Commodities 2023: South Korea's natural gas demand likely to dip on nuclear startups, mild winter, power price cap

Highlights: New nuclear reactors and coal-fired power plants will reduce LNG demand. South Korea's natural gasoline consumption is expected to rise in 2023 as a result of the start of nuclear power plants. There are also uncertainties about the recovery of industrial gas demand as China continues its zero-COVID policy. Also, supply disruptions in Ukraine may make it difficult for Korean buyers to take part in the spot LNG market. Get daily email alerts and subscriber notes, and personalize your experience. Register Now Nuclear and coal power plants are now up. Korea's LNG demand is expected to fall with increased nuclear power generation. This was predicted by President Yoon Suk Yeol, who took office in May
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Yoon's administration aimed to prolong the life expectancy of existing reactors. It also hoped to increase Korea's nuclear power to 33% by 2026. Six old reactors will continue to operate. The 1.4 GW No. Dec.
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After 12 years of delays, construction was completed in 2010, and the unit is now 7. After 12 years of delays since construction began in 2010, the government estimated that the unit could replace approximately 1.4 million mt/year LNG imports. No. 1.4 GW
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The 2 Shin Hanul plant is expected to begin operations in 2023. This could potentially increase the number of nuclear reactors Korea's to 27. Market participants were not optimistic about the immediate impact on LNG consumption. A Korean importer stated that Korea might continue to rely on LNG power generation in the event of a sudden cold spell. He also said that it is difficult to scale up nuclear reactors due to the strict scrutiny.
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The latest nationally determined contribution target, which was proposed by the Ministry of Trade, Industry and Energy, increased the percentage of nuclear power generation to 32.4% by 2030, up from 25% in previous NDC targets. A Korean buyer stated that the government's 10th NDC Energy Mix Plan, due to be released in Q1 2023, might decide gas demand in 2023. The new LNG spot procurement strategy of the state-run gas utility under the new CEO might also be on our minds. According to the Korea Energy Economics Institute, Korea's natural gas consumption was likely to drop 1.2% annually to 44.1 million mt/year by 2023. This is due to an accelerated switch from nuclear and renewable power generation in the face of high LNG prices.
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"LNG imports to South Korea could drop 6% to 44,000,000 mt in 2023 due to higher electricity generation by nuclear; commissioning 2 nuclear reactors, and higher availability factor both for existing fleets and from coal," Vince Heo, director of APAC Gas, Power & Climate Solutions, S&P Global, stated. Heo also said that two new coal-fired energy plants would be coming online in 2022-22. The KEEI data revealed that Korea's gas-fired power generation declined by 3.49% over the past year to 111.089 GWh. However, its nuclear generation rose 15.7% to 118.344 GWh. The government's decision to remove the 80% utilization limit for coal-fired power stations this winter in November suggests that it may facilitate coal power generation in case of peak heating demand.
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A Korean importer stated that the government seemed to embrace coal as an emergency power source for winter. The recent price cap Korea has imposed on its wholesale electricity market clearing price. This is known as the System Marginal Price. It aims to relieve financial pressure on KEPCO. This will likely cause headwinds for Korean LNG importers and force them to decrease their spot LNG intake. The power generation cost of marginal power generator units per hour is used to determine the SMP via Korea Power Exchange.
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Market participants anticipated that the SMP cap, which took effect Dec. 1, would reduce the LNG volume purchased by independent power producers like SK E&S and POSCO due to smaller operation margins. According to a market source, the SMP cap could reduce South Korea's LNG spot intake from direct LNG importers.
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Private power utilities may have lower run rates due to smaller margins. The exposure of industrial demand Korea to spot LNG procurement is likely to continue over the next few years. In 2024, 9.62 million tonnes/year of long-term contracts volumes will expire. This includes the 4.92 million mt/year contract with Qatar's RasGas, and 4.06 millions mt/year contract with Oman LNG. In response to China's recovery, the country's industrial sector gas demand was expected to increase in 2023. A direct LNG buyer stated that "Many Korean refineries are increasing their production in preparation for the rise in China's demand after the holidays."
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However, high LNG prices are causing demand destruction by industrial end-users (refiners, petrochemicals) as naphtha or LPG are more affordable. The continued destruction of gas supply in the industrial sector by the bearish outlook for Asia has exacerbated the current demand destruction. The mild winter Korea Meteorological Administration predicted that January temperatures would be comparable to previous years and that February and March temperatures would be higher.
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A milder winter may mean that there won't be any additional spot demand in the first half of next year. A Korean buyer stated that many Asian end-users purchased more spot volume in preparation for the winter peak, ever since the Russia/Ukraine war. "If winter weather is mild, there's little chance we can purchase more spot volume." The source said that they have sufficient inventory to last until March.