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Seoul searches for security

SOUTH Korea is set to become a much more active force in the hunt for overseas oil and gas assets, writes Ian Lewis. Last month, the National Pension Service (NPS), the world's fifth-largest pension fund, said it would invest W20 trillion ($21bn) in a range of energy and mining ventures – mirroring the trend evident in some other developed economies, notably the US, to invest pension funds in commodities.

The country urgently needs long-term energy supplies. The spending plan will give state-owned energy firms Korea National Oil Corporation (KNOC) and Korea Gas Corporation (Kogas) the financial capability to compete with China and Japan in the pursuit of overseas energy assets.

According to NPS president Kim Ho-shik, investments will be made "mostly in oil or gas fields that are already in production, as it would be too risky to go for fields only under exploration". This indicates a shift away from higher-risk projects, which have not generally yielded the hoped-for rewards. "South Korea knows it needs to be very aggressive to compete with China," says James Webster, an analyst at PFC Energy, a consultancy.

Hunting for coal

The search is not restricted to oil and gas. As the world's second-biggest coal importer, NPS funding will also be used for the operations of national mining firm Korea Resources Corporation (Kores). Recently, Kores, as head of a domestic consortium, signed a W74bn agreement to take a 10% stake in the Moolarben mine in New South Wales, Australia, from Felix Resources, securing coal supply of 2.8m tonnes a year from 2009.

Imports totalled 50.7m tonnes in the first seven months of 2007, according to the Korea International Trade Association, while demand is expected to increase by around 7% a year in the near-term. The country is forecast to increase imports by 15m tonnes a year by 2010.

Like Japan, South Korea is heavily dependent on imports, having scant domestic resources. Oil imports account for around 40% of all energy supplies and coal provides more than 30%; nuclear and gas each account for 12-15% of the energy-supply mix.

The urgency behind the country's search for energy is also evident in the rapid upgrade of Kogas' terminals at Incheon and Pyongtaek ports, which are now able to receive new Q-Flex and Q-Max liquefied natural gas (LNG) tankers – the largest in the world. Such a rapid response was crucial to enable South Korea, the world's second-largest LNG importer after Japan, to be successful in sourcing supplies, analysts say.

Qatar, an important supplier of LNG to South Korea and other Asian nations, has ordered 45 of these tankers, which are being built in South Korean shipyards. The biggest can carry 266,000 cubic metres of LNG – 80% more than a standard tanker. A dozen or so other terminals around Asia, notably in Japan, are also being upgraded to accept ships from the new fleet.

As with Japan, part of the country's energy strategy involves replacing some oil use with LNG. But Korea's gas-usage profile differs from that of Japan; in South Korea, a greater proportion of gas is used for heating in the residential and commercial sectors and lesser proportion in power generation.

However, efforts to raise imports were held back for a time by attempts to liberalise the market, although reforms were designed to achieve the opposite effect. Plans to hive off some parts of Kogas, auction off some of its long-term gas-supply contracts and introduce greater competition to the energy market in the early part of this decade were met by stiff resistance in some quarters of an economy used to domination by a handful of powerful groups.

While a more broadly acceptable approach was being devised, the government blocked the signing of long-term LNG agreements, leaving a gap in the country's energy supply, which could be filled only by expensive spot-market purchases. The government has since permitted a return to long-term contracts, allowing a return to something like normality.

"They still rely on the spot market to balance supply and demand in the winter months, but they are in a healthier position than they were a couple of years ago," says John Meagher, head of global LNG research at Wood Mackenzie, a consultancy. South Korea's proposed energy-market reform has been significantly curtailed, partly because of pressure from within the industry, but also because the country's energy objectives are changing fast. "The emphasis is now far more on how to compete for energy resources with China, India and its other neighbours, rather than market liberalisation," says PFC's Webster.

In the gas market, Kogas dominates, although the world's second largest steelmaker, Posco, now has a bridgehead in the south of the country at its Gwangyang import terminal from where gas is fed through Kogas-run pipelines to power stations at two steel mills. Analysts say the government has committed to allowing further private-sector LNG investments in, but there is little prospect of a US- or European-style competitive market developing in the near-term.

Hydrate potential

With LNG suppliers seeking to renegotiate old long-term LNG contracts to reflect higher prices, South Korea is eager to exploit its relatively meagre domestic resources base. Succour has been provided by the discovery of a potentially very large gas-hydrate deposit in the Ulleung Basin off the east coast. The energy ministry says the discovery could hold up to 0.6bn tonnes of gas hydrate – a semi-solid type of natural gas, which can be converted into LNG – sufficient to meet the country's LNG needs for 30 years. In 2006, South Korea imported around 25m tonnes of LNG.

But with technical and costing feasibility studies set to run until 2014 at the earliest, the hunt for imports goes on. Russia is among the potential suppliers. Talks between the countries in December resulted in an agreement to conduct a feasibility study for a spur gas pipeline to South Korea from the planned Novosibirsk-Khabarovsk link. As the route would almost certainly take the pipe through North Korea, the project would also be laden with political symbolism. LNG supplies from Russia are also a possibility.

Kogas has also told Russia's Gazprom it would be interested in playing a role in the development of the Kirinsky block at Sakhalin-3, market observers says. The block was originally part of a production-sharing agreement signed by an ExxonMobil-led group, cancelled by Russia in 2003.

Ambitious energy pledges

RENEWED efforts to liberalise South Korea's energy sector can be expected from the new president, Lee Myung-Bak, when he takes up office this month. Lee has said he will privatise the state-owned oil and gas companies and cut energy taxes.

He has also said he will try to re-energise the long-mooted privatisation of Kogas, which has met resistance from some industry leaders and labour unions that favour continued state control over energy supplies. Lee also wants to split KNOC into two entities, covering oil-reserves management and oilfield development, and then sell off the development business to the private sector. That move aims to boost KNOC's competitiveness and enable it to acquire energy assets more efficiently.

The incoming president also supports the expansion of the country's nuclear programme – the number of reactors is set to increase to 30 from 20 by 2020 – and efforts to boost energy derived from renewables to meet environmental commitments.

Building on efforts to connect South Korea to the fast-developing Asian oil and gas pipeline network is another aim, as is forming an oil-importers group with China and Japan to mitigate regional price fluctuations. A 10% cut in oil tax to ease the effect of high fuel prices is also proposed.



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