Kogas to Cut Spot LNG Purchases to Limit Risk of Supply Squeeze

Korea Gas Corp. (036460) is seeking to cut spot purchases of LNG as the world’s biggest commercial buyer of the fuel seeks to shield itself from a potential supply squeeze amid the country’s power shortages.

Kogas, as the company is known, will look for more long-term contracts lasting at least 10 years for buying liquefied natural gas, Chief Executive Officer Jang Seok Hyo said today in Seoul. The Seongnam, South Korea-based company will also reduce spot purchases to about 5 percent of its total imports by 2020, he said. Prompt and short-term contracts currently account for 20 percent of the state-run company’s LNG imports.

“For the stability of gas supply, we need to plan at least 10 years ahead, as it’s the most easily substitutable energy source to nuclear,” Jang said in an interview today. “It’s too risky to rely on spot purchases in times of urgent disruptions to the country’s energy mix.”

Kogas distributes gas to utilities in South Korea, where power consumption is almost twice the average of nations in the Organization for Economic Cooperation and Development relative to the size of its economy. Supply has failed to keep pace with demand, especially after the government suspended operations at two nuclear reactors amid a corruption scandal last year in the industry at home and increased concern about atomic safety following the Fukushima nuclear disaster in neighboring Japan.

Nuclear Dependence

South Korea relies on imports for almost all its energy, and it taxes coal to discourage use of the dirtier-burning fuel. Output of nuclear power, which accounts for more than 30 percent of its electricity generation, was cut after the government ordered the shutdown of two reactors last year.

An investigation last year into the use of components with false quality-control certificates found that 277 were faked for parts used in 20 operating nuclear reactors and another 2,010 documents at eight plants that are offline or under construction, according to the government.

Atomic energy will account for 29 percent of the country’s generation capacity in 2035, lower than a 41 percent goal introduced in 2008. That may lead to increased demand for gas used in electricity plants, according to a draft proposal of the country’s next long-term energy plan.

South Korea’s LNG demand may grow to about 45 million metric tons a year by 2020 from a range of 39 million to 40 million in 2013, Jang said. Kogas has long-term supply deals to buy LNG from countries including Qatar and Oman.

U.S. LNG

The company has an agreement with Cheniere Energy Inc. (LNG) to buy 3.5 million tons a year of LNG from the Houston-based company’s Sabine Pass export facility. Kogas may start taking deliveries of the fuel as early as 2017 under the 20-year deal, Cheniere said in a statement in January 2012.

In the wake of a shale boom in North America, the U.S. Energy Department is reviewing more than 20 applications from companies to build multibillion dollar terminals that can liquefy natural gas for loading onto ships for foreign markets.

The department approved yesterday Jordan Cove Energy Project LP’s application to build a terminal in Oregon, the seventh proposal the agency has cleared since President Barack Obama took office.

“I think some of the outlook on shale gas may be too rosy,” Jang said. “When it’s liquefied and transported to Korea, the cost of shale gas may not be too appealing.”

Gas from unconventional sources such as shale formations may account for 10 million tons of Kogas’ purchases by 2020 if demand reaches its maximum projected level of 50 million tons, Jang said.

To contact the reporter on this story: Heesu Lee in Seoul at hlee425@bloomberg.net

To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net Mike Anderson

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