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South Korea finds balance between security and emissions

Juggling the need for energy security and adequate supply while cutting emissions is a tough task. Justin Jacobs looks at how South Korea deals with these competing demands

With few natural resources of its own, South Korea faces a more difficult task than most striking the right balance between ensuring energy security, providing affordable and adequate supply while limiting carbon emissions.

The country has historically relied on imported oil and coal to do the job. Last year, the fuels accounted for around 70% of South Korea’s total energy mix, with gas and nuclear making up most of the remaining 30%.

Over the coming years, though, the country will push for more investment in nuclear, natural gas and renewables as it seeks to slow the growth of its carbon emissions.

South Korea’s nuclear plans, a critical component of the government’s carbon reduction plan, have been under threat. Public concern spiked following the Fukushima nuclear disaster in Japan. Then, more recently, after it emerged that safety certificates at a number of South Korean plants had been forged, forcing the government to shut down and replace parts at those plants.

The concerns, though, have not derailed the government’s commitment to build new nuclear capacity. Under the most recent power development plan, the government reaffirmed its commitment to building six planned nuclear reactors, which will add a third more capacity to the country’s 20.7 gigawatts (GW) of nuclear generating capability over the next decade.  

Gas expansion

The government also plans to significantly expand the country’s gas-fired power generation capacity. The strategy calls for increasing capacity by around 60% from around 21 GW to 33 GW by the end of the decade. With just one small producing domestic gasfield, that will put the country’s import strategy in the spotlight.

Because it does not have any international pipeline links, South Korea imports all of its gas via liquefied natural gas (LNG) vessels. It is the world’s second-largest LNG importer behind Japan, and the countries combined account for more than half of all LNG imports. State-owned Korea Gas (Kogas) is the world’s single largest LNG buyer.

Like its neighbours, the country has been stung by high LNG prices in the Asian market in recent years. As a result, South Korea is pursuing both supply and pricing diversification. On the supply side, it is lining up deals from new projects in Australia, the US, Canada and Mozambique. It is also pushing for deals that do not include oil-linked pricing, as most LNG contracts have in the past, but links prices to gas hubs such as the US’ Henry Hub benchmark.

At home, the International Energy Agency has urged the government to deepen liberalisation of the natural gas market, which is dominated by Kogas. “Consumers of energy need to develop an awareness of the market price of natural gas in order to understand its real value. The present system of regulated natural gas prices may not be appropriate for future market conditions,” the IEA said in a report last year.

The centrepiece of the country’s carbon cutting programme, though, is an emissions trading scheme (ETS) that is scheduled to go into force in 2015. The scheme has won plaudits for its ambition, with a goal of reducing the emissions by 30% compared to a “business as usual” case by 2020. But some analysts have warned that an aggressive build-up of coal-fired power generating capacity outlined under the latest power development plan run counter to the government’s carbon reduction strategy. That could force major changes to the ETS, such as increased number of allowances or offering more generous offsets to industry and power producers that could reduce the plans short-term effectiveness.

“The market is likely to see some fundamental changes, because the current design will probably imply an illiquid, very expensive and potentially non-functioning structure of the Korean carbon market,” said Jelena Sinjanovic, an analyst at Thomson Reuters Point Carbon.

Although South Korea is not a major investment destination for the global upstream sector, its shipyards – which have the capacity to build the latest tankers, LNG carriers and harsh-environment drilling units – make the country a vital part of the industry’s supply chain.

When companies need boundary-pushing kit to explore for and produce oil and gas offshore, they often turn to South Korea. Shell, for instance, has turned to Samsung Heavy Industries to build the groundbreaking Prelude floating liquefied natural gas vessel at its Geoje shipyard.

Korean companies are also increasingly important investors abroad. Kogas and Korea National Oil Corporation have invested billions of dollars developing oil- and gasfields around the world, with a recent focus on North America’s unconventional fields. And as South Korea’s energy needs grow, so too will its companies global footprint.

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