353 4 653 5 969 City gas kt – 575 3 417 4 561 5 770 6 232 7 886 9 528 10 299 11 194 Other kt 8 12 108 179 232 222 306 339 402 425 Total kt 53 2329 7 087 9 362 11 378 10 664 12 961 14 556 15 990 18 128 Sources: KEEI (2002c. However. the time lag in the adjustment to LNG prices meant that LNG became more competitive over this period and replaced oil fired power generation. However. district heating (3 per cent) and other uses (2 per cent). Since 1990. by sector Rapid growth in city gas use –– or gas for nonpower generation –– is the main reason that LNG demand has increased so sharply (table 7). electricity sector demand for LNG spiked in late 2002 in response to increases in crude oil prices. followed by electricity generation (33 per cent). for example.

Liquefied petroleum gas (LPG) accounts for the remaining 0. 2 equivalent to 10. the state owned gas company. Source: Citygas Association (2002). Incheon and Gyeonggi. Increasing use of gas in billion m3 the residential sector has driven the 1986 1990 1994 1998 2002 expansion in city gas demand.6 km 89 927 41 099 131 027 ’000 6 019 2 671 8 691 Capital area a Province area Total 706 257 963 a Includes Seoul. the residential sector accounted for 55 per cent of total city gas demand. space heating and increasingly. KOGAS. with average annual growth of 27 per cent since 1990 (KEEI 2003a: figure 7).3 million tonnes of LNG. 8 City gas consumption. This growth reflects in part marketing efforts to boost gas sales in this sector.1 billion cubic metres.5 per cent of city gas supply. Industry use of city gas has grown at a similar rate over the past decade.City gas demand LNG currently accounts for 99. and for commercial users to install gas cooling systems. LNG in Korea: opportunities for growth 19 . 2001 % 24. In 2002.3 26. space cooling. hence trends in the city gas sector have a direct impact on LNG demand.9 30. by sector Korea Industry Commercial Residential Korea’s consumption of city gas in 4 2002 was 14.5 per cent of city gas supply in Korea. by region Korea Consumption 1990 million m3 2000 million m3 7 799 4 381 12 180 2001 million m3 8 148 4 709 12 858 Annual Connections growth Network as at 1990–2001 2001 Dec. The commercial sector is the smallest user of city gas. provides subsidies for industrial customers to build natural gas facilities or cogeneration units. 7 12 10 8 6 City gas demand. City gas is mainly used in this sector as a fuel for cooking. to constitute 27 per cent of city gas consumption in 2002.

by sector Korea Total City gas Electricity generation 2000 Dec 2001 Dec 2002 Dec Patterns of gas use LNG consumption in Korea exhibits strong seasonal fluctuations.accounting for around 18 per cent of city gas consumption in 2002. for this Residential sector was 7. Colder than average temperatures during winter months can further increase the peak demand. including in provincial areas (table 8). The peak in winter is associated with high heating loads. The rapid expansion in city gas demand has been driven to a large extent by the development of gas distribution networks throughout the country. City gas monthly consumption. the difference between the highest by sector Korea and lowest demand months. Korea’s widespread gas distribution system has enabled natural gas to penetrate the market quickly.8 8 9 Although city gas consumption in the commercial sector is also affected by winter temperatures.4 . That is. gas 1. 0. The turndown ratio.2 billion m3 Commercial Dec 2001 Dec 2002 Dec 2000 ABARE research report 03.2 0. 2003a. figure 8). figure 9).1 in 2002. the Seoul region is by far the largest consumer of city gas.8 0.6 1.0 1.0 Industry month of lowest demand.1 times consumption in the 1. the monthly consumption pattern is less severe than in the residential sector.6 0.2 consumption in the peak month was 7. LNG use in the peak winter months (December–February) generally averages at least twice that in summer (KEEI 2002a. 8 2. Most of this seasonal variation is explained by city gas use in the residential sector where about two-thirds of annual gas consumption occurs during the winter season (KEEI 2002a.4 0.4 Mt LNG monthly consumption. However. with more than 6 million users at the end of 2001. 2003a. The turndown ratio in 2002 20 0.

equivalent to just over 4 million tonnes of LNG. the national gas distribution network. The Korea National Oil Corporation (KNOC) plans to begin full commercial production of this field from late 2003. The industry sector exhibits the least monthly fluctuations in demand.6 in 2002. with a turndown ratio of around 1. although LNG demand for power generation can also peak in winter (figure 8). Korea is currently entirely dependent on LNG imports for its natural LNG in Korea: opportunities for growth 10 4 3 2 1 US$b 1986 LNG imports Korea Volume 16 Value 12 8 4 Mt 1990 1994 1998 2002 21 . LNG imports The government owned Korea Gas Corporation (KOGAS) was established in 1983 and currently controls LNG imports. Natural gas supply Domestic gas reserves Korea’s only known gas reserves are in the Donghae field in the East Sea.8 in the commercial sector. This partly reflects maintenance schedules for base load coal and nuclear plants that increase demand for gas fired plants at that time. LNG demand in the electricity sector exhibits little seasonal fluctuation compared with that of city gas.was around 2.4 million tonnes of natural gas a year to KOGAS. Recoverable reserves in that field are estimated at around 6 billion cubic metres. KOGAS supplies LNG to city gas distribution companies and to electricity generators. This has necessitated significant investment in gas storage capacity at LNG import terminals. LNG receiving terminals. The strong seasonal fluctuations in LNG demand evident in Korea have created supply and storage problems as contracted LNG deliveries have typically taken place throughout the year. The Donghae-1 project is expected to deliver 0. or approximately 2 per cent of Korea’s current gas demand (EIA 2002). and wholesale LNG sales in Korea.

22 ABARE research report 03. Malaysia.9 5.06 0.7 100.0 – – 0. In 2002.15 4. The issue of gas market reform is discussed further in chapter 3.5 100. 9 LNG imports.07 14. Currently.4 .59 0.13 2.80 3. Korea is the second largest importer of LNG in the world after Japan.26 1.7 10.71 – – 0.9 22.3 0. however. particularly in the winter months.30 0.2 11.02 2. in recent years Korea has diversified its supply sources.3 28. importing 17.37 2002 Mt 5.09 2000 Mt 6.83 1990 % 99. Korea purchases most of its LNG requirements under seven long term take or pay contracts that account for 17 million tonnes of LNG (table 10).6 16.8 1. New procurement of LNG is based on ‘The Basic Plan of Long Term LNG Supply and Demand’ issued by the Ministry of Commerce.01 2. Indonesia has traditionally supplied the majority of Korea’s LNG.0 1.0 2002 % 28. KOGAS is postponing entering into new long term contracts until plans to restructure the gas sector are progressed. Industry and Energy (MOCIE). However.8 million tonnes in 2002 (KEEI 2003a.6 21.05 0. Qatar and Oman supplied more than 90 per cent of Korea’s LNG imports (table 9). BP (2003).5 – – – – – – 0. KOGAS (2003).77 5.04 0.7 0.12 17.03 7. Indonesia.4 100. Plans are revised every two years and the latest plan –– the sixth –– was released in November 2002 (MOCIE 2002a).44 0. Based on the demand and supply projections in the plan.2 12.30 a Includes cargo swaps with Japan and Chinese Taipei. Long term contractual supplies have typically not been adequate to meet the rapid rise in Korea’s demand for LNG.9 4. the government permits KOGAS to directly negotiate an LNG procurement deal with the supplier. after KOGAS and the supplier set the price and other terms and conditions. Sources: KEEI.0 Indonesia Malaysia Brunei Qatar Oman Australia United Arab Emirates Other a Total 2.06 – 0.2 14.18 0.24 0. figure 10).gas supply.29 – – – – – – 0.5 100.23 0.1 0.05 1.0 Shares 1995 % 74. The government typically approves the new LNG contract. by source Korea Volume 1990 Mt 1995 Mt 5.4 1.8 – 0.0 2000 % 42.

0 million tonnes of LNG a year respectively for seven years. beginning in late 2003. 100 per cent of the contracted volume will be delivered in the winter months.50 2. However. to cope with winter peak demand and is one of the largest markets for LNG spot trade in the world.5–2.5 and 1.00 1. More recently Korea has entered into midterm contracts with Australia and Malaysia to supply 0.70 4.30 2. for example.86 1986 – 2007 1994 – 2014 1998 – 2017 1995 – 2015 1997 – 2013 1999 – 2024 2000 – 2024 MLNG Tiga NWS Australia LNG 1.06 16. LNG in Korea: opportunities for growth 23 . In winter 2002–03. between 1996 and 1999.00 0.50 a 0. Delivery schedules in these contracts are heavily biased toward winter supply. Korea is also an active buyer of spot product.10 Source Existing mid and long term LNG contracts Korea Project name Amount Mt/yr Agreement period Long term Indonesia Indonesia Indonesia Malaysia Brunei Qatar Oman Total Midterm Malaysia Australia Total Arun III Korea II Bontang V MLNG II BLNG Ras Laffan OLNG 2. This recent experience has highlighted the vulnerability of Korea’s current gas supply situation and the importance of having adequate and secure long term LNG supplies.00 2003 – 2009 2003 – 2009 a The contract includes an option for an additional 0.5 million tonnes. This has resulted in Korea also entering into short term contracts from the early 1990s. At their peak.80 4. Under the contract with North West Shelf Australia LNG.00 2. this reliance on the spot market has not always resulted in an optimal outcome for Korea. there was an unprecedented shortage of LNG in Korea and KOGAS had difficulty sourcing additional spot cargoes (see box 1). short term contracts contributed almost 4 million tonnes a year to Korea’s LNG supply.

Increased LNG demand by electricity generators coincided with an early start to a cold Korean winter. there is a time lag before rises in crude oil prices filter through. The domestic supply shortage that necessitated such unprecedented access to the spot market was the result of a number of factors.Box 1: Korea’s LNG supply shortfall in winter 2002–03 An unprecedented domestic shortage of LNG during winter 2002–03 required KOGAS to source additional supplies on international markets. Unlike Korea. Korea is likely to continue to require spot cargoes and short term contracts to make up further projected supply shortfalls as KOGAS is currently delaying entering into new long term contracts for LNG until plans to restructure the gas sector are progressed. 24 ABARE research report 03. In comparison. The situation was exacerbated by limited spare international LNG shipping capacity.5 million tonnes. Arrangements were also made with suppliers to redirect cargoes from other existing contracted customers. KOGAS purchased a reported record 42 spot cargoes that winter. In the interim. subject to the consent of producers. This mismatch in seasonal demand has in the past lent itself to diverting LNG cargoes originally destined for Japan to Korea during the winter.b. which boosted city gas demand by the residential sector. including some Japanese power companies. redirected from Gaz de France. There was a sharp and unexpected rise in LNG use by electricity generators during this period as LNG became relatively less expensive than oil. KOGAS has signed two midterm contracts with Australia and Malaysia to begin supplying in late 2003. This was related in part to Japan’s increased demand for spot LNG cargoes over the same period as the Tokyo Electric Power Company (TEPCO) increased its use of LNG in response to the closure of its nuclear plants. totaling around 2. 2003a.b). Energy Argus (2002a. While LNG prices are linked to international crude oil prices. This was equal to nearly 15 per cent of Korea’s contracted LNG volumes at that time.4 . the Korean government required power plants running on LNG to switch to petroleum fuels. Highlighting Korea’s difficulty in sourcing cargoes. Japan consumes more LNG in summer than in winter as a result of its relatively higher demand for air conditioning. To help alleviate the tight gas supply situation. KOGAS purchased three long haul LNG cargoes from Algeria. to Korea. Sources: Reuters (2003a). LNG was therefore cheaper over this period because of the lag in LNG price adjustment following the increase in crude prices. and is understood to have exceeded the prevailing prices for these cargoes by more than 10 per cent. which will alleviate the projected shortfall to some extent. It has also been reported that KOGAS has reached an agreement with Tohoku Electric Power Company in Japan to swap LNG cargoes when appropriate as a means of avoiding a repeat of last winter’s LNG shortage. A nuclear plant undergoing maintenance and repairs was also brought back on line earlier than planned. in the previous winter KOGAS purchased 22 spot cargoes.

POSCO. These terminals are all owned and operated by KOGAS. Korea’s largest steel producer. This will be the first privately owned terminal in Korea. has commenced construction of an LNG receiving terminal at Kwangyang that is expected to be in operation in 2005. Incheon and Tongyeong (figure 11).Gas supply infrastructure Korea currently has three LNG receiving terminals at Pyeongtaek. 11 LNG import terminals and pipeline network Korea Seoul Incheon LNG terminal Pyeongtaek LNG terminal Donghae field Tongyeong LNG terminal Kwangyang LNG terminal (under construction) LNG in Korea: opportunities for growth 25 .

280 2 280 13 Planned expansion of gas pipeline network Korea 2001 km New pipeline Total pipeline 131 2 412 2002 km 30 2 442 2003–07 km 140 2 582 2008–10 km 15 2 597 2011–15 km – 2 597 Source: MOCIE (2002a). mainly through city gas companies. The Incheon termiIncheon 2 970 1 680 14 nal is being expanded to include Tongyeong 750 280 2 four additional storage tanks a year Total – 2 960 26 between 2002 and 2004 to meet Source: KOGAS (2003).2 million tonnes of Pyeongtaek 2 016 1 000 10 gas (table 11). According to the sixth Basic Plan of Long Term LNG Supply and Demand. ten in Supply Storage Storage Pyeongtaek and two in Tongyeong. The network currently supplies natural gas to customers in around 60 cities. 26 ABARE research report 03. 11 In 2002. 12 Planned expansion of LNG storage tanks Korea 2001 2002–03 2004–05 2006–07 2008–10 2011–15 GL GL 1 500 3 780 GL 680 4 460 GL 700 5 160 GL 960 6 120 GL 1 260 7 380 New storage tanks Total storage tanks Source: MOCIE (2002a). projected growth in LNG demand.4 million tonnes) by 2015 (table 12). t/hr GL no. equivalent to 2. capacity capacity tanks The total storage capacity at the three terminals is 3 billion litres. Korea will have an LNG storage capacity of more than 7 billion litres (5.Twenty-six LNG storage tanks are LNG receiving terminals Korea located at the three existing terminals: fourteen in Incheon. the operational length of the national gas pipeline network was 2442 kilometres. In the sixth Basic Plan of Long Term LNG Supply and Demand. it is planned that a total of 2597 kilometres of nationwide pipeline will be operational by 2010 (table 13).4 .

