Kogas: Gas deals in the pipeline

24 May 2002

The long-awaited privatisation of Korea Gas Corporation (Kogas) is inching ever nearer. The government's first announcement of the proposed sell-off was followed swiftly in December 1999 by an initial public offering in Kogas equity on the Korea stock exchange granting a 38 per cent stake in the company to private investors. Now the government is gearing up to push forward with the full privatisation of the company.

The task ahead is a delicate one, for in the two decades since the company was established, Kogas has overseen Korea's development into the world's second largest importer of liquefied natural gas (LNG). The rise in LNG consumption has been meteoric, matching Korea's dramatic economic growth. From a meagre 177,000 tonnes bought from Indonesia in 1986, LNG imports rose over the next decade by an average of 20 per cent a year to reach 11.6 million tonnes, all sourced from Asia, in 1997.

Then came the economic crisis and imports slumped by 9 per cent as the economy headed south. However, the downturn proved short lived: since 1998, imports have grown by more than 10 per cent a year to reach 16.2 million tonnes in 2001.

The strong rise in Korea's LNG consumption has been welcomed by gas producers worldwide, but none more so than in the Gulf, where the construction of new capacity has been integrally linked to the energy requirements of Kogas. 'The Middle East has played an extremely important role in supplying Kogas over recent years,' says Myung-Kyu Kim, president of Kogas. 'And we plan to continue developing close relations with regional gas producers for many years to come.'

The statistics illustrate just how significant the Gulf producers are becoming. The first LNG shipment from the region was made in 1998, when Abu Dhabi supplied 61,000 tonnes. The following year, Ras Laffan Liquefied Natural Gas Company (RasGas) in Qatar broke new ground, supplying its first cargoes - amounting to 497,000 tonnes - under its 4.8 million-tonne-a-year (t/y) long-term sales and purchase agreement (SPA) with Kogas. In 2000, Oman LNG joined RasGas as a long-term Kogas supplier, shipping its first volumes under its 25-year SPA, amounting to 4.06 million t/y.

Gulf LNG supplies ramped up in 2001, with RasGas' deliveries increasing to 4.9 million tonnes and Oman LNG's to 3.9 million tonnes. As a result, Gulf LNG accounted for half of Korea's gas imports.

The Middle East's importance to Kogas is not limited to supplies. Of equal significance is that Oman LNG and RasGas represent Kogas' only overseas equity participations to date. The company's decision to take a 5 per cent equity stake in each producer has meant the gas importer has not only been well placed to ensure a steady LNG supply, but is also able to profit from the gas exporting process. It is a winning formula that Kogas is keen to replicate in the future.

'With the government's policy of adopting cleaner energy for a cleaner environment, we anticipate a further significant increase in demand over the coming years,' says Kim. 'The government has a long-term LNG forecast of 21 million tonnes in 2010, which will require a 5 per cent year-on-year increase in the coming decade.'

The demand for gas is coming from all sectors of Korea's economy and the wider society. 'The tone has been set by the government which has stipulated that all new power plants from now on must be gas-fired,' says Kim. 'With the anticipated expansion of the nation's generating capacity, this will have an important impact on increasing natural gas penetration in Korea, helping to bring it in line with one of the major natural gas users in the region - Japan.'

With the expansion of the supply area reached by the city gas corporations, gas demand is projected to increase by an annual average of 8 per cent by 2010. At the other end of the scale, Kogas is already involved in research and development to create demand and introduce natural gas into new economic sectors. 'We have developed a small-scale air conditioning unit which is driven by natural gas, and there are already 2,000 compressed natural gas (CNG) buses in operation today,' says Kim. The government plans to introduce a further 3,000 CNG buses to the streets of the metropolitan areas by the end of the year and the number is expected to increase to 20,000 by 2007.

The projected increase in Korea's gas demand is music to the ears of LNG producers across the world. But Kogas' sourcing policy is a strict one, encompassing several key criteria. 'Our primary concern is to ensure a stable supply, so diversification of imports is extremely important,' says Kim. 'Secondly, there is the economic aspect of gas purchases and we will always seek competitively priced gas.'

Korea's erratic annual gas consumption patterns have prompted Kogas to add a further condition to their gas purchase agreements - flexibility. 'The variations in Korea's climate lead to extreme seasonal fluctuations in gas demand with the residential heating sector surging during winter, then dropping off entirely in summer,' says Kim. 'We therefore need to find a flexible supplier who can provide volumes to meet our specific needs. That way we are able to avoid investing in unnecessary storage tanks.'

Following the success of its equity participation in Oman LNG and RasGas, Kogas is keen to secure further upstream interests. 'We plan to increase our overseas activities dramatically,' says Kim. 'We are interested not only in taking an equity stake in LNG projects where we can benefit from dividend profits, but also in hands-on active participation in the upstream side, undertaking operation and management of a project, for example. Moreover, it is not just the gas projects we are looking at. We're also reviewing the possibility of joining forces with the oil majors as a means of increasing our chances to enter new markets.'

The continued upswing in Korea's gas demand is good news for Oman LNG and RasGas, both of which are undertaking expansions of their LNG facilities. 'We will indeed consider the possibility of further sales agreements with the two Gulf producers,' Kim says. 'But at the moment it is too early to say whether we will sign contracts or not.'

Such matters will have to wait until after the restructuring of Kogas, which is now scheduled to take place this year. The plan, initially slated for completion last year, involved the division of the gas supply company into three subsidiaries, of which the two dealing with imports and wholesale marketing were to be sold off. However, mounting opposition from trade unions led to delays and the bill is now due to go before parliament later this year.

'I've had several telephone calls from suppliers wanting to discuss new sales contracts now,' says Kim. 'But I have given them all the same reply - we will not be signing any new contracts until after the restructuring, and it's a matter of whoever is offering the best price and conditions. I'm confident they'll be calling me back.'

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