brought tears to my eyes, page-2

lets hope the management can get a slice of the gas contracts on offer.

Gas runs out in Korea
Peter Alford
October 06, 2004
KOGAS, the Korean Gas Corporation, is over a barrel: an unfortunate position in which to start detailed negotiations on crucial long-term liquefied natural gas contracts.

Conversely, it's a happy prospect for the projects, including Australia's North West Shelf and Gorgon partnerships, hoping this week to see their names on a shortlist for negotiating contracts estimated to be worth a handy $US30 billion ($42 billion).

From a standing start in 1986, South Korea has become the world's second largest LNG market after Japan, using about 18.1 million tonnes per annum of natural gas (all but 400,000tpa imported as LNG) to produce 11 per cent of its primary energy.

Two-thirds of the LNG imported by Kogas, a state monopoly which also runs the LNG terminals and pipelines, goes to "city gas" and one-third to electricity generation – that's an expensive use of gas but it's clean and relatively energy efficient. LNG-fired plants are also ideal swing producers in Korea's high-demand winter months.

But politics has hampered planning in recent years and now, at a time of soaring petrol costs and choked supply, Kogas is having to find medium-term suppliers in a sellers' market, while it braces for hard bargaining on the big 20-25 year contracts that start opening up over the next decade.









According to a joint study by the Australian Bureau of Agricultural and Resource Economics and the Korea Energy Economics Institute, as early as next year contracted supply could be 3 million tpa shy of demand.

By 2015, which is not that far away in the lifespan of big LNG developments, the gap might be 20mtpa if ambitious pipeline projects from the Irkutsk and possibly the Sakhalin gas fields in the Russian Federation don't eventuate.

Uncomfortably for Seoul, both pipe proposals depend on markets other than Korea for viability – Irkutsk on China and Sakhalin on Japan – though the Sakhalin II LNG project is one of the dozen Kogas invited to tender.

Korea's gas problems are both long term and immediate. Right now, with big new customers like China and California appearing in the market, there's very little spare capacity about. Only this week a Kogas official said the company had been obliged to split a four-year, 1.5mtpa contract between two established suppliers, Malaysia's MLNG and Qatar's RasGas, because neither had the spare capacity to fill it alone.

The spot market, to which Kogas has frequent resort, is tight as a drum, largely because Korea is readying itself for the peak demand winter season. Projects in places like Trinidad and Nigeria have reportedly diverted US-bound LNG tankers mid-voyage to chase the higher Asian spot prices.

According to the industry news service Upstream this week: "Kogas reckons it will need to purchase a record 45 spot cargoes of LNG, totalling some 2.5 million tonnes, to meet this winter's fuel demand. The company has been snapping up almost every available cargo for several weeks now and reportedly paying up to a 15 per cent premium."

There were LNG shortages in the winter of 2002-03 and in March-April 2001 when Exxon-Mobil shut down Indonesia's Arun, Korea's original long-term supplier, because of threats from Aceh separatists.

A bad winter would not only be cold and dim; politically it could be nasty for President Roh Moo-hyun's administration. The President's second honeymoon, after the Uri Party thrashed his Grand National Party opponents in parliamentary elections, is well and truly over and the last thing he needs is for the heating to fail in December-January.

So even in this balmy autumn, everybody's minds will be well focused when Kogas settles down this week with five short-listed projects from those that submitted tenders in September.

Kogas is running to a tight schedule, considering that complex issues like its likely preference for significant equity in the successful projects are unlikely to have been dealt with yet. Kogas wants to sign heads of agreement by December for three contracts, each between 1.5mtpa and 2mtpa, for minimum 20-year periods, starting January 1 2008 – or, as one senior foreign official in Seoul put it this week, "potentially, I stress potentially, starting 2008". The contracts are substantial, the timetables are ambitious and there is considerable doubt that some attractive contenders could meet it.

There are likely to be gaps and they are likely to be "filled by the losers", says the official with a grin, referring to tenderers who miss out on the three contracts.

In any case, with current long-term contracts representing 7mtpa expiring between 2007 and 2015 and more mid-term contracts becoming necessary (North West Shelf entered the Korean market last year with a seven-year, 500,000tpa deal), none of the contenders is likely to be closing its Seoul offices any time soon.

Korea's gas problem has been in the pipeline for some time and it's coming to a head at the worst conceivable time. But it was foreseeable.

Indeed the excellent ABARE-KEEI study of the market published 14 months ago makes an observation that – unfortunately for the Koreans – turns out to be extremely prescient.

Noting the Korean Government's preference at the time for settling its gas market reform plans before negotiating new long-term LNG contracts, the study warns that that strategy was (already in August 2003) exacerbating Korea's gas supply shortfall.

Further, "by waiting, Korea is potentially missing the opportunity to secure favourable terms and conditions that are currently being offered under long-term contracts in the international market".

Today those favourable conditions are little more than a fond memory.

One serious problem has been the political handling of Kogas itself, and both President Roh and his opponents share the blame.

When elected in 2002, Roh inherited the Kim Dae-jung administration's plans for privatising both Kogas and Kepco, the Korea Electric Power Company. However, Roh's priorities were more social and strategic than economic and the GNP majority in the old parliament, which had privatising legislation before it, was more intent on sabotaging the new President.

As ABARE-KEEI points out, the previous administration had taken the principled and, at the time, practical decision that Kogas reform should happen before new long-term contracts were negotiated. One obvious reason for that decision is the potentially difficult problem of who would hold existing LNG contracts once Kogas was broken up and sold.

But the political distractions – and determined opposition from Kogas's muscular labour union -- have forced the administration, after wasting much valuable time and market opportunities, to take the course of contracts first, privatisation later – maybe.

One modest reform has been enacted in the gas sector, allowing industrial LNG users to bypass Kogas and import for their own use. Posco, the big steel maker, and refiner KL have done that.

Now the national generator Kepco, which accounts for 32 per cent of Kogas's sales, wants to do the same thing, which would have one of the effects the architects of privatisation were seeking. It was this week reported to be proposing an ambitious power-for-LNG barter deal with Indonesia.

However, though Kepco has at least been separated into generating companies, that privatisation program is in similar difficulties, and the prevalent view is that the administration will be reluctant to allow one state monopoly to jump into another's business, probably complicating even further Kogas's difficult task.