96 0.04 0. January 2003 Korea For POSCO won/m3 US$/m3 US$/MBtu For others won/m3 US$/m3 US$/MBtu 293.26 42.02 0. This methodology is discussed in more detail in box 2.25 0. Source: KOGAS (2003).71 Average exchange rate.79 7.71 0.75 0.12 31.30/MBtu (million British thermal units).03 0.28 6.30 33. The average wholesale price of gas to electricity generators was between 325 and 327 won (US$0.80 a tonne.03 0.5 won. equivalent to around US$4.75 7.97 33.03 0. Prices since 2000 have been considerably higher than in previous years. reflecting storage costs.71 22.Gas pricing LNG import prices In 2002.01 0.57 0.26 326.28) 14 Wholesale gas price for power plants.93 0.96 0.56 23.52 0. LNG in Korea: opportunities for growth 27 . This reflects standard long term contract conditions in which up to 90 per cent of the LNG price is indexed to movements in international oil prices.41 324.30 31.25 0.28 6.75 Feed stock cost Average supply cost – for winter – for summer – for other seasons Average gas price 293. January 2003.03 0. Gas supply costs for power plants are differentiated on a seasonal basis. US$1=1170. hence supply costs in winter are higher than in summer. the average LNG import price to Korea was US$223.41 40.03 0.57 0. as gas contract prices rose in line with movements in international oil prices (KEEI 2003a. 12 250 200 Average LNG and crude oil import prices Korea Crude oil import price right axis 25 20 15 10 5 US$/bbl 150 LNG import price 100 left axis 50 US$/t 1990 1994 1998 2002 Wholesale and retail gas prices The KOGAS wholesale price for gas consists of a feedstock cost and a supply cost.02 0. the latter of which is differentiated by type of user and end use.79 1. figure 12).

Rates are subject to approval from the relevant regulatory institutions. while city gas uses include space heating. a special excise tax. and a safety management fund contribution. while the rates for retail gas supply must be approved by the provincial government in its jurisdictional area.06) per Box 2: Gas price setting procedures in Korea The regulation of natural gas prices in Korea is based on the City Gas Business Law. city gas and power plants) and then by type of use. KOGAS adopts ‘cost of service’ as the principle of its rate making system. Wholesale gas supply rates need to be approved by the Minister of Commerce. handling charges.per cubic metre at January 2003 (table 14). KOGAS adjusts the LNG feedstock cost for power plants on a monthly basis and for city gas customers every two months. The objectives of the regulations are to ensure that gas companies do not charge customers unreasonable supply costs and to enable gas companies to sustain their business on a sound basis. city gas retail rates are determined by the cost to recover the total expenditure by the local distribution company for supplying city gas to end users. commercial. To reflect changes in import prices in the wholesale price. That is. cooling. including import tariffs and levies. 28 ABARE research report 03. Supply costs are determined by type of demand (that is. industry and cogeneration/community energy system use. These rates are then divided by an estimated supply volume to produce unit prices. Industry and Energy. industry and commercial use.26) per cubic metre at January 2003. The supply cost is subject to annual adjustment. The feed stock cost for city gas was 305 won (US$0. use is based on season. The total cost of service includes a reasonable return on investment as well as reasonably estimated total operating costs. including heating. Source: KEEI. For power plants.71 and US$7. Local city gas companies design city gas retail prices by adding locally specific supply costs to the wholesale price paid to KOGAS. The wholesale price for city gas (table 15) is higher than for power plants and is different across end uses.75/MBtu. The KOGAS wholesale price consists of a feedstock cost and a supply cost. For wholesale pricing. The feedstock cost is the sum of the LNG import price (cif) and additional domestic costs associated with LNG importing. This is equivalent to between US$7.4 . while the average supply cost was 74 won (US$0. This includes a predetermined reasonable return on investment.

January 2003.97 10.61 8. Seoul area.15 450.98 – 0.70 9.73 Retail cost of service Average retail price Heating – cooking – heating (house) – heating (apartment) – heating (building) Commercial I Commercial II Cooling Industry Cogeneration/CES: district heating – winter – summer – other seasons Cogeneration/CES: others – winter – summer – other seasons 43.76 2.09 232.06 – 0.69 10.08 338.52 8.18 41.38 0.09 422.31 US$/MBtu 1.29 0.15 Wholesale price for city gas. US$1=1170.64 312. 16 Retail price for city gas.16 442.47 0.08 74. January 2003 Korea won/m3 US$/m3 0.29 0.35 0.51 379.11 – 29.26 0.69 10.59 0.30 0. January 2003 won/m3 US$/m3 0.03 0.35 104.75 Average exchange rate.00 Feed stock cost Average supply cost House heating Commercial Cooling Industry Cogeneration/CES – winter – summer – other seasons Average city gas wholesale price 305.04 0.03 10.80 342.34 0.24 367. LNG in Korea: opportunities for growth 29 .38 0.51 9. Source: KOGAS (2003).30 9.43 Average exchange rate.70 379.38 0.32 US$/MBtu 7.02 10.24 1. January 2003.70 1.52 445.38 0.32 0.12 9.5 won.31 405. Source: KOGAS (2003).60 450.06 0.71 399.47 5.03 0.27 0.03 8.84 – 29.42 8.56 10.04 – 0.72 349.60 462.5 won.39 0.20 0.01 7.09 0.51 66. US$1=1170.36 0.

The average retail price in Seoul at January 2003 was 423 won (US$0.03/MBtu. In Seoul this is calculated to be 43 won (US$0. while cogeneration/community energy systems are also exempt from the supply cost charge during summer.4 . equivalent to US$10. the average city gas wholesale price was 379 won (US$0. 30 ABARE research report 03. The retail price is the sum of the wholesale price for city gas and the retail cost of service.36) per cubic metre. Table 16 shows city gas retail prices in the Seoul area in January 2003.cubic metre. although the price varied across end uses. City gas for cooling is exempt from the supply cost charge. The retail cost of service is the cost of supplying city gas to end users.32) per cubic metre at January 2003. in order to encourage demand for gas cooling systems. equivalent to around US$9. Combining these costs.00/MBtu.04) per cubic metre. lowering its wholesale price.

This law also sets permissible emission standards for stationary and transport emission sources. These include environmental factors. for example. the pace of investment in gas fueled district heating systems. bans the construction of thermal power plants that use fuels other than natural gas in the Seoul metropolitan area. LNG in Korea: opportunities for growth 31 . emphasise and encourage substitution away from conventional fossil fuels such as coal and petroleum. and the implications of plans to deregulate Korea’s electricity and gas markets. Major regulations and policies to address environmental issues have been introduced since the Korean Ministry of Environment was established in 1990. As a result. a range of issues will affect the extent and profile of future demand. the environment and sustainable development. One of the main goals of long term energy policy in Korea is to create a balance between economic growth and environmental protection. Mandatory air quality controls and stricter emission standards reinforce this trend. The 1990 Air Quality Preservation Act. However. particularly in relation to energy use. industry and transport sectors. energy security concerns. most major cities and industrial areas have significant environmental pollution problems.3 factors affecting Korea’s future natural gas demand While natural gas demand is likely to grow strongly in Korea. including natural gas. environmental issues were generally given low priority in Korea in favor of economic expansion. growing demand for cooling systems by the expanding Korean middle class. Environmental issues Until recently. Energy related environmental policies Korea’s energy related environmental policies focus principally on air quality control in the electricity. at both the national and local government level. to relatively clean fuels. Many policies. are emerging as some of the most important issues facing the country.

Korea has had the fastest growth in carbon dioxide emissions from fuel combustion among OECD countries over the past decade: carbon dioxide emissions in Korea grew by 6. Korea established an Inter-Ministerial Committee on the United Nations Framework Convention on Climate Change in April 1998 comprised of representatives of relevant government agencies. petrochemicals and cement –– to reduce carbon dioxide emis32 ABARE research report 03. In addition. academia and industry under the chairmanship of the Prime Minister to coordinate overall activities related to climate change policy. The provisional operation of four CNG buses began in 1998 and has been gradually extended. a heavily discounted natural gas price is being offered and more natural gas stations will be provided. natural gas demand in the transport sector could account for a significant proportion of total gas demand. In December 1998. natural gas accounts for around 12 per cent of energy consumption (IEA 2002a). In the iron and steel sector. natural gas is likely to benefit from increased emphasis on reducing the rate of growth in greenhouse gas emissions. To implement the plan. Korea developed its first comprehensive action plan for climate change policy (1999–2001). More than 40 per cent of Korea’s air pollution is from motor vehicle emissions and in the Seoul metropolitan area this source accounts for 85 per cent of total air pollutants. for example.7 per cent a year between 1990 and 2000. If this replacement plan is carried out as scheduled. One of the major achievements of the action plan was the introduction of voluntary agreements with the largest greenhouse gas emitting sectors –– including iron and steel. while the OECD average over this period was 1.4 . recent trends indicate movement out of coal and oil into natural gas and electricity. To reduce the emission of pollutants by motor vehicles the Korean government is promoting the use of CNG vehicles for public transport.In the industry sector.2 per cent a year (IEA 2002c). As a relatively low carbon intensive fuel. Another relatively new source of demand for natural gas is the expansion of compressed natural gas (CNG) vehicles. the Korean government is providing bus companies with subsidies and tax incentives to purchase new CNG vehicles. 20 000 existing diesel buses will be replaced by CNG buses by 2007. Climate change response policies Climate change has become one of the focal points of environment and energy related policies in Korea. According to government plans.

sions and energy consumption. The government recently released the second comprehensive action plan (2002–04) in March 2002. This included a range of measures and expanded programs to stimulate efforts to ensure real greenhouse gas emission reductions and provisions for developing a national greenhouse gas emissions reduction target. In November 2002 the Korean government ratified the Kyoto Protocol. As a non-Annex B party to the protocol, Korea would not be bound by any emission reduction targets if the protocol enters into force but would be eligible to participate in projects under the clean development mechanism.

Security of energy supply
To enhance energy security, a key objective of Korea’s energy policy has been to diversify both the types and sources of fuel supply. This policy led to the introduction of natural gas into the market in the mid-1980s and was behind the high level of government investment in natural gas infrastructure that facilitated its expansion. However, as discussed in chapter 2, oil remains the dominant source of energy in Korea, accounting for around half of primary energy consumption in 2002. In addition, around three quarters of crude oil imported by Korea is from the Middle East. The Korean government is likely to continue to attempt to reduce oil dependency by promoting the development and use of alternatives to oil, including natural gas and nuclear power.

Overseas investment
The government is further reducing the risks associated with imported energy supply through the promotion of equity participation in the exploration and production of overseas resources of oil, gas and coal. The government’s Overseas Resource Development Program, funded by the Energy Special Account, encourages Korean companies to participate in overseas exploration and production business activities. Korea has equity investments, for example, in Oman LNG and RasGas, in addition to long term LNG supply contracts with these companies. According to the Korean government’s second Basic National Energy Plan (2002–11), as much as 30 per cent of Korea’s natural gas supply by 2010 could be sourced from projects or fields in which Korean companies have
LNG in Korea: opportunities for growth 33

invested (MOCIE 2002b). This target is likely to have implications for future sources of natural gas supply for Korea.

New sources of demand
District heating systems
The development of district heating systems throughout Korea is generating new demand for natural gas. A district heating system supplies large areas, including apartment complexes and office buildings, with heat produced by combined heat and power plants or other large scale heat production facilities using various fuels, including natural gas. District heating systems are generally part of larger community energy systems that provide the integrated supply of heating and electricity to communities. These systems are regarded as efficient, economical and environmentally friendly energy sources. Because many communities in Korea are placing more emphasis on environmental protection, clean energy sources, including natural gas, are in demand for district heating systems. This is despite LNG being relatively more expensive than other fossil fuels. Moreover, district heating systems are usually located in major cities such as Seoul and Busan, where the use of fuels other than natural gas is prohibited under the Air Quality Preservation Act. LNG accounted for around three-quarters of energy consumption in district heating systems in Korea in 2000 (KDHC 2002; figure 13). According to the Korean government’s Basic Plan for Mid to Long term Supply of District Heating, it will spend about 1.4 trillion won by 2006 to provide district heating for 426 000 new households (MOCIE 2002c) (table 17). By 2006, about 1.6 million households will benefit from district heating. This significant projected expansion of district heating is likely to contribute to future growth in natural gas demand in Korea.
34

13

Fuel mix in district heating systems, 2000 Korea

LNG 75.8% Oil 24.2%

ABARE research report 03.4

17

Mid to long term projections for district heating supply Korea
2002 2003 79 1 245 468 779 2004 117 1 362 303 1 081 2005 152 1 514 232 1 313 2006 78 1 592 100 1 413

New residences Total residences New investment Total accumulated investment
Source: MOCIE (2002c).

’000 ’000 bill won bill won

101 1 166 310 310

Cooling systems
Since the 1990s, rapid economic growth, rising personal incomes and more affluent lifestyles have stimulated greater demand for summer cooling in Korea. This trend is likely to continue as the penetration of cooling is not yet widespread throughout the country. The uptake of electricity based cooling systems has increased the summer peak level of electricity in recent years. As gas is a peak load fuel, the growing demand for summer cooling is in turn creating new demand for natural gas. In addition to growth in electric cooling systems, gas cooling systems are also likely to become more widespread in Korea, creating new direct demand for natural gas. The diffusion of gas cooling systems is expected to ease to some extent the seasonal imbalance of supply and demand in the natural gas industry as LNG demand in summer begins to rise. While gas cooling systems in Korea have been available for commercial use since the mid-1980s, recent demand for residential gas cooling systems has emerged as a result of the development of new small size cooling system technology. By 2010, it is anticipated that there will be 175 000 residential gas cooling systems across Korea, compared with 450 in 2002 (KOGAS 2003). The penetration of gas cooling systems will be assisted by government promotion policies, including a preferential low interest loan scheme for their installation. KOGAS is also encouraging new demand in this area with its own assistance program that provides subsidies to customers to install gas cooling systems.
LNG in Korea: opportunities for growth 35

the government announced a plan to restructure the gas industry and to privatise the Korea Gas Corporation (KOGAS) (MOCIE 1999b). stable and cost effective energy supplies and to increase consumer benefits through the expansion of consumer choice. Electricity market reform The fundamental elements of the former government’s Basic Plan for Restructuring the Electricity Industry included: I unbundling of the generation. In 1999. and the generation assets were divided into the proposed six generating companies in April 2001. The key objectives of the proposed reform programs were to introduce competition into these monopoly sectors. I privatisation of the non-nuclear and hydro generation companies and the distribution companies. the then Korean government announced plans to restructure the electricity industry. In the first phase. transmission and distribution sectors of KEPCO. I separation of KEPCO’s distribution assets into six companies.4 . with full retail competi- tion from 2009. The six generators currently compete among themselves and independent power producers in a cost based pool market –– a transitional step to wholesale competition –– by bidding available capacity on a daily basis. including the privatisation of the state owned monopoly Korea Electric Power Corporation (KEPCO) (MOCIE 1999a). I restructuring of KEPCO’s generation assets into six companies.Energy market reform Korea is in the process of deregulating the electricity and gas industries in order to introduce competition and to enhance efficiency in these key energy markets. This follows the deregulation of the petroleum industry that occurred in the late 1990s. 36 ABARE research report 03. includ- ing one company to hold KEPCO’s nuclear and hydro assets. to enable long term. In the same year. KEPCO was separated into a power generation business and a transmission/distribution business. and I phasing in of wholesale and retail competition.

