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Shift in South Korea energy policy brings boon for LNG

New president moving to reduce nuclear, coal use

DENPASAR, Indonesia -- Liquefied natural gas exporters will be excited by the prospects of state-backed Korea Gas returning to the buyers' table following moves by newly elected South Korean President Moon Jae-in to shift the country's power-generation mix away from coal to natural gas to cut pollution.

South Korean LNG imports peaked at 39 million tons in 2013 and have been declining since. But Moon's proposed energy policy, which would increase the share of LNG in the country's electricity mix from around 20% to 37% by 2030, could reverse that trend.

"Given plans for the early retirement of coal, we could really see LNG imports accelerate post-2020," said Chong Zhi Xin, principal Asian LNG analyst at research company Wood Mackenzie. The return of Kogas, as the company is known, as a strong buyer could enable developers to invest in new export projects around the world, he said.

Higher South Korean demand will hearten producers in Brunei and Malaysia whose contracts are expiring in 2018, said Tony Regan, managing director of Asian oil and gas consultancy DataFusion Associates in Singapore. "It could potentially give the ExxonMobil-led Papua New Guinea LNG project an opportunity to break in," he said.

Gordon Kwan, head of Asian oil and gas research at Nomura, said it would make strategic sense for South Korea to source more LNG from the U.S., especially given the cost efficiencies achieved in the production and export of U.S. shale gas in recent years. His bank estimates that U.S. producers will contribute more than 41% of new export capacity starting up this year and that the country will be the third-largest exporter by next year, after Australia and Qatar.

"Importers in general don't want to put all eggs in one basket due to unforeseen supply disruption risks," Kwan said. "Therefore the U.S. offers a diversified alternative."

Historically, demand from Japan and South Korea, the world's biggest importers of LNG, underpinned many of the biggest export projects across the globe. But in recent years, as demand for LNG has wavered, big buyers in both countries have been reluctant to make new long-term commitments, particularly with more flexible supply options hitting the markets from the U.S.

Moon's new phase

The new South Korean president's stance could change this. "South Korea will be the first North Asian economy to see LNG demand pick up on a long-term basis," said Chong.

The 64-year-old leader can implement change, as South Korean utilities like Korea Electric Power, or Kepco, are controlled by the state, unlike in European countries where the sector is deregulated and governments can only nudge suppliers in a certain direction.

Since taking office on May 10, Moon has already ordered 10 old coal-fired power plants, out of 59 in operation, to shut down in June. The affected plants represent 4.1% of Kepco's overall generating capacity. Kepco shares have fallen 9% since Moon's election victory on May 9.

Coal supplies 45% of the country's power needs. Moon pledged during the campaign that he would review import taxes to help make LNG imports more competitive with coal.

Analysts believe that consumers won't be hit with higher bills if import taxes are reformed in favor of the super-cooled gas given already low global LNG prices. Platts Analytics forecasts that South Korea's LNG demand will climb steadily from 2018, surpassing 37 million tons by 2022 from 33 million tons in 2016.

Given the upcoming ramp-up in global LNG supply, South Korea offers sellers an expanding, creditworthy market with significant volumes of spare LNG and gas infrastructure capacity.

"South Korea should absorb some of the excess global supply, particularly as LNG is not expected to face any competition from piped gas imports by 2022," said Marc Howson, senior managing editor at S&P Global Platts.

Moon's campaign pledge to cut or restrict nuclear generation will be a harder sell because it will cause the cost of electricity to rise. Nuclear's share of power generation -- which has slipped to 30% from 40% in 2005 -- is set to shift with the new government amid safety concerns and following a series of scandals. Moon promised to cancel construction of reactors 5 and 6 at the Shin Kori power plant and to review the decision to restart the Wolsong 1 reactor, one of South Korea's oldest.

Clearing the air

Nuclear power has also been a source of export revenue as South Korean companies sell their technology and expertise overseas. But the move away from nuclear power is in line with South Korea's plan to develop a competitive edge in green technology. Moon has outlined ambitious plans to increase the use of renewable energy from 5% now to 20% by 2030.

He is aiming for an installed capacity of 37 gigawatts of solar and 16GW of wind by 2030, which will cost billions of dollars. "It's a very lofty target and will be hard to achieve," Chong said. Last year, the previous government committed $27 billion to install 13GW of renewable energy by 2020.

Moon's energy policy was lapped up by an electorate sick of the hazardous smog that has routinely blanketed South Korean cities. Data compiled by political risk consultancy Verisk Maplecroft shows that air quality has deteriorated substantially since late 2014.

For a long time the public were led to believe that the haze was blown in from China. Much of it was actually generated domestically however. Between 2005 and last year, the capacity of the country's coal-fired power plants rose almost 95% as the government encouraged the use of cheaper fossil fuels. As a result, pollution in Seoul is sometimes worse than in Beijing or Mumbai, said Verisk's Miha Hribernik.

Increasingly, governments across Asia are becoming more concerned about particulate pollution from burning coal. Particulates penetrate the respiratory system and can trigger a variety of illnesses, including cancer.

"What voters really care about is that their children are coughing, they are developing asthma, and so on," said Alan Bannister, Asia director at energy information provider S&P Global Platts. "That's because of the particulates you get from coal, which gas does not have. Gas still contributes to global warming, but it does not come with the particulates, which affect people's breathing in the big cities."

While Moon is off to quick start on energy policy, DataFusion's Regan said LNG producers still want to see more. "I don't think any LNG suppliers are getting the champagne out yet as they will want to see a more detailed plan before being convinced that we really might see a recovery of imports over the medium term," he said. "Don't expect Korea to get back to the 2013 level of 40 million tons."

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