KEPCO will continue to manage the transmission and distribution sectors. scheduled to be split into six companies in April 2004. in order to ensure more favorable market conditions (Energy Argus 2003c. However. In particular.d). This is a result of the new government’s intention to review the privatisation plans of its predecessor. In the interim. The introduction of the two way bidding pool system. It is understood that the earliest this operation could begin is April 2004. has also been delayed. This outcome was partly a result of the uncertainty surrounding the new administration’s views on economic reform and the lack of clear market rules and a regulatory framework for the planned power pool market. This reflects the generally more cautious approach to economic reform of the current government compared with its predecessor and has led to some uncertainty over the direction and timing of further reform (see box 3). and a desire to build a consensus for privatisation with labor groups. At present it is uncertain when and if this stage of reform will be implemented (Korea Times 2003b). Regional and international economic uncertainty is also a key reason for the lack of interest from buyers. since the appointment of the new administration in early 2003. However. Key factors driving the review are concerns to ensure that efficiency increases are realised. concerns about privatising natural monopoly industries if sufficiently strong regulatory frameworks are not in place. Also delayed is the planned division of KEPCO’s power distribution assets. In March 2003 the government canceled the sale of Korea South-East Power Company (KOSEPCO) –– the first company nominated for sale –– after all potential investors indicated that they would not be submitting final bids. With the delay in the reform process. KEPCO is now considering an initial public offering of a minority of the stock rather than the sale of a strategic stake through a tender process. reforms in the electricity sector have stalled. The Korea Electricity Commission was also established at the same time to oversee KPX and the electricity market and to implement industry reforms. scheduled for 2003. this is likely to be delayed for some time. the timetable for LNG in Korea: opportunities for growth 37 . an independent nonprofit organisation responsible for operation of the wholesale electricity market. the plan to privatise the five non-nuclear and hydro generating companies has been delayed indefinitely.Other reforms undertaken to date include the establishment in April 2001 of the Korea Power Exchange (KPX).

Part of this policy will involve establishing socially cohesive labor management relations. The government is also targeting improving labor relations. in addition to reform in the above four major sectors. although there were strong labor protests over the issue.the introduction of full retail competition. the electricity sector and the gas sector. planned from 2009. This move has led to some uncertainty over the timing and direction of further reform throughout the Korean economy. more flexible. Korea Times (2003a). 38 ABARE research report 03. as well as the railways. and limit large Korean conglomerates from controlling the financial sector.b). To do so. which are still around 25 per cent state owned across the system as a whole. by making the formal sector.4 . More broadly. It has announced that it will continue to implement policies that enhance market transparency and corporate governance. is now also uncertain. and by improving protection in the informal sector. These included the banks that had been nationalised during the Asian financial downturn of the late 1990s. laws and institutions to global standards. including greater fiscal. The government is also aiming for Korea to become a north east Asian business hub and to strengthen its economic ties in the region. Apart from the banking sector. a priority of the Roh government is to increase transparency and accountability in the business sector. has been the key priority to date. To do so. Sources: MOFE (2003a. It is now targeting its stake in the Korea Exchange Bank. it is difficult to predict the impact that reforms could have on natural gas demand. It inherited from its predecessor a number of plans for reform throughout the economy. Asia Pulse (2003). particularly its unionised component. the government has emphasised the need for ongoing and consistent structural reform in order to strengthen Korea’s economic fundamentals and to enhance external credibility. deregulation. In Box 3: Economic reform under the Roh Moo-hyun administration The new Korean government under President Roh Moo-hyun took office in late February 2003. it is implementing measures to foster investment. the government is focusing on further promoting market liberalisation. Economist Intelligence Unit (2003). Given the uncertainties over the future of electricity sector reforms. financial and tax support. as well as regulatory improvements. privatisation and labor sector flexibility. including privatisation plans for public entities in several sectors. all other privatisation plans that the government inherited from its predecessor are being reviewed. Since coming to office. Privatising Korea’s banks. improve supervisory regulations in the accounting sector. The government recently sold the Chohung Bank to the Shinhan Financial Group.

LNG prices have won/kWh USc/kWh increased in recent years in Korea. Nevertheless. Fuel costs for electricity generation. when the total cost of generation. operating and maintenance costs. including public investors. while those for coal have remained Nuclear 4. are not required to meet private sector rates of return on their electricity generation assets. 2000 Korea including coal. if investors. have shorter construction times and lower operating costs. gas fired power generation has a number of economic advantages over coal fired plants. oil and nuclear (table 18). and fuel costs.3 fairly stable. These include easier project financing.0 3. the strong outlook for electricity consumption growth in Korea and the advantages of natural gas suggest that there could be a more robust future for gas use in power generation in a deregulated. lower operating and Domestic coal Gas Oil Hydro Pumped storage hydro Average Source: IEA (2002d). Box 4: Assessing the costs of electricity generation The total cost of electricity generation has several components. despite relatively high fuel costs. including coal (see box 4).8 18. including capital expenditure for plant construction. is taken into account. competitive environment. less land. Based on these comparative costs and higher fuel conversion efficiency relative to coal fired plants.0 18 However. The advantage of gas will be reduced. Greater competitive pressures faced by generation companies will provide incentives for cost minimisation. This is likely to affect fuel procurement decisions as generators give more weight to the cost of alternative fuels. In Korea.8 87. there is evidence that gas fired generation can be competitive against other fuels.3 1. including LNG. consume less land.0 17. LNG in Korea is generally less competitive than other fuels. private investors tend to favor gas fired plants over coal (Poten and Partners 2002).7 6.4 0.a liberalised and privatised electricity sector. lower capital requirements. However. easier siting. the cost of gas per kilowatt hour is higher on average than other energy sources. as elsewhere.3 1.4 LNG in Korea: opportunities for growth 39 . 48.0 0. Based on fuel costs alone. LNG demand for power generation will be determined on a commercial basis. Imported coal 13.6 0.0 1. however. In particular. This is because gas fired plants typically have lower capital costs.6 4. or the long run marginal cost of electricity supply.1 52. shorter construction times.

31 3.1 10. gas combustion turbine. As smaller plants.000 7.50 5.00 27.212 0.09 10.27 8. contributing to lower total costs at a range of gas prices.81 3.6 5.319 0.4 .00 0. and a significantly lower carbon intensity than coal. nuclear. gas combined cycle.018 Base case Fuel total cost $/MBtu 0.045 – 0. (2003).31 0. solar 19 Nuclear – DOE – Platts Coal – DOE – Platts Gas CC – DOE – Platts Gas CT – DOE – Platts Solar PV – DOE – Platts Wind – DOE – Platts Cost estimates for new generating plants In 2003 US dollars Years to construct Plant size MW Capital $/kW 1 821 – 1 122 1 028 586 443 457 347 3 526 7 185 976 896 Fixed Variable O&M O&M $/kW 60.204 0.9 5 – 4 3 3 2 2 1 2 1 3 1 600 – 400 400 400 400 120 120 5 5 50 50 Source: Drennen et al. including pulverised coal.00 0.00 c/kWh 0.342 10.8 6. including lower labor and water requirements.27 0.40 3.00 c/kWh 5.3 61. 2002) shows that capital requirements and operating costs for gas fired electricity generation can in fact be less than half those for coal.839 0. fewer pollutants emitted into the local environment.0 – 4.15 0. Environmental advantages of gas fired plants include lower noise. and greater thermal efficiency.046 0.8 3.47 0.000 1.40 3.0 3. 10% discount rate Fuel Operating Capital USc/kWh Gas at $3/MBtu Gas at $3.43 – 1. 14 4 3 2 1 Electricity generation costs 80% load factor.maintenance costs.319 0.5/MBtu Gas at $4/MBtu Coal This conclusion is supported by data for the United States on electricity production costs for new plants for a variety of generation technologies.84 – 25.00 0.21 18.3 22. they also tend to be more flexible in supply. 40 ABARE research report 03.8 6.183 0. Figure 14 (FACTS Inc.7 3.63 15.

Drennen et al. pipelines and storage infrastructure) business. fuel costs become a more important component of total costs and the advantage of coal increases. This reinforces the benefits of gas as a fuel Load factor (%) for peak load electricity generation. In addition. I separate the gas import/wholesale business of KOGAS into three inde- pendent companies in 2001. ending the regional monopoly that city gas companies currently enjoy. IEA (2002d). Gas market reform The key components of the former government’s Basic Restructuring Plan for the Natural Gas Industry were to: I divide KOGAS into a gas import/wholesale business and a gas supply facil- ity (receiving terminals. with the existing long term LNG import contracts divided between the three. FACTS Inc. I provide third party access to the facility sector. I privatise two of these companies and retain KOGAS ownership of the third. 15 Indicative long run marginal costs for power generation Korea $/MWh Coal The advantage of gas.photovoltaic and wind (table 19). fuel costs. Sources: Poten & Partners (2002). Platts (2003c). and I introduce competition in the retail sector. if the required rate of return on investment is lower. the advantage moves more toward coal fired generation. (2003). These costs incorporate a range of plant and economic assumptions. especially CCGT over coal. The data indicate that gas combined cycle plants can be the least cost electricity generation alternative. say in the case of public sector investment. LNG in Korea: opportunities for growth 41 . As the load factor increases. (2002). operating and maintenance costs. and interest and discount rates. including capital. construction times. is likely to be higher at (gas) low load factors as a result of the lower fixed costs of gas fired generation (figure 15).

subject to several requirements. there are currently plans by POSCO and SK Corporation to begin importing LNG from 2005 through POSCO’s planned LNG receiving terminal in Kwangyang for own use in electricity generation facilities and steel plants. Under the current industry structure. In the import/wholesale sector of KOGAS. The previous government’s option for reform –– to split KOGAS into three competing businesses –– is considered problematic because the existing contracts held by KOGAS are likely to be at higher average prices than future contracts. the new arrangements must involve a pooling of old and new contracts to ensure the disposal of volumes under the take or pay system (FACTS Inc. Hence. Reuters News 2003b). If successful. storage and pipeline networks owned by KOGAS will be opened to third party access. privatisation of the LNG receiving terminals. or allowing private companies to import LNG alongside KOGAS under a licensing system (MOCIE 2003. Under the new administration.4 . As with proposed reform in the electricity sector. this would represent the first element of competition in Korea’s LNG supply (see box 5). private parties can import LNG for their own use. the proposed reforms have been delayed further. However.As in the electricity sector. however. the government is considering two options: the original plan to split KOGAS into three companies. 42 ABARE research report 03. The previous government had difficulty passing the required legislation for the implementation of the proposals. The government announced in March 2003 that the facility sector of KOGAS will maintain its present status as a state owned corporation –– that is. the uncertainty surrounding the timing and nature of reforms in the gas industry makes it difficult to predict the impact that this issue will have on future natural gas demand. It is anticipated. gas market reform has not progressed significantly over this period. with the government proposing that a review be conducted before any reforms take place. This has not occurred in Korea to date. storage infrastructure and pipeline network will be excluded from any gas industry restructuring (Asia Pulse 2003). The complexities involved in the reassignment of contracts is one of the reasons why the gas market reform process has been delayed and why it is generally believed that the licensing system option is more likely to be adopted. 2003a) and the establishment of some competitive equity between the companies. that the LNG receiving terminals.

b). Reuters (2003c). subject to several requirements. In the past. was announced in May 2003. LNG in Korea: opportunities for growth 43 .6 million tonnes. and that it negotiates access from KOGAS to the gas pipeline network. the company has not imported LNG directly. POSCO’s decision to bypass KOGAS is reported to stem from the need to seek cheaper supplies of gas to boost competitiveness against other steel manufacturers. (2003a. with likely spare capacity at its import terminal.However.7 million tonnes a year. It is understood that POSCO is still negotiating with KOGAS over access rights to the pipeline network. with a planned capacity of around 1. Sources: FACTS Inc. Korea’s largest steel producer.1 million tonnes of LNG a year for twenty years from 2005. It may also be that the move by POSCO and SK to import LNG directly will create the impetus for other companies to seek their own LNG imports.5 million tonnes a year. POSCO. the first of which is not due to expire until 2007. It is important to note.f). POSCO. In March 2003. currently holds a licence to import LNG for its own consumption. A shortlist of two potential suppliers. private companies are in principle permitted to import LNG. Energy Argus (2003e. MLNG Tiga and Tangguh. The planned import terminal is larger than POSCO’s own LNG needs and POSCO has announced that it intends to supply LNG from 2006 to a new 900 megawatt thermal power plant in Kwangyang planned by SK Corporation. These include that the gas be for own use. POSCO and SK issued a tender for the supply of up to 1. Energy Intelligence Group (2003a). any transition to a more efficient and competitive industry structure would have the potential to enhance the relative competitiveness of natural gas and therefore stimulate increased demand. However. including those from China.5 million tonnes and SK between 0. relying instead on supplies from KOGAS. POSCO would use around 0. New international LNG contract prices have tended to be lower than prices under KOGAS’s existing import contracts. however. If the Korean government chooses to implement a gas import licencing system as a means of introducing competition into the gas market. which is around 0.35 and 0. POSCO is planning to begin importing LNG directly from 2005. that the importer have adequate storage capacity. could be in a strong position to win a license and increase its import volumes for the purpose of reselling. that the delay in implementing gas market reform has some serious implications for Korea’s long term gas supply Box 5: Entry of private LNG importers into the Korean gas market While KOGAS has to date been the sole LNG importer in Korea. It is currently building an LNG receiving terminal in Kwangyang. Of this.

Delinking new LNG procurement decisions from the implementation of reform is possible if appropriate assignment of contracts is part of the reform process. Korea would also have the opportunity to benefit from similar conditions. KOGAS’s current delay in entering into new long term LNG contracts because of the uncertainties of reform means that the gap between contracted gas supply and projected demand is growing. these market dynamics could change relatively quickly if new sources of demand. successful gas market reform is a highly complex process that requires good planning and time to implement. such as China and the north American west coast. Korea could be putting its ability to secure equally favorable long term contract conditions at risk. Reports of recent long term contracts signed by various suppliers with China. By delaying its commitment to new LNG contracts. By committing to new LNG contracts in this climate. However. It is not necessarily in Korea’s best interests to put pressure on the reform process in order to hasten the signing of new LNG contracts. materialised over the next several years. As demonstrated in other countries. Japan and Chinese Taipei indicate that producers are able to meet buyers’ demands for lower prices and increased contract flexibility. 44 ABARE research report 03. Waiting for reform plans to be implemented before committing to new long term contracts is exacerbating this situation. or vice versa.security.4 . An important issue for Korea in this context is that the current LNG market is highly competitive in terms of price and other contract conditions.

trade and investment behavior of representative producers and consumers in 45 regions across 55 sectors.4 projecting natural gas demand in Korea Analytical framework The analysis of the potential demand for natural gas in Korea over the period to 2015 presented in this chapter is based on simulation results from ABARE’s global trade and environment model (GTEM).abareconomics. The regional aggregation LNG in Korea: opportunities for growth 45 . Regional and sectoral aggregation At its most disaggregated level.com). The database used to simulate the potential demand for natural gas in Korea in this report has been aggregated to the fifteen regions and fifteen sectors presented in table 20. The model includes a high level of commodity disaggregation. Further information on GTEM is provided in appendix A and on ABARE’s web site (www. including a detailed treatment of energy and energy related sectors and a sophisticated representation of technological change and interfuel substitution possibilities in the energy sector. This enhances the capacity of GTEM to analyse the impacts of changes in energy policies and other external factors that could influence the operation of energy markets. multisector. and the major energy intensive industries that are likely to influence total energy consumption. It is derived from the MEGABARE model (ABARE 1996) and the GTAP model (Hertel 1997). dynamic general equilibrium model of the world economy. The sectoral aggregation was chosen to include the three fossil fuels –– coal. the version of GTEM used in this study consists of equations and data that describe the production. consumption. GTEM is an appropriate framework for analysing energy markets because it takes into account the interaction between different sectors of the economy and between economies through trade linkages. GTEM is a multiregion. oil and gas –– and electricity.

and other variables in the policy simulation against those in the reference case scenario. fisheries and forestry Services Republic of Korea Australia Canada United States Japan Western Europe Eastern Europe and Russian Federation China a Chinese Taipei Indonesia Malaysia Rest of ASEAN b Rest of Asia Middle East Rest of World a Comprises mainland China and Hong Kong. Singapore.4 .20 Regions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Regions and sectors in GTEM in this study Sectors 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Coal Oil Gas Petroleum products Electricity Iron and steel Aluminium Nonferrous metals Chemicals. Thailand and Viet Nam. 46 ABARE research report 03. gas consumption and trade. GTEM requires a reference case or a ‘business as usual’ scenario against which the impacts of alternative policies can be measured. In this study. the reference case represents the likely outlook for economic activity and energy demand in Korea over the period to 2015 in the absence of any changes to key energy. The reference case projects the growth in key variables in a region in the absence of any significant policy changes or external shocks. the impact of deregulation can be isolated by comparing economic growth. b Comprises the Philippines. in particular existing and potential gas suppliers to Korea. For example. The reference case also provides a benchmark against which the impacts of policy initiatives. can be measured. identifies major energy producing and trading regions. such as the deregulation of Korea’s electricity and gas markets. for example. sectoral output and investment. Developing a reference case As a dynamic general equilibrium model. rubber and plastics Nonmetallic minerals products Other mineral products Other manufacturing Trade and transport Agriculture. environmental or economic policies.

a sensitivity analysis that assumes average annual GDP growth of 4 per cent over the outlook period is also conducted to examine the impacts that lower growth in Korea could have on energy and gas consumption. LNG in Korea: opportunities for growth 47 . suppose that reference case gas consumption at 2015 is projected to be 30 million tonnes of oil equivalent (distance ab in figure 16). Given this uncertainty. GDP in Korea is assumed to grow at an average annual rate of 5 per cent between 2001 and 2015. nonetheless. Hence the effect of deregulation in this example would be to increase gas consumption by 10 per cent relative to the reference case at 2015. reflects a sustained recovery from the Asian financial downturn that led to a sharp contraction in GDP in 1998.To provide a numerical example. The historical growth rates used in the study from 1995 to 2001 are from the International Monetary Fund. Growth prospects for Korea in the medium term will remain highly dependent on the strength of the world economy. particularly that of the United States. Long term projections to 2015 are from ABARE and are derived by fitting an ARIMA (autoregressive integrated moving average) forecasting model to the historical GDP data. The first of these relates to projected GDP growth rates in Korea and in other regions identified in the aggregation. gas consumption at 2015 is projected to be 33 million tonnes of oil equivalent (distance ac ). While this projected growth rate is lower than the average achieved over the past fifteen years it. Following deregulation of the electricity and gas sectors. This corresponds to a 10 per cent increase in gas consumption from the reference case level (distance de). 16 Mt 33 30 Deviation from the reference case in a GTEM simulation c Policy simulation Reference case b a 2001 Deviation from the reference case (%) 2015 Time 10 0 e d Economic growth In developing a reference case for 2001 2015 Time Korea. several key assumptions have been made.

although a decline also occurs between 2007 and 2010 (figure 17). oil.4 . MOCIE has indicated in subsequent discussions that its next set of projections is likely to incorporate higher shares of gas fired electricity generation than those in the basic plan. gas. This is a result of planned expansions in nuclear and coal fired capacity. The power generation technologies in the model are coal. 17 As indicated in table 21. An alternative set of projections is published by the Korea Power Exchange (KPX 2002a). MOCIE published in 2002 a set of projections in its first Basic Plan of Long Term Electricity Supply and Demand that indicates a decline in the share of gas fired power generation over the period 2007–12 (MOCIE 2002d). with distinct fixed input requirements. using government and other projections. In Korea there is some debate surrounding the projected fuel mix in electricity generation over the period to 2015. Taking into consideration discussions with MOCIE and Alternative projections for share industry representatives in Korea. electricity is generated by a finite number of technologies. The KPX ‘most probable plan’ projections do not predict the same magnitude of decline in the share of gas fired power generation over that period. of gas fired power generation current uncertainty surrounding Korea future nuclear developments. substitution between fuels occurs in response to changes in relative costs. and the relative 12 competitiveness of gas fired power generation over the long run when 8 total costs are taken into account. or fuels. nuclear. hydropower and other renewables.Fuel mix in electricity generation Also incorporated in the reference case are assumptions relating to the fuel shares in electricity generation. The share of each fuel in total electricity generation is determined exogenously (outside the model) in the reference case. the KPX fuel share projections are 4 used in this study. significant changes are expected to occur in the 48 % 2003 2006 2009 2012 2015 ABARE research report 03. Under this approach. enviMOCIE (2002d) ronmental concerns over coal fired KPX (2002a) power generation. electricity production is modeled using a ‘technology bundle’ approach. In a policy simulation. In GTEM.

as discussed in chapter 2. reference case Korea 2001 a % 2005 % 38. This is despite an expected increase in the share of gas fired generation in the first half of the outlook period. the long term development of nuclear power in Korea will have to overcome growing public resistance to the siting of new nuclear plants and waste disposal. Based on KPX projections. There are doubts among some analysts and industry representatives that these nuclear projections can be realised. Gas is assumed to account for 11 per cent of electricity generation in 2015.0 Coal Oil Gas Nuclear Renewables Total a actual.0 2010 % 44. Experience in other countries. 38.1 100. with its share increasing from 39 per cent in 2001 to 46 per cent in 2015. nuclear power is likely to continue to be the main form of electricity generation over the outlook period. LNG in Korea: opportunities for growth 49 .4 7. given such concerns and previous delays in nuclear expansion in Korea.8 2.7 9.21 Projected share of electricity generation.2 38.1 2.2 4.8 11. including Japan and Chinese Taipei.1 2.3 1.2 46. by fuel.7 39.8 2. similar to its level in 2001.0 2015 % 37.0 fuel mix in electricity generation in Korea over the reference case. reinforce a less optimistic expansion in nuclear power for Korea. This expansion is underpinned by government policy responses to growing reliance on energy imports.7 42. Coal is also expected to remain a major fuel for base load and midload electricity generation in Korea. The projected growth in nuclear and coal fired capacity is the main reason behind the limited growth in gas fired electricity generation.8 6. maintaining its share of the fuel mix at around 38 per cent.6 13.0 100.5 100. However. The continued reliance on coal reflects the competitiveness of imported bituminous coal in Korea relative to other fuels (table 18).8 10. Five nuclear power plants are currently under construction and an additional eight units are planned for construction by 2015. as is the current high cost of LNG in Korea.1 100. Source: KPX (2002a).

This could occur.Conversely. While there are 50 Coal Mtoe 1990 1994 1998 2002 ABARE research report 03. The main risk in these assumptions is that Korea will not be able to realise its ambitious targets for nuclear power expansion or that planned additions to coal fired capacity will be slower than expected. This reflects the impacts of higher personal incomes on demand for clean and convenient fuels in the residential sector. In these circumstances. I the household income elasticity for gas and electricity is strongly positive. implying that household demand for gas and electricity will grow more rapidly than GDP. Other assumptions In the reference case it is also assumed that: I the switch away from oil toward natural gas in Korea’s industry and commercial sectors will continue over the projection period as access to gas improves in line with the expansion of gas distribution networks and ongoing policy efforts to increase gas consumption in these sectors. if gas fired capacity were used at higher load factors than currently assumed. I the capacity for Korea to meet 18 10 8 6 4 2 Residential consumption of coal. I the income elasticity of demand for coal by households in Korea is nega- tive. the share of oil fired electricity generation is expected to decline significantly over the outlook period. it is likely that the share of gas fired power generation would not decline over the intermediate period.4 . for example. This means that as personal incomes rise in Korea. from 10 per cent in 2001 to 3 per cent in 2015. This is driven principally by energy security concerns and the relatively high marginal cost of oil fired power generation. consumption of coal by households will fall. principally gas and electricity (KEEI 2003a: figure 18). This reflects recent experience in Korea indicating that the residential sector is moving rapidly away from coal and into cleaner and more efficient fuels. gas and electricity Korea City gas Electricity its gas requirements from domestic sources is limited by a lack of reserves.

0 LNG in Korea: opportunities for growth 51 . Reference case projections The reference case projections presented here represent a possible outlook for energy demand.9 % 5. however.5 per cent a year. by fuel Underpinned by significant increases in economic output.5 Real GDP a US$b 2001 2015 Average annual growth 2001–15 a 2002 prices and exchange rates.1 319.0 843. are not forecasts of what will actually happen in the region. particularly in the electricity and gas sectors. energy consumption in Korea is expected to grow strongly over the period to 2015. will not progress over the outlook period. gas supplies from the Donghae field are unlikely to meet more than 2 per cent of Korea’s total gas requirements. the projections could provide a reasonable estimate of energy developments in Korea. I energy market reform in Korea. They are projections based on the set of assumptions outlined earlier that are considered plausible at the present time. to reach 319 million tonnes of oil equivalent in 2015 (table 22). Total primary energy consumption is projected to grow at an average rate of 3. with no further reforms than those already undertaken assumed to take place. If these assumptions are realised.0 423. trillion won 560.9 1 117.0 % 3.0 % 5. Korea is unable to expand domestic production significantly in response to increases in domestic gas demand. Energy consumption. This implies a continuing decline in Korea’s energy intensity over the outlook period. The results. As a result.plans for offshore gas production to commence in 2003. reference case Korea Total primary energy consumption Mtoe 196. in Korea over the period to 2015. and in particular natural gas demand. reflecting efficiency gains in energy use in many sectors and 22 GDP and primary energy consumption. in the absence of any major policy changes or external shocks.

3% 23. the increase in overall demand for gas is moderated by continued improvements in the efficiency of gas use in industry and electricity generation.6% Coal 14. from 16. at an annual rate of 2. The share of natural gas in Korea’s primary energy mix is projected to increase to 13.2% Oil 49.1 to 45. 19 5 4 3 2 1 Annual growth in energy consumption. including increasing pressure for industry to use cleaner and more efficient fuels for environmental reasons and escalating demand for city gas by the residential and commercial sectors. Under the lower economic growth assumption.4 million tonnes of oil equivalent in 2015 (figure 21).0 per cent a Coal Gas Renewables Oil Nuclear year between 2001 and 2015.0 per cent at 2015. Driving this growth will be the issues discussed in chapters 2 and 3.0 per cent. to reach 60.9% Gas 13% Oil 51. Coal consumption in Korea is projected to grow more slowly than in previous years.2 million tonnes in 2015. When lower economic growth is assumed over the outlook period.3 per cent a year.9 billion cubic metres) (figure 19). Underpinning much of the growth in coal consumption will be growth in electricity gener52 20 Primary energy consumption. However.3 million tonnes (23. growth in energy consumption is projected to slow to 3.7 to 33.4 . 2001–15 Korea Natural gas consumption is % projected to grow by 5. by fuel.8% ABARE research report 03. Lower growth is a result of the reorientation of the economy toward less fossil fuel intensive forms of production such as light industry and services.6 per cent in 2001 (figure 20). reference case Korea 2001 Renewables Nuclear 0. and an assumed substitution away from coal in the residential sector toward natural gas.5% 18. natural gas demand is projected to reach 32. to reach 310 million tonnes of oil equivalent in 2015.8% Nuclear Coal 17.3% Gas 10. reference case.continued restructuring of the economy toward less energy intensive sectors.6% 2015 Renewables 0. from 10.

in turn. Nuclear energy is projected to be one of the fastest growing energy sources in Korea.ation. Oil is expected to 50 remain the dominant source of energy in Korea. Also limiting oil demand growth are rising taxes on oil consumption. These changes can be expected to increase the relative cost of oil to industry and to enhance the competitiveness of natural gas for industrial applications (table 23).1 per cent a 23 Revision of special consumption taxes on fuel sources Korea Index of fuel prices after tax amendment (based on LNG at 100) LNG m3 Heavy oil litre 84 85 87 Kerosene litre 175 189 205 Diesel litre 200 238 252 LPG litre 194 238 277 July 2002 July 2004 July 2006 Source: MOCIE (2002b). reflects the impacts of high GDP growth and rising personal incomes on the demand for freight and passenger travel. A significant proportion of the growth in oil consumption is accounted for by the transport sector. which. in line with an ongoing government program designed to rebalance the taxation burden across competing fuels. with its contribu. coal will remain a major energy source over the outlook period.3 per cent a year over the 100 period to 2015. 21 300 250 200 Total primary energy consumption.Mtoe tion to total primary energy 2003 2006 2009 2012 2015 consumption falling only marginally to around 50 per cent in 2015. by fuel. Growth in nuclear power is projected to average 5. reference case Korea Renewables Nuclear Gas Oil Coal Demand for oil is projected to grow 150 by 3. driven by the increasing role it is assumed to play in electricity generation. Moderating the growth in oil consumption over the projection period is a significant shift away from oil in the fuel mix for electricity generation and government policies to reduce Korea’s reliance on oil. although its contribution to the primary energy mix is projected to fall from 23 per cent in 2001 to 19 per cent in 2015. 100 100 100 LNG in Korea: opportunities for growth 53 . As a result.

For example. 2001–15 Korea which provides a framework within 6 which to develop alternative energy 5 sources. or around 18 per cent of primary energy consumption. gas consumption is projected to rise by 5. 22 Gas consumption. as discussed earlier in this chapter. R&D Basic Plan in February 2001. and by legislating that % KEPCO buy at least 1 per cent of Electricity Industry Commercial Residential electricity requirements from renewable sources (IEA 2002d). energy derived from wind and photovoltaic 4 power.9 million tonnes of oil equivalent at 2015. reference case Korea Residential Commercial Industry Electricity 2003 2006 2009 2012 2015 ABARE research report 03. in particular. Specific measures include 3 provision of financial support 2 through low interest loans and preferential tax treatments and incen1 tives.year over the period 2001–15. to reach 14. Much of this growth will be derived from government programs that focus on research and development of alternative energy sources. Underpinning this increase in demand is the continued switch from coal and oil to natural gas. In this sector. reference case.4 million tonnes (figure 23). making future projections of nuclear consumption somewhat uncertain. the government anAnnual growth in gas nounced the Alternative Energy consumption.5 per cent a year over the period to 2015.4 . However. there remains significant public opposition to the siting of proposed nuclear plants. to reach 55. This is reinforced 54 23 30 25 20 15 10 5 Mt Gas consumption. by sector Most of the growth in Korea’s gas consumption will be driven by the residential sector. Demand for hydropower and other renewables is projected to grow by 5. although from a relatively small base. Underpinning these projections is the assumption that there will be sufficient investment in nuclear power infrastructure to support the growth in consumption.7 per cent a year over the period to 2015 (figure 22). by sector.

This will be driven by continued government policies encouraging gas use.6 per cent a year over the period 2001–15. The assumed fall in gas fired electricity generation in the years 2007–10 accounts for the fall in overall natural gas consumption shown in figure 23 over this period. a number of Korea’s contracts will mature prior to 2015.0–2. the first being the Indonesian Arun contract that expires in 2007.8 million tonnes and 2. indigenous gas production in Korea is expected to begin from late 2003 and to supply around 0.9 million tonnes of LNG a year.by growing demand for gas cooling systems as incomes rise and technologies for modular gas cooling units are further developed. Pipeline natural gas may also form part of the gas supply structure over Projected unmet gas demand. the longer term.8 million tonnes respectively. reference case Korea 24 30 25 20 15 10 5 Mt KOGAS currently has long term take or pay contacts of 16. Natural gas imports In Korea. Consumption of natural gas in the electricity sector is expected to grow by around 3. associated in particular with the emission of sulfur dioxide particulates from consumption of heavy fuel oils. As discussed previously.4 million tonnes a year to 2015.5 million tonnes a year. changes in natural gas demand to date have been reflected in changes in LNG imports.4 per cent and 4. Key factors behind the push for greater gas use include environmental considerations. This will leave increasing shortfalls in natural gas LNG in Korea: opportunities for growth Projected unmet gas demand Domestic gas field supply Current LNG supply contracts 2003 2006 2009 2012 2015 55 . which lowers its share in total gas consumption from 34 per cent in 2001 to 28 per cent in 2015.3 per cent a year respectively over the period to 2015. with all natural gas currently imported in the form of LNG. and continuing efforts to reduce oil dependence for energy security reasons. It also recently negotiated two midterm contracts of 2. However. Gas consumption in the industry and commercial sectors is projected to rise at 6. to reach 6. supported by investment in expanding the distribution network.

gas supply options include short and midterm LNG contracts and LNG spot cargoes.1 0. however. KOGAS is currently delaying entering any new long term LNG contracts until plans for gas market reform are progressed.0 2. and increases the likelihood that gas supply shortages could occur in the coming years.5 20. supply to meet projected demand over the outlook period (figure 24).4 .9 4.4 23. The projected gap between current contracted levels and projected demand over the outlook period is likely to provide a serious challenge for Korea in the coming years.24 Contracted gas supply and projected shortfall.9 3. and its potential to meet some of the projected gas supply shortfall over the period to 2015.4 0.0 Indonesia Malaysia a Brunei Qatar Oman Australia Total contracted LNG supply b Domestic gas supply Projected natural gas demand Projected unmet gas demand 5.9 4. This issue. Greater security of gas supply could be ensured by decoupling LNG procurement from plans for gas market reform.7 4.1 – 15. This limits Korea’s gas supply options. 56 ABARE research report 03.1 – 12.0 0.9 4. Until this issue is resolved.0 4.2 2015 Mt 1.3 4.7 4.4 33. the projected shortfall in gas supply could be as large as 20 million tonnes by 2015 (table 24).6 0.1 a Assumes 0.3 20.4 24. reference case Korea 2005 Mt 2010 Mt 3. An additional option to meet natural gas demand over the medium to longer term currently being evaluated by Korea is the introduction of pipeline natural gas.9 0. is explored in chapter 6. Based on current contracts.0 2. b Includes POSCO/SK 1 million tonne contract.5 million tonne option on MLNG Tiga contract is utilised. It also suggests that new long term LNG contracts will be required to meet demand in the near future.2 8. As discussed earlier in the report.0 0.

for example. as discussed in chapter 3. Korea was subject to this form of disruption in 2001 when LNG deliveries from Indonesia’s Arun plant were interrupted for a period of several months. While there are many uncertainties about the structure and timing of reform under the new administration in Korea. complete deregulation of the wholesale and retail electricity sectors and of the import. That is. wholesale and retail natural gas sector is assumed to occur by 2009. These two issues and their possible impacts on energy and natural gas demand in Korea are explored in this chapter using GTEM. there are a number of issues that may influence these outcomes. Electricity and gas sector deregulation The key features of proposed deregulation in Korea’s electricity and gas sectors were outlined in chapter 3. including interruptions to supply in key energy exporting countries. proposed reforms in Korea’s electricity and gas sectors could make a significant difference to market structure and the dynamics of fuel procurement decisions. it is assumed that Korea’s electricity and gas sectors are progressively liberalised over the period to 2010. Results of these scenarios are reported as deviations from the reference case. However. The reference case.5 alternative policy scenarios While the reference case presented in the previous chapter provides an outlook for energy and natural gas demand in Korea over the period to 2015 under a reasonable set of assumptions. the analysis in this chapter assumes that the key reforms outlined in the basic plans for the electricity and gas sectors are fully implemented. Indeed. The second scenario assumes that a proportion of Korea’s LNG supplies is interrupted for a period of three months or six months in 2005. Energy security concerns are also likely to remain a major focus of energy policies in Korea over the outlook period. Yet Korea’s extreme dependence on imports to meet its fossil fuel requirements makes it vulnerable to external shocks or disruptions. assumes that no further progress is made to liberalise energy markets in Korea over the outlook period. In the first scenario. LNG in Korea: opportunities for growth 57 .

a study undertaken by the Korea Institute for Industrial Economics and Trade (1999) suggests that regulatory reform in the electricity industry in Korea could lead to total factor productivity improvements of around 1. where British Gas. Further. and subsequent reforms adopted to allow competition to develop. it is assumed in this study that comprehensive liberalisation of Korea’s gas sector could lead to an increase in total factor productivity of around 20 per cent relative to the reference case in 2010. for example. lower energy prices are likely to have economywide implications for the structure and level of economic output. In this study. Most of the measurement of the productivity impacts of gas market deregulation is confined to the United Kingdom. more efficient investment and wider consumer choice (Fairhead et al. the results of a study by Price and Weyman-Jones (1996) are used to estimate the maximum potential productivity impacts that could be derived from the implementation of comprehensive liberalisation programs in natural gas sectors characterised by extensive regulatory barriers. that have implemented only limited major reforms to date will benefit significantly from the implementation of further comprehensive liberalisation initiatives in electricity and gas sectors. In the case of electricity market reform. This is because Korea’s gas sector is highly regulated and that reforms are yet to be implemented. lower prices.Box 6: Benefits of deregulation in the electricity and gas sectors The broad principle underpinning reform of the electricity and gas sectors that has occurred in many economies is that there are significant long term efficiency benefits from allowing markets to play a greater role in determining what is produced. In this context. These estimates of the potential price impacts of reform could be lower if. 2002).4 . In general. ABARE has drawn on the available economic literature to estimate the potential productivity gains that could be derived from electricity and gas market liberalisation in Korea. Estimates of the potential efficiency gains from reform of the gas market in Korea are more difficult to obtain. Experience of regulatory reform in economies that have already implemented liberalisation policies in these sectors provides some evidence of the type of gains that may be generated in energy markets. Based on this analysis. it can be expected that economies. These productivity improvements are phased in through equal annual 58 ABARE research report 03. such as Korea’s. such as Korea. was privatised in 1986. as cost savings achieved through productivity gains are passed on to electricity users in terms of lower prices. Productivity gains of this magnitude are estimated to lead to an 8 per cent reduction in electricity prices in Korea relative to the reference case over the period to 2010. as energy is a fundamental input to economic activity. consumed or invested. current electricity prices are subsidised or if the rate of return on assets required by a private investor is higher than that received by the current government owner.3 per cent a year over the reform period. a publicly owned. vertically integrated enterprise. including productivity improvements.

2002). Liberalisation of this nature in electricity and gas markets is projected to have both direct and indirect impacts on the Korean economy. (2002). These gains are demonstrated in ABARE’s recent study. Because of its dependence on imports for natural gas supply. This LNG in Korea: opportunities for growth –15 –20 59 . efficiency gains from reform among major suppliers of gas. Deregulating Energy Markets in APEC: Economic and Sectoral Impacts (Fairhead et al. Although there is a trend toward energy market liberalisation in many of Korea’s trading partners. Because the results presented in this study are based on assumptions. such as Indonesia and Malaysia. including on energy prices.increments over the period to 2010. the analysis reported in this study assesses the impacts of energy market reform in Korea’s electricity and gas sectors in isolation from energy sector reform programs being adopted in other countries. The productivity gains are estimated to lead to a fall in the price of gas by 18 per cent relative to the reference case at 2010. Korea stands to gain as much from liberalisation among its trading partners as from domestic reforms. the modeling results for Korea in this study will differ from those in Fairhead et al. While domestic reform will contribute to lower prices. they should be viewed Change in energy prices as illustrative only of the general following deregulation. This scenario represents the adoption in Korea of a comprehensive liberalisation package involving greater reliance on market forces in electricity generation and retailing and gas imports and retailing –– areas where competition is feasible –– and the design of an effective regulatory framework where there is a need for government intervention to address issues associated with natural monopolies and externalities. are likely to result in even lower gas costs in Korea. consumption and trade (see box 6). 25 –5 –10 Economic impacts As a result of enhanced productivity and lower electricity and gas prices following deregulation (figure 25). Because extra-national gas market reforms can enhance the gains in Korea from domestic reforms. 2015 impacts and direction of change that relative to the reference case Korea can be expected from regulatory Electricity Gas % reform in Korea’s energy markets. total demand for goods and services in Korea expands relative to the reference case.

this is equivalent to an increase 60 Coal Oil Gas Electricity ABARE research report 03.8 trillion won) relative to the reference case. and exports of. rubber cals and plastics. the efficiency gains that are realised when resources are employed in their most productive end use as energy consumers and producers respond to price signals.1. lower electricity and gas prices following deregulation.5 1.0 0. 2015 have a favorable impact on the cost relative to the reference case structures of energy intensive indusKorea tries such as iron and steel.4 .8 Nonmetallic minerals This leads to an increase in the Other manufactures competitiveness of Korea’s energy 0. Consequently.2 other economies. chemi. Structural impacts Underlying the rise in GDP in Korea is an improvement in the competitiveness of industrial and commercial output resulting from higher productivity in the electricity and gas industries Change in production and exports and lower energy prices. 26 27 3. 2015 share of energy intensive industries relative to the reference case in total economic output (figure 26).3 per cent higher than its reference case level. % demand for.5 % Korea Energy consumption impacts Reflecting the fall in electricity and gas prices and increased economic output. together with the Change in energy consumption following deregulation.1 billion (2. energy Production Exports intensive goods rise relative to the reference case.1 per cent respectively relative to the reference case at 2015 (figure 27).0 1. This is equal to an increase in GDP at 2015 of around US$2. As a result of these effects. 0.0 Iron and steel Chemicals. In the case of electricity. nonmetallic and plastics minerals and other manufacturing.effect is reinforced by the resource allocation benefits of liberalisation –– that is. Korea’s GDP at 2015 is 0.6 intensive sectors relative to other 0. electricity and gas consumption in Korea rise by 1.0 2. In particof energy intensive goods ular.5 2.4 per cent and 3.4 sectors of the economy and relative to energy intensive production in 0.

4 billion cubic metres).to 467 terawatt hours. particularly in industry.8 per cent following 8 deregulation (figure 29).5 40. 25 Projected energy consumption following deregulation. Greater demand for electricity also increases the relative demand for other fuels. The share of gas 12 Reference case in electricity generation rises from Deregulation 11.10 ence case to 11.6 55.4 55.8 41. The increase in electricity use is driven by higher demand by the industry.1 b Coal Oil Gas Nuclear Renewables 60.2 per cent at 2015 in the refer.9 2. The switch LNG in Korea: opportunities for growth Mt Electricity Industry Commercial Residential 61 .3 million tonnes (47. as following deregulation. 2015 gas becomes more competitive relaKorea tive to other fuels. including coal.6 Total primary energy consumption 319. b Equivalent consumption relative to the refer. by sector The largest growth in natural gas consumption following deregulation is in the electricity sector (figure 28). commercial and residential sectors.0 Electricity 39.6 321. Total primary energy consumption is projected to rise to 321 million tonnes of oil equivalent at 2015 (table 25).9 2. 2015 Korea Reference case Deregulation Mtoe Mtoe 61. to around 467 terawatt hours.6 a The projected rise in natural gas a Equivalent to 460 terawatt hours.9 42. ence case at 2015 is equal to around 1 million tonnes and total gas consumption reaches 34.5 158. The relative increase in gas consumption following deregulation is driven primarily by the enhanced competitiveness of gas as a fuel for electricity and residential applications.4 158. 28 6 4 2 The overall increase in gas consumption is moderated by the increased use of electricity in some sectors relative to the reference case.in consumption of 6 terawatt hours in 2015. Gas consumption. there is an increase in the share of natural gas in the fuel mix for Gas consumption by sector electricity generation in Korea. Along with the rise in electricity consumption.

toward gas following deregulation would be expected to be larger if gas market reform was undertaken independently from electricity market reform. subject to shipping capacity constraints. Korea and other affected countries are required to source additional cargoes from alternative suppliers. including disruptions to LNG supply (see box 7). Malaysia. In the scenario it is assumed that Korea continues to import the majority of its LNG supplies under long term contracts. As demonstrated by the events of 2001. As all other contracted LNG supply to Korea continues as usual in the year of the disruption. While sources of supply have expanded over the past few years. The disruption to Korea is equivalent to around 2 per cent and 4 per cent of its total LNG demand respectively in that year. it would be difficult for suppliers to increase LNG production in the short term in response to a sudden increase in demand. 2015 Korea Reference case Deregulation Impacts of a gas supply disruption 10 % As discussed in previous chapters. To maintain LNG supply. three of Korea’s current seven long term LNG contracts are with Indonesia. Coal Gas Renewables Korea currently depends entirely on Oil Nuclear LNG imports for its natural gas supply. this could leave Korea vulnerable to international shocks. In addition. In this scenario it is assumed that there is a gas supply disruption in 2005 that decreases LNG deliveries to Korea and other countries in the north east Asian region for a period of three months and six months. As gas is an important input to economic activity. four countries — Indonesia.4 . Qatar and Oman — account for more than 90 per cent of Korea’s gas imports. any interruption to LNG supplies could be costly for the Korean economy. It is assumed that spot supplies and transport are available in this situation. 29 40 30 20 Fuel mix in electricity generation following deregulation. including the spot market. it is expected that these prices will not be affected. 62 ABARE research report 03. as the relative competitiveness of gas would be enhanced. at contracted prices. However.

Some substitution of nongas fired technologies –– coal. KOGAS held a contract to import 3. During the period of disruption it is assumed that there is limited interfuel substitution in Korea. oil. it is expected that spot prices could rise significantly in the short term. with a greater proportion of overall LNG demand met by spot purchases. An LNG swap deal was also arranged with Chinese Taipei and import schedules from other LNG suppliers were advanced. Considering Korea’s seasonal gas demand patterns.Box 7: LNG supply disruption to Korea in 2001 In March 2001. security concerns in Indonesia led Exxon-Mobil to shut its Arun LNG complex in North Aceh for several months. Korea was required to seek alternative LNG supplies to make up the shortfall. it was fortunate that the interruption to supply did not occur in the peak winter months. In 2001. This is designed to reflect the short run nature of the analysis as well as specific industry conditions that preclude the procurement of alternative energy supplies over that timeframe. LNG in Korea: opportunities for growth 63 . Assuming that Korea has not signed any new term contracts for the period 2003–05. The closure of the Indonesian gas plant had a direct impact on the supply of natural gas to Korea as Indonesia was the largest single LNG supplier to Korea at that time. involving several cargoes a month for the period of the disruption. While in this case Korea was able to source adequate additional LNG supplies to meet its requirements. Indonesia was able to switch supply to the Bontang LNG facility to cover some of the cargoes. to represent excess capacity in those systems. The gas supply disruption would intensify the pressure to source additional spot cargoes in that year. with a tight international supply situation. Sources: Doh (2001). As a result of the disruption to contracted deliveries. Given the likely increased demand and competition for spot cargoes. while Korea was able to cover its remaining requirements with spot cargoes from Malaysia and Brunei.b). hydro and nuclear –– in the electricity generation sector is permitted. As discussed in box 1.4 million tonnes of LNG a year from Arun and Arun was contracted to supply KOGAS with 20 per cent of Korea’s total annual gas requirements in that year. the impacts on the gas sector and the broader economy could have been severe. it would already be meeting a significant shortfall of LNG –– around 3 million tonnes –– on the spot market or through short term contracts. if the LNG supply disruption had occurred during that season. Reuters (2001a. Korea had difficulty sourcing additional cargoes in early 2003 and in one case paid up to 10 per cent more than prevailing prices to secure a cargo.

including on energy prices. energy consumption. Following a three and six month disruption.6 million (110. While this scenario involves an interruption to a relatively small proportion of Korea’s total gas supply. This reflects the fact that a larger 2005 relative to the reference case Korea proportion of Korea’s total gas imports is now accounted for by 3 month 3 higher priced spot LNG cargoes. It is projected that a three month gas supply disruption in 2005 could result in GNP that is around US$96. following a gas supply disruption.3 per cent relative to the reference case at 2005. Energy price impacts The impacts of a disruption to LNG supply are felt primarily on energy prices. when gas demand peaks.2–0. As the length of the disruption period increases. for example. gas prices in Korea are projected to rise by 2.6 per cent and 3.9 per cent respectively relative to the Change in gas and electricity price reference case at 2005 (figure 30).7 billion won) lower than in the reference case in the same year. or if international LNG supply capacity was tighter.5 billion won) lower than in the reference case at 2005 (figure 31). is lower than reference case levels. GNP is around US$142.The scenario demonstrates that a disruption in gas supply has impacts on the broader economy. electricity prices also 2 rise. Gross national income. the effects of a disruption could be more severe than modeled here if it occurred during Korea’s winter. As 6 month gas is a key fuel for electricity generation. % Sectoral impacts Underlying the macroeconomic impacts in Korea are changes at the sectoral level.4 . As the gas supply disruption has an impact on gas and electricity prices 64 ABARE research report 03. by around 0. sectoral output and national income. the economic effects deepen. Following a six month disruption in gas supply.5 million (74. 30 1 Economic impacts Higher energy prices and input Electricity Natural gas costs that follow the supply disruption have a negative impact on Korea’s economy.

or by around 0. Gas consumption impacts As expected. 31 Because industries that use electricity reduce their output relative to the reference case.1 per cent relative to the reference case at 2005. or by 0. rubber and plastics gas consumption is projected to fall Iron and steel by around 3. the electricity industry also contracts. The most affected sectors in this scenario are the nonmetallic –100 minerals and iron and steel indus.02 % 65 .5 Manufacturing million tonnes (figure 33).1 per cent relative to the reference case.–125 tries (figure 32).04 –0. Industries that are less energy intensive are also –150 3 month disruption 6 month disruption affected. though to a lesser degree. the cost structures of Change in GNP following a gas supply disruption. 32 Electricity The results of this scenario highlight the potential cost to Korea’s econLNG in Korea: opportunities for growth –0. Higher energy costs –25 reduce the competitiveness of –50 energy intensive industries. Electricity production is between 152 and 222 gigawatt hours lower than in the reference case at 2005. depending on the contribution of electricity and gas use to their total cost of production. leading to a contraction in demand for their –75 output. natural gas consumption in Korea is projected to decline relative to the reference case at 2005 following the rise in gas prices that result from the supply disruption. Under the following a gas supply disruption. 2005 energy intensive industries are negarelative to the reference case tively affected in the short term Korea because there is limited interfuel US$m substitution.8 million Nonmetallic minerals tonnes in that year. When 3 month disruption Chemicals. gas consumption falls by Korea Services 2.in Korea. 6 month disruption supply is interrupted for six months.06 –0. three month supply disruption 2005 relative to the reference case scenario. The fall in gas use is moderated by the limited ability of some users to substitute Change in sectoral output into alternative fuels.

Failure to resolve the issue of LNG procurement policy and the projected gap between supply and demand as soon as possible could leave Korea vulnerable to gas supply shortfalls over the medium term and the subsequent adverse economic effects discussed in this scenario.omy if reliable. secure supplies of natural gas are not ensured. However. 2005 Korea Reference case 3 month disruption 6 month disruption 66 ABARE research report 03.4 . 33 20 15 10 5 Mt Gas consumption following a gas supply disruption. Korea could reduce the likelihood of supply interruptions if it reduced its reliance on a small number of suppliers by further diversifying its LNG supply portfolio.

Each of these options has different cost profiles and other characteristics that will affect its competitiveness and penetration in the Korean market. for both economic and 34 Possible gas pipelines to Korea Russian Federation Lake Baikal Okka Irkutsk Ulan-Ude Mongolia Chita Manzhouli Khabarovsk Harbin Sakhalin Shenyang Beijing Dalian Pyeongtaek China Vladivostok North Korea Pyongyang Nigata Seoul Japan South Korea Tokyo LNG in Korea: opportunities for growth 67 . Pipeline natural gas There is considerable support among government and industry in Korea for the development of pipeline natural gas supplies. This could be met either by expanding LNG imports or by constructing natural gas pipelines to international sources of supply. meeting the potential increase in demand for natural gas will require significant increases in gas imports.6 natural gas supply considerations Because Korea has limited indigenous gas resources.4 million tonnes a year. with the Donghae project expected to supply only 0.

strategic reasons. Natural gas deposits in the Irkutsk region are estimated at around 840 million tonnes. it is understood that there has been some difficulty in reaching an agreement between the parties on gas prices. The Korean Ministry of Finance and Economy recently estimated the total cost of the project to be US$11 billion (Reuters 2003d). The second route is overland from Kovykta through north eastern China. then via a subsea pipeline from Dalian to Pyeongtaek. construction of the pipeline would take 68 ABARE research report 03. The results of the feasibility study are expected to be released in September 2003. south of Seoul. China and Korea are conducting a joint feasibility study into the supply of pipeline natural gas from the Kovykta field. China has reportedly sought gas prices that are linked at least partly with coal prices rather than oil as in traditional LNG contracts. Both the proposed pipeline routes are around 4100 kilometres in length. These are pipelines from the Irkutsk region in eastern Siberia and from Sakhalin Island in the Russian far east (figure 34). for a number of reasons this view is not shared by all. In contrast. The volume of gas supplied to Korea could reach 7 million tonnes (10 billion cubic metres) a year for thirty years. However. It has been agreed by the Russian Federation. to China and Korea. China has sought at least 15 million tonnes (20 billion cubic metres) a year over the same period. China and Korea that each party will construct the relevant portion of pipeline in its own territory. Irkutsk The Russian Federation. The first is overland from the Kovykta field through north eastern China and North Korea to Pyeongtaek. However. in the Russian province of Irkutsk. Korea is believed to have sought gas prices that are 20–30 per cent lower than current LNG contract prices. only two projects are considered to have realistic commercial potential as sources of supply into Korea over the medium term. bypassing North Korea. There are two proposed pipeline routes considered in the feasibility study. the Russian Federation has advocated that the price should reflect gas prices for China’s west to east pipeline (Dow Jones 2003). While there are many pipeline projects that have been proposed in the north east Asian region. First. The Korean government is optimistic that the Irkutsk pipeline could begin delivering natural gas to Korea by 2008–10.4 .

Given the uncertainties associated with the project. Wybrew-Bond and Stern 2002). at the end of the pipeline supply chain.a number of years to complete and would therefore need to begin quickly to be operational within this timeframe. There are also reports that China prefers to use domestic gas supplies and imported LNG and will be unlikely to commit to Russian pipeline gas before 2015 (Platts 2003a. LNG in Korea: opportunities for growth 26 Field Sakhalin gas reserves Application Reserves billion m3 Sakhalin 1 Sakhalin 2 Sakhalin 3 Sakhalin 4 Sakhalin 5 Sakhalin 6 Pipeline LNG Unassigned Unassigned Unassigned Unassigned 485 500 970 540 600 na 3 095 Preliminary total na Not available. Many of the uncertainties surrounding the pipeline project could be clarified when the results of the feasibility study are announced. there are potential security risks for Korea if the proposed pipeline transits North Korea. 69 . such an option could also provide strategic advantages as it could better integrate the North into the region and provide the country with both much needed energy and an alternative to nuclear power (see box 8). In addition. Sakhalin 1 Another potential source of pipeline natural gas to Korea over the period to 2015 is Sakhalin Island. Alternatively.b). including both its potential natural gas demand and infrastructure priorities.d. China is currently investing large amounts of capital in building the west to east gas pipeline. Reserves for this development are estimated to be around 354 million tonnes (485 billion cubic metres) (table 26). Second. The Sakhalin 1 development is dedicated to pipeline natural gas for export. China’s potential demand for natural gas is vast. generating some concern that China could absorb all potential supply from Irkutsk for its own needs. for Korea. some reports have suggested that the earliest the Irkutsk pipeline could deliver gas to Korea is around 2012–13 and that a possible startup date could be after 2015 (Platts 2003a. and some commentators have questioned China’s willingness to commit to two large pipeline projects in the same time period.b. However. the viability of the project depends to a large extent on China. Source: Platts (2003a). although no feasibility studies for a route to Korea have been undertaken.

However. 70 ABARE research report 03. Energy Intelligence Group (2003b).4 . This could make pipeline natural gas less competitive in South Korea against its established sources of imported LNG. and issues relating to sovereign risk. In addition. It recently announced that it will proceed with its plan to construct two new nuclear reactors with a combined generating capacity of at least 200 megawatts. The 1994 accord stalled in late 2002 and oil shipments were halted after North Korea revealed that it has a uranium enrichment program and later reopened its Yongbyon nuclear power plant and withdrew from the nuclear nonproliferation treaty. North Korea has since announced it is in possession of nuclear weapons and tensions have heightened between North Korea. The proposed pipeline would pass through North Korea to supply customers in the South but could allow the North to access an agreed volume of gas per year as a transit payment. neither of the proposed gas pipelines is scheduled to be constructed until at least the end of the decade. Nevertheless. North Korea could be provided with sufficient natural gas to generate an equivalent volume of electricity. not only because of the geopolitical and security implications but because it would provide its gas fields with access to the South Korean market. the North Korean issue is likely to remain a key point for consideration in the development of any natural gas pipeline for the South. the proposal could form part of a multilateral aid program to North Korea. gas could be delivered to the North through the proposed Irkutsk pipeline. There have been reports that the Russian Federation is likely to favor the proposal. that a ‘gas for peace’ plan could form part of a possible solution to the current North Korean nuclear standoff. in return for the North dismantling its nuclear arms program. the United States and several other countries in north east Asia. World Markets Research Centre Limited (2003). or alternatively from the Sakhalin 1 project. Other problems include uncertainty surrounding any large scale projects in the North. Under such a plan. Sources: KEEI (2003b). North Korea is suffering a critical shortage of energy and its economy is close to collapse. the lack of gas infrastructure in the country.Box 8: A ‘gas-for-peace’ deal with North Korea – implications for pipeline projects It has been suggested. including by some in South Korea. Any such arrangement would effectively replace a 1994 accord with the United States that provided monthly shipments of fuel oil in return for North Korea’s guarantee that it would not pursue its nuclear ambitions. hence any supplies to the North could have to be built into the cost of the gas supplied to the South. the Russian Federation would be unlikely to provide natural gas to North Korea free of cost. Under a ‘gas for peace’ deal. Such a proposal is still in the early stages of discussion and the North Korean stance toward this and other such projects on regional energy cooperation remains uncertain. Alternatively.

A US$15 billion scheme has been proposed to build a 1900–2200 kilometre subsea pipeline that would supply around 6 million tonnes (8 billion cubic metres) a year of Sakhalin gas to the Niigata or Tokyo area in Japan from 2008 (Platts 2003b. These projects will be viable only if the gas reserve is large enough to recover the costs incurred in constructing the pipeline and in bringing the gas to end markets. These and other factors are important in assessing the overall viability of pipeline projects into Korea and their competitiveness with alternative gas supplies. These market factors could reduce the likelihood of the Sakhalin 1 pipeline project proceeding. recent announcements suggest that any pipeline from Sakhalin 1 would target Japan as its principal market. Well defined legal. will absorb the minimum volume of pipeline gas required for the project to be viable in the medium term –– particularly in the light of recent LNG import commitments by Japanese companies from the Sakhalin 2 project (Platts 2003e). this may increase the lifespan and viability of the project. If clusters of reserves are located near the original development. Energy Argus 2003g). possibly via the North. the size and quality of natural gas reserves that provide pipeline gas supplies will be a critical determinant of the viability of both the Irkutsk and the Sakhalin 1 projects. Because of the high capital costs of financing either of the proposed pipeline options. The gas base must also be dependable.The distance from Sakhalin to Seoul is shorter than that from Irkutsk and would imply lower pipeline construction costs. This is likely to involve both domestic and foreign capital. It is unlikely. there are no well developed plans at this stage (FACTS Inc. access to finance will be an important determinant of their viability. However. While it has been suggested that pipeline gas from Sakhalin 1 could be redirected or extended to Korea to enhance its viability. 2003a. or at least postpone its development until there is sufficient market growth (Energy Intelligence Group 2003c). with its emphasis on LNG. Issues relating to pipeline natural gas Natural gas pipelines are characterised by high capital costs. In the first instance. taxation and foreign exchange systems will be important in terms of LNG in Korea: opportunities for growth 71 . long construction times and often complex international transit issues. that Japan’s gas market. however. Platts 2003b). as continuity of supply is an essential issue not only for producers and consumers but also for financiers and other parties involved in the project.

72 ABARE research report 03.4 . principally China and Japan. agreement to supply gas by pipeline would rely heavily on noneconomic factors such as enhancing energy security through fuel diversification or increasing political stability and economic security on the Korean peninsula. In the case of the Irkutsk and Sakhalin pipelines to Korea. Transit of either pipeline project through North Korea could present considerable risk for the security of South Korea’s gas supplies. While it has been estimated that the Irkutsk pipeline project would cost around US$11 billion. (2002) and Park. However. and the easing of the current political tensions on the peninsula. Hence the dynamics of these markets will be as important for the viability of the pipeline projects in Korea as the Korean market itself. particularly if the pipeline must traverse more than one country. there could also be strategic advantages associated with such an option. Can pipeline natural gas compete with LNG? An important question regarding the implementation of any pipeline project in Korea is whether pipeline natural gas can compete on a price basis with imported LNG. Lee and Lee (2002). there has been little discussion of how this will be financed. As discussed above. as discussed in box 8. Transit fees. However. can add substantially to gas pipeline transit costs. either financial or in kind through physical deliveries of gas.encouraging the appropriate flow of foreign funds. The viability issue will be compounded by factors associated with the transit of gas pipelines through third countries. existing pipeline proposals have not targeted Korea as a priority market –– rather they have been extensions of planned pipeline to other markets. the transit issue is compounded by the geopolitical situation surrounding the relationship with North Korea. including increased economic and energy security for North Korea and access to non-nuclear energy. Further information on issues related to developing natural gas projects in Korea and the north east Asian region can be found in Park et al. If pipeline natural gas is not price competitive with LNG then there is little economic argument for pursuing a pipeline development to provide additional gas supply. there is significant potential for future gas demand growth in Korea. The existence of a viable market will also be a prerequisite to the development of natural gas pipeline projects in Korea. In these circumstances.

at distances greater than 4000 kilometres. In addition. as currently planned. Platts 2003a. The terms and conditions on which LNG is available are also likely to become more flexible (Platts 2003a). Further. It also assumes that POSCO and SK Corporation import 1 million tonnes of LNG a year from 2005.b). Economic factors aside. are emphasised in the decision making process. some analysts believe that pipeline natural gas cannot be delivered to Korea at such a discount to LNG prices.4 million tonnes of natural gas a year is provided from Korea’s Donghae gas field. and existing mid and long term LNG supply contracts. the Irkutsk pipeline is therefore unlikely to have a transport cost advantage over imported LNG (Energy Argus 2002c. However. pipeline natural gas may still form an important part of Korea’s gas supply mix in the medium to longer term. The downward trend in prices will be the result of new technology and production methods. This could occur if noneconomic factors. average LNG contract prices to Korea are likely to fall over the period to 2015 as existing contracts expire. The balance is based on the set of demand projections for Korea that were developed in chapter 4. For example. Such prices could enable pipeline gas to compete with LNG and allow for some fall in LNG prices over time. including security and geopolitical concerns. LNG is generally considered to be a more cost effective form of gas transport than pipeline. lower shipping costs and greater competition. making it more difficult for pipeline natural gas to compete with LNG.There is much speculation about whether pipeline natural gas can compete on a price basis with LNG imports into Korea. As discussed earlier. The balance assumes that 0. pipeline LNG in Korea: opportunities for growth 73 . a direct comparison with LNG import prices cannot be made.3 million tonnes at 2015. Natural gas supply and demand balance An indicative natural gas demand and supply balance for Korea is provided in figure 35 that sees new pipeline gas supply complementing existing LNG supply toward the end of the outlook period. At around 4100 kilometres. in which gas demand is forecast to reach 33. Korea has reportedly sought gas prices from the Irkutsk pipeline project that are 20–30 per cent lower than current LNG contract prices. Given the absence of pipeline natural gas in the north east Asian region.

Irkutsk Donghae gas field supply POSCO/SK LNG contract KOGAS LNG mid term contracts KOGAS LNG long term contracts 2006 2009 2012 2015 natural gas supply from Irkutsk is assumed to commence from 2010 and is ramped up to 7 million tonnes of gas a year by 2013.4 .1 a Assumes 0.3 20.4 4.6 – 1. This shortfall is likely to be met by new LNG import contracts.9 20.2 20.5 1.4 7. Irkutsk Supply shortfall/market for additional LNG 23.8 2015 Mt 33.0 0. when stronger growth in natural gas demand is forecast than in the earlier part of the outlook period.4 – 3.8 16.0 Projected gas demand Assumed total gas supply – KOGAS LNG long term contracts – KOGAS LNG midterm contracts a – POSCO/SK LNG contract – Donghae gas field – Pipeline natural gas.0 million tonnes at 2015 (table 27).9 – 1.4 3.4 14.9 2.0 0.0 0. 74 ABARE research report 03.3 11.35 30 25 20 15 10 5 Mt 2003 Potential natural gas demand and supply balance Korea Gas supply shortfall/possible additional LNG Pipeline natural gas supply. The supply gap becomes more significant after 2010. On the basis of these assumptions.5 million tonne option on MLNG Tiga contract is utilised. The need for additional LNG contracts could be greater if the Irkutsk project (or other pipeline options) are delayed beyond 2010 or are not able to supply 7 million tonnes of gas a year (see box 9). there is projected to be a natural gas supply shortfall of 13.0 13. 27 Potential natural gas demand and supply balance Korea 2005 Mt 2010 Mt 24.

2 2015 Mt 33.9 2. difficulty in resolving transit issues.3 20.0 0. a less optimistic view of the Irkutsk pipeline project is presented in the following alternative supply and demand balance (figure 36).3 11. Irkutsk Supply shortfall/market for additional LNG 23.2 16.9 – 1.6 – 1. This balance assumes that pipeline gas supply to Korea does not commence until 2014.5 1.0 13.4 – 8.0 Projected gas demand Assumed total gas supply – KOGAS LNG long term contracts – KOGAS LNG midterm contracts – POSCO/SK LNG contract – Donghae gas field – Pipeline natural gas. Given this possibility. Irkutsk Donghae gas field supply POSCO/SK LNG contract KOGAS LNG mid term contracts KOGAS LNG long term contracts 2006 2009 2012 2015 28 Alternative natural gas demand and supply balance Korea 2005 Mt 2010 Mt 24. some analysts express doubts that the Irkutsk pipeline from eastern Siberia could begin supplying natural gas to Korea by 2008–10. and delays in the construction process.Box 9: Alternative natural gas supply and demand balance As discussed in this chapter.4 – 3.4 7.9 20. including uncertainties over the project’s economic viability. Such a delay could occur for a number of reasons.0 0.1 LNG in Korea: opportunities for growth 75 .0 14. a postponement by China in committing to the project. The volume of gas supplied in 2014 is assumed to be around 5 million tonnes. ramping up to 7 million tonnes the following year 36 30 25 20 15 10 5 Mt 2003 Alternative natural gas demand and supply balance Korea Gas supply shortfall/possible additional LNG Pipeline natural gas supply.0 0.8 16.

56 4. rising to 13.80 4.06 14.56 1.00 0.08 – – – – – – 5.11 Total 25. Korea would need to secure additional LNG contracts of around 3 million tonnes by 2005 and further term contracts to meet the projected shortfall in the remainder of the outlook period.13 7.11 million tonnes. say beyond 2015.23 – b 17.4 .80 4.59 6. Failure to contract additional medium to long term gas supplies is likely to leave Korea vulnerable to gas shortages and to exacerbate the difficulties it has experienced in recent years.93 11. In these circumstances.56 Chinese Taipei 3.10 a Includes a cargo swap from Korea to Japan of 0. Source: BP (2003) 76 ABARE research report 03.10 5.07 0.18 0.A delay in the delivery of pipeline gas of this magnitude would increase Korea’s potential gas supply shortfall over the outlook period and would put further pressure on the demand for additional LNG contracts.80 0. 29 LNG trade in the Asia Pacific. b Includes a cargo swap from Japan to Korea of 0.24 a 53.26 5.08 10.24 75.2 million tonnes. Under the less optimistic scenario.76 4.27 6. Supplying LNG to Korea An additional 13 million tonnes of LNG a year or greater in the Korean market would add significantly to Asia Pacific LNG trade.33 1.0 million tonnes in 2015.95 2.03 2. It would also provide a strong incentive for LNG producers to invest in new production capacity to ensure reliable supply to an expanding market. Korea’s potential supply shortfall at 2010 could be around 8. 2002 Importer Japan Korea 4. If the pipeline is delayed further.21 7. then Korea’s gas supply shortfall in 2015 could be as high as 20 million tonnes.04 million tonnes.77 Exporter Indonesia Malaysia Qatar Australia Brunei Oman Unites Arab Emirates United States Total Mt Mt Mt Mt Mt Mt Mt Mt Mt 17.

The most significant gas reserves are in Qatar. total world LNG trade was 110 million tonnes.The objective in this section is to assess LNG supply capacity to meet Korea’s potential demand and to examine some of the factors that could affect the competitiveness of alternative LNG suppliers in the Korean market. In 2002. equivalent to 35 and 17 billion tonnes). Qatar and Australia (table 29). Issues relevant to this assessment are the size and distribution of gas reserves. Natural gas reserves Proved recoverable reserves of natural gas –– defined as the volumes in place that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reserves under existing economic and operating conditions –– held by the group of eight existing LNG exporters to the Asia Pacific market are considerable (figure 37). especially in spot trades. of which Japan. Because Korea falls firmly within the Asia Pacific region. 2002 Qatar United Arab Emirates United States Indonesia Australia Malaysia Oman Brunei 0 2 4 6 8 10 12 14 trillion m3 77 . transport and other cost considerations. and the reliability and security of potential suppliers. demand and supply in the Asia Pacific market are relatively distinct from and unaffected by the Atlantic basin market although there can be some spillover between markets. The Asia Pacific market dominates world LNG trade. and while they do not currently export LNG. Korea and Chinese Taipei accounted for almost 70 per cent. The Russian Federation and Iran have the world’s largest reserves (48 and 23 trillion cubic metres respectively. Geographical separation and transport costs mean that LNG pricing. the group collectively accounts for 22 per cent of total world proved recoverable reserves. Indonesia is the largest followed by Malaysia. Together with those of the remaining Asia Pacific LNG exporting countries. both have LNG in Korea: opportunities for growth 37 Proved recoverable reserves in countries exporting LNG to the Asia Pacific market. existing and planned LNG export capacities. Of the eight LNG exporters to the Asia Pacific market. this section focuses on the dynamics of that market.

0 4. Korea Japan. The remaining 10 million tonnes a year capacity is sold through short term arrangements. on the spot market or remains unused. particularly in Japan and Korea. in part.8 3.1 7. Korea. however.6 7. Korea Japan.3 6.4 6. Chinese Taipei Japan Japan. however. LNG production capacity There are currently twelve LNG plants in the eight countries that supply the Asia Pacific market (table 30). Approximately 80 million tonnes a year or 89 per cent of this capacity is tied up in medium or long term contract commitments to established buyers.plans to do so in the future.5 90.8 19. Chinese Taipei Japan.4 .7 6.3 ABARE research report 03. that not all the gas reserves identified in any country will be available for liquefaction.5 7.6 7. Korea Japan Korea Japan Japan 3 5 4 8 3 3 1 2 3 2 3 1 7.2 80.4 4. Korea. It should be noted. This modest production overcapacity has.3 6.5 8. Indonesia has the largest operating capacity followed by Malaysia. as a result of the effects of lower economic growth. Qatar and Australia.8 4. Korea Japan. Collectively. expected to be robust over the coming decades as the energy sectors of established buying countries resume stronger 30 Country Existing LNG plants.8 22.7 6.9 3.2 6.3 Project Customers Australia Brunei Indonesia North West Shelf Lumut Arun I-III Bontang A-H Bintulu MLNG I Bintulu MLNG II Bintulu MLNG III OLNG Qatargas Rasgas Das Island Alaska Malaysia Oman Qatar United Arab Emirates United States Total 78 Japan Japan.6 5. been the product of contract cancellations and weaker than expected demand among Asia Pacific buyers.5 1. Market demand is. the total capacity of all existing plants in the market is about 90 million tonnes a year. Asia Pacific market Number of Operating Current trains capacity contracts Mt/yr Mt/yr 7.7 6.7 1.

India and the United States west coast.0 3. New LNG buyers.2 5. 31 Country LNG plants under construction and planned. however.7 18. and others in Indonesia.growth.6 million tonnes a year.0 4. Together with projects in the Middle East. there are limited new gas supply projects under construction in the region. If these greenfields projects are to proceed. These include Australia’s North West Shelf Train 5.6 1 1 1 1 1 5 1 1 2 1 1 2 1 2 2004 2006 2004 2005 2004 2007 2008+ 2007+ 2008+ 2005+ 2007 2005 2007 79 . they will need to be underpinned by secure long term contracts that ensure their economic viability and access to finance. the Middle East and the Russian Federation. Compared with these strong demand projections.0 7.7 9. Asia Pacific market Operating capacity Mt/yr Number of trains Startup date Project Projects under construction Australia North West Shelf Train 4 Bayu-Undan Malaysia Bintulu MLNG III Train 2 Oman OLNG T3 Qatar Ras Laffan Total Projects planned or proposed Australia North West Shelf Train 5 Gorgon LNG Sunrise Brunei Lumut II Indonesia Bontang I Tangguh Qatar Ras Laffan Russian Federation Sakhalin 2 LNG in Korea: opportunities for growth 4. these projects could deliver an additional 18. including China.0 3. Other projects in the region are at various stages of planning and approval. Brunei. could also provide a major demand stimulus. Sunrise and Gorgon projects.5 4.6 4.4 3.0 7. with start dates from 2003 to 2006. Projects under construction include Australia’s North West Shelf Train 4 and the Bayu Undan project in the Timor sea and Malaysia’s MLNG Tiga Train 2 (table 31).2 3. The potential demand from Korea if converted to contracts could provide the necessary incentive for producers to proceed with some of these developments.3 4.

While price will be a key factor influencing the competitiveness of potential suppliers into Korea. Middle Eastern suppliers make up the third group. Transport costs will be one such factor and these will be affected to a large extent by distance. one way nautical miles Australia Indonesia Malaysia Brunei Oman Qatar United Arab Emirates US Alaska 80 3 633 2 493 2 124 2 082 5 694 6 156 6 093 4 027 Time. with shipping costs representing 30 per cent of delivered LNG costs. Given the seasonal nature of Korea’s gas consumption. These are furthest from the Korean market. 2001 Distance. These include the capacity of a supplier to negotiate flexible contracts in areas such as seasonal delivery patterns. from where transport costs account for around 10–15 per cent of delivered LNG costs. nonprice issues will also be important. are higher at around 20 per cent of landed LNG prices. The ability to offer flexibility in such matters will often depend on a supplier’s overall contract commitments and the capacity to balance supply commitments in different markets. round voyage days 19 14 12 12 28 31 30 21 Shipping cost. share of delivered price % 20 15 15 10 30 30 30 20 32 ABARE research report 03. Transport costs for the second group. realistic take or pay provisions and make good and resale provisions. consisting of Australia and the United States (Alaska). flexibility and timing of delivery are also likely to influIndicative LNG transport costs to Korea from various exporters. Malaysia and Indonesia. Suppliers to Korea fall into three groups.4 . with strong demand peaks in the winter. The first comprises those from Brunei.Competitiveness of alternative LNG suppliers A range of factors will influence the competitiveness of alternative potential LNG suppliers into the Korean market. A summary of relevant transport data for existing LNG suppliers to the Korean market is provided in table 32.

Korea’s recent midterm LNG contract with North West Shelf Australia LNG. The disruption of part of Korea’s gas supply in 2001 demonstrated the potentially high costs if reliability and security of supply are not met. as evident in the midterm contract with KOGAS in which all cargoes will be supplied during the winter period. In addition. Less tangible factors that are likely to be important determinants of competitiveness in the Korean market are the reliability and security of supply. will deliver all the contracted volume in the winter period. operated by Woodside Energy. There are several other projects in Australia either under construction or planned that could potentially supply Korea’s LNG market. but would require long term commitment from a buyer such as Korea to underpin its development. These include Sunrise in the Timor Sea and Gorgon LNG on the North West Shelf. for example. or planned capacity.5 million tonnes of LNG a year from late 2003 was awarded to NWS Australia LNG. A fifth train is planned. the gas links between Australia and Korea were expanded when a 7 year contract to supply 0. with trade restricted to several spot cargoes from the North West Shelf project. including in Australia.ence the relative attractiveness of one source of LNG over another. Australia has had a limited role in supplying LNG to Korea. LNG in Korea: opportunities for growth 81 . Malaysia. Box 10: Australian LNG supply To reduce its risk profile. These factors will tend to favor politically stable economies. This issue has formed a key part of Korea’s energy policies and fuel procurement decisions. to export LNG. The North West Shelf’s 4. is politically stable and has supportive government policies toward the export of its natural gas resources. However. there are other gas producers in the Asia Pacific region. the North West Shelf joint venture has demonstrated an ability to offer flexible supply conditions. with the capacity. To date. Australia has abundant reserves of natural gas. More than 90 per cent of Korea’s LNG supply in 2002 was from four sources –– Indonesia. and the capacity to contribute to overall energy security through the diversification of energy supply sources (see box 10). a reputation for reliable delivery. and tend to discriminate against regions where instability could increase the risks associated with investing in LNG infrastructure and hence Korea’s overall gas security position. Qatar and Oman. including Australia. Korea has in recent years contracted LNG supplies from a more diverse portfolio of suppliers. Recently.2 million tonne fourth train is expected to be online in 2004.

These include addressing the environmental implications of energy consumption and ensuring a secure. This will be underpinned by the increasing use of gas in households and by industry as well as in the electricity sector. This is insufficient. Government policy to diversify energy supplies away from oil has been a key driver of growth in natural gas consumption. Given current policy settings and assumptions about economic growth and the fuel mix in electricity generation. as gas supply plans have not kept pace with projected 82 ABARE research report 03. reliable and secure supplies of gas are available to electricity generators and city gas companies.4 . as demonstrated by Korea’s experience in the winter of 2002–03. KOGAS has made extensive use of the spot market and short term contracts to meet its current demands. Analysis in this study indicates that natural gas demand in Korea is likely to continue to grow strongly over the period to 2015. to cover Korea’s gas requirements over the medium to longer term. reliable and diversified energy supply base. In addition. Given the strong projected growth in LNG demand in Korea it is imperative that cost effective. The costs of this policy. natural gas demand in 2015 could reach 33 million tonnes. one of the major issues faced by Korea in the short and long term is how to establish effective gas procurement policies that will help to realise the benefits of gas consumption throughout the economy. are lack of certainty about access to gas supplies and prices higher than under long term contracts. while strong investment in nationwide gas distribution networks has facilitated its expansion. however. although at a slower rate than in the recent past.7 conclusions Natural gas has played an increasingly important role in meeting Korea’s rapidly growing energy demand in all sectors of the economy since imports of LNG commenced in 1986. Korea is the world’s second largest importer of LNG after Japan and has in place medium and long term contracts to import 19 million tonnes of LNG a year. Increased use of gas would assist Korea to meet a number of its key energy policy objectives. However. This is emerging as a serious concern for Korea.

waiting for gas reform plans to be implemented before committing to new LNG contracts is exacerbating the potential gap between demand and supply. many observers believe that it is unlikely that the pipeline will deliver gas to Korea before 2010. This could amount to around an additional 13 million tonnes a year at 2015 and will be met almost certainly by increased imports of LNG. it is not necessarily in Korea’s best interests to link the process to new gas supply contracts. However. Indeed. Because gas market reform is complex and requires good planning to implement effectively. An alternative form of natural gas supply that is currently being investigated by the Korean government is the delivery of gas by pipeline from reserves in Siberia or Russia’s far east. the analysis in this study indicates that Korea will need significantly more natural gas to satisfy its requirements over the period to 2015. given the time required to bring new greenfield or brownfield gas developments to the market. By doing so. The issue is complicated by the fact that KOGAS is delaying entering into new long term LNG supply contracts until plans to liberalise the gas market have progressed. There is currently a number of LNG supply projects in the Asia Pacific region. the size of Korea’s projected gas demand over the period to 2015 is sufficient to justify additional investment in production capacity by LNG suppliers. Even if the project proceeds within this timeframe.demand and a significant gap between demand and supply is likely to arise over the next decade. backed by large gas reserves and extensive existing and planned production facilities. Korea is potentially missing the opportunity to secure favorable terms and conditions that are currently being offered under long term contracts in the international market. While the results of the feasibility study are not yet known. LNG in Korea: opportunities for growth 83 . The Irkutsk pipeline proposal is currently the subject of a feasibility study by a consortium of Russian. Chinese and Korean government and industry representatives. If the pipeline is not developed by 2015 then the demand for additional LNG could be as high as 20 million tonnes. However. that have the capacity to meet Korea’s long term gas requirements. it will be important for Korea to commit to new supply contracts as soon as possible if it is not to face an increasingly difficult gas supply situation in the medium term. The current competitiveness of the LNG supply industry and its responsiveness to changing market conditions will ensure in these circumstances that Korea’s long term energy security objectives are met.

A

appendix

structure of the global trade and environment model (GTEM)
GTEM is a multiregion, multisector, dynamic general equilibrium model of the world economy with a database that has a detailed representation of production sectors and regions in the global economy. A nontechnical description of the major assumptions and features of GTEM is presented below. A detailed description of the model can be found on ABARE’s website (www.abareconomics.com).

Dynamics
GTEM is a dynamic model that includes relationships between variables at different points in time. This is in contrast to comparative static models, which compare two equilibriums, one before a policy change and one following. As a dynamic model, GTEM requires a reference case against which the results of policy simulations can be compared. The reference case provides projections of growth in labor and capital in each economy or region, and the associated growth throughout the rest of the economy in the absence of any policy measures. The results of policy simulations are then interpreted as deviations from the reference case.

Factors of production
The four primary factors of production in GTEM are capital, land, labor and natural resources. The capital stock in each region accumulates by investment less depreciation in each period. Both capital and labor are mobile between industries and, to a lesser extent, across regions through international capital flows and labor migration. Land is used only in agriculture and is fixed in each region. GTEM explicitly models natural resource inputs as a factor of production in resource based sectors (coal mining, oil and gas extraction, other minerals, forestry and fishing). For example, the natural gas extraction industry uses three factors of production — labor, capital and a natural resource (reserves of natural gas). The natural resource is a factor used solely in the production of resource based commodities and is not mobile between sectors or regions.
84 ABARE research report 03.4

Returns to the natural resource adjust to maintain its full employment. If, for example, the demand for natural gas declines, returns to the natural resource (its price) fall, leading to a reduction in the supply price of natural gas. Population and labor supply for each region are determined endogenously (within the model) over time. GTEM contains an elaborate description of population dynamics, which captures the idea that as economies move along the economic development path, increasing per person incomes lead to well defined changes in fertility and mortality rates. The model uses estimates of the dependence of fertility and mortality rates on income and an exogenously imposed migratory pattern to predict age and gender specific population changes.

Natural rate of unemployment
It is assumed that the imposition of any policy change does not raise unemployment above the so-called natural rate of unemployment for any economy. Any downward shifts in the demand for labor are assumed to be offset by reductions in real wages growth sufficient to prevent the emergence of unemployment above the natural levels. This assumption is often known as the ‘full employment assumption’ and its use is justified in cases where policy changes are introduced progressively, allowing time for wages to adjust to new market conditions. In practice, however, it could be expected that changes in patterns of production caused by a policy shock such as the implementation of trade and investment liberalisation or the imposition of greenhouse gas emission constraints could lead to the emergence of some unemployment, especially if liberalisation has negative impacts in sectors where the skills of the labor force are not easily transferable

Prices
For each commodity and primary factor in the model, taxes on production, sales, exports and imports are accounted for separately. As a result, the supply price, market price, domestic user prices and the export price (including export taxes) for a commodity in the producing region and the import price (including international freight), duty paid market price and user prices in the importing region of a given commodity are clearly distinguished. In the standard model closure, prices adjust fully to equate the supplies of and demands for all factors and commodities in each region in each period.
LNG in Korea: opportunities for growth 85

Producer behavior
Producers in GTEM are assumed to operate in perfectly competitive markets using constant returns to scale technologies. Under these assumptions, prices will be set to cover costs and GTEM industries earn zero profits at all times, with all returns paid to primary factors of production, including any returns paid to owners of natural resource assets. Thus, changes in output prices are determined by changes in input prices of materials and returns to primary factors.

National income, savings and consumption
In GTEM, a representative household in each region owns all factors of production and receives all payments made to the factors, all tax revenues and all net interregional income transfers. The representative household allocates its net income across private and public consumption and savings. National savings are assumed to move in line with national income. Total consumption expenditure is calculated as the difference between current household income and savings, with the ratio of private consumption to government consumption assumed to be constant. Given total private consumption, the representative consumer maximises current period utility by choosing consumption levels for each of the commodities in the database, from both domestic and imported sources.

Trade
A key feature of GTEM is that it models bilateral trade flows of all commodities between all regions. In GTEM an ‘Armington’ preference structure is adopted. This implies that a good produced in one region is an imperfect substitute for goods produced by the same industry in other regions (Armington 1969a,b). In other words, the same commodity from different sources can trade at different prices. Consumers in a region can substitute goods produced in that region with the same goods produced in other regions. For any given consumption activity, demand for a commodity is allocated between a domestic product and a composite imported product according to a constant elasticity of substitution (CES) function. The demand by a region for each composite imported commodity is then allocated between sources of imports according to a further CES function. Substitution between domestic and imported commodities
86 ABARE research report 03.4

In equilibrium. however. For example. in turn. At the regional level. changes in investment flows represent changes in demand from expansionary or contractionary effects (changes in real GDP) and expectation effects. LNG in Korea: opportunities for growth 87 . International capital mobility Global investment equals global savings in GTEM. there is uncertainty about the appropriate size and relativities of the Armington elasticities for various commodities. rates of return may differ to reflect country specific differences in the risk premium required by global savers. The equilibrium rates of return in developing countries are therefore higher than in developed countries. As with all parameters in a global computable general equilibrium model. These elasticities are important determinants of the model results as they affect the estimated trade impacts on commodities resulting from policy shocks. GTEM does not require the current account to be in balance every year. global average rate of return. (1991) in the construction of the SALTER world trade model. Investment demands. The cost of international transport is added to the cost of imports to each region. Goods are transported between regions by an international transport industry. Any excess of investment over domestic savings for a given region causes an increase in net debt for the region. Thus. the exports of a good from one region to the rest of the world are equal to the import demand for that good in the remaining regions. are determined by changes in regional GDP and regional expected rates of return relative to expected global rates of return. Borrowers service the debt at the global rate of return (interest rate).and between imported commodities from different sources will depend on movements in relative prices and the specified elasticity of substitution — the Armington elasticity. The Armington elasticities in GTEM vary between commodities and are derived from current literature and from empirical work undertaken by Jomini et al. global savers tend to place a higher risk premium on investing in developing countries in GTEM to reflect greater uncertainty of investing in these regions. It is assumed that regional borrowers (investors) issue bonds to global savers at a risk free. It allows the capital account to move in a compensatory direction to maintain the balance of payments.

On the other hand. petroleum. The debt servicing requirement (interest paid) will increase in domestic currency terms. In GTEM. hydro or renewable based technologies. industries produce a commodity by combining primary factors and intermediate inputs in fixed proportions. restoring balance of payments equilibrium. a region that has borrowed from international capital markets in GTEM that experiences an exchange rate depreciation will have a greater level of debt denominated in foreign currency. Industries are able to substitute between technologies in response to changes in their relative costs. The depreciation in the exchange rate will improve the competitiveness of exporters and import competing producers in that region. nuclear. By modeling energy intensive industries in this way. a region holding foreign assets through international lending will earn more interest income in domestic currency if its exchange rate depreciates. Production and interfuel substitution For industries other than those characterised by the ‘technology bundle’. Substitution is only possible between primary factors. if trade liberalisation leads to a significant decline in export earnings from a particular region this will. different production techniques are used to generate a homogeneous output from each industry. production in each region is assumed to use only one technology. Electricity can be generated from coal. electricity generation and iron and steel production are modeled using the ‘technology bundle’ approach. while iron and steel can be produced using blast furnace or electric arc technologies. For example. result in an exchange rate depreciation for that region. GTEM restricts substitution to known technologies. This tech88 ABARE research report 03. Technology bundle In the standard general equilibrium modeling approach.Exchange rates The exchange rate in GTEM is the price of converting local currency into global currency. gas.4 . Exports will increase and imports decline. other things being equal. With this approach. It is the price that adjusts to keep the balance of payments in equilibrium. thereby preventing technically infeasible combinations of inputs being chosen as model solutions. A change in the exchange rate will also influence international transfers associated with foreign debt or lending. For example.

Underpinning the demographic module are historical data showing the age and gender composition of the population in each region in one year cohorts from age 0 to 100. International Iron and Steel Institute 1996). Allowing for interfuel substitution and substitution between fuel and primary factors in this way means that industries can alter their production input structure in response to price changes by substituting between energy and primary factors or by changing the energy mix. The GTAP database required substantial alteration to form the GTEM database. black steaming and coking coal) and explicitly identifying bauxite. which is expanded by ABARE to include 55 commodities by expanding the coal producing sector to three distinct industries (brown. with the exception of energy inputs and primary factors. petroleum products. These are sourced from United Nations (1998). significant demographic detail is required in GTEM to model population and labor force growth over time. particularly in the energy sector. In addition. Also. greenhouse gas emissions and population data) were collected. Non technology bundle industries obtain a least cost combination of four energy commodities (coal.nology requires fixed proportions of intermediate inputs. For example. Database The starting point for the GTEM database is the GTAP-4E database that contains 50 commodities and 45 regions. and electricity) to produce an energy composite and a least cost combination of the three primary factors to produce a primary factor composite. alumina and primary aluminium producing sectors. the contribution of each technology to total electricity and iron and steel production has been derived to reflect external data (IEA 1998. gas. The industry then forms a least cost combination of these two composites to obtain an energy–factor composite. The GTAP-4E database is based on 1995 production and trade data (expressed in United States dollars). LNG in Korea: opportunities for growth 89 . and additional data (principally energy sector. the data underpinning the representation of two major fossil fuel using industries (electricity and iron and steel) were enhanced to reflect input–output relationships in the range of known technologies.

is considered to be 310 times more potent in terms of radiative forcing than an additional tonne of carbon dioxide. methane and nitrous oxide. 90 ABARE research report 03.4 . a measure of the relative radiative forcing of different greenhouse gases. The global warming potential values are 1. Emissions of methane and nitrous oxide are represented in GTEM in carbon dioxide equivalents. The carbon dioxide equivalent is derived by multiplying the emissions by the appropriate global warming potential. 21 and 310 for carbon dioxide. At current atmospheric concentrations. for example. methane and nitrous oxide respectively over a one hundred year time horizon (IPCC 1996). an additional tonne of nitrous oxide in the atmosphere. over a one hundred year time horizon.Greenhouse gas emissions accounting GTEM models emissions of three greenhouse gases — carbon dioxide.

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