Korea’s Energy Policy and Northeast Asian Energy Cooperation

Dr. Younkyoo KimThe Korean Peninsula and International Relations in North-

east AsiaHanyang University, Seoul

Nov. 30, 2012

1. Global LNG Supply and Demand Structure– 8% Increase in LNG Trade (2011): Total Turnover of 241.5 MT

– Largest Exporter → Qatar 75.5 MT ( 31% of total supply)• Malaysia + Indonesia+ Australia = 27 % of total supply

– Largest Importer → Japan + S. Korea ( 48% of total de-mand)

2006-2011 LNG Trade Trends

* [Total Turnover]

(2006) 159.1 MT → (2011) 241.5 MT (52%↑)

[Export Coun-tries]

(2006) 13 → (2011) 18

[Import Coun-tries]

(2006) 15 → (2011) 24

Global Natural Gas Structure

2. LNG Spot Market

LNG is traditionally traded through Long-term deal con-tracts

Spot Market Share

11.7 %

19.0 %2006

2004

2010

2011 → 25% (62 MT)

Global Natural Gas Structure

LNG Pricing Mechanism

Global Natural Gas Structure

1. Hub Pricing and Oil Index Pricing Difference

2008-2009: 3% decrease in global natural gas de-mand

Late 2009 – Early 2010: recovery in gas demand (Cold winter)

From early 2009, a gap between Oil Index Pricing and Hub Pricing appeared. Oil Index Pricing > Hub x 2

Appeared after the end of 2010 ◆ Hub Pricing for 2011: NBP : $9 mmBtu

Henry Hub : Continue to dropOil Index Pricing: Continue to rise

“the logic of linking gas prices to those of (mainly) oil products had largely disappeared in the major European gas markets. A transition away from formal contractual oil product price linkage is inevitable and arguably has already begun with a great degree of spot gas pricing indexation in some long term contracts”

Jonathan Stern of the Oxford Institute for Energy Studies

Natural Gas Conditions and Implications After the Financial Crisis and Fukushima

Natural Gas Conditions and Implications After the Financial Crisis and Fukushima

Natural Gas Conditions and Implications After the Financial Crisis and Fukushima

Natural Gas Conditions and Implications After the Financial Crisis and Fukushima

Natural Gas Conditions and Implications After the Financial Crisis and Fukushima

2. Decrease in Russian Export to Europe

European importers complain Russian Oil Index Pricing Larger gap between spot pricing and Russian oil index pricing

* $244.44/Mcm (2009. 7) → $452.16/Mcm (2012.7) Late 2011-’early 12: Focus on renegotiation of gas price be-

tween Gazprom and main European importers European importers increased import from ME, Africa LNG

import rather than Russian PNG • LNG share 20.4% (‘09) → 23.6% (’11)

Gazprom provides 15% of recent European supply on spot price

*Russian Northeast(NE) Asia gas export 11.8 bcm ('11) → 44.2 bcm ('20)

Natural Gas Conditions and Implications After the Financial Crisis and Fukushima

Natural Gas Conditions and Implications After the Financial Crisis and Fukushima

• Russian Energy Strategy 2030 (2009.11)• Diversification of exports to Asia: Oil 6% → 25% Natural Gas

0 → 20%– Supplied oil to China through ESPO (0.3 million bpd) Dec, 2010 – Supplied gas to Japan through Sakhalin-II LNG. April, 2009

• Delay in Siberia PNG supply to China due to pricing problems. • Reliance of Russian oil of 3 NE Asian nations (2011)

– Japan: 4%– China: 8%– S. Korea: 6%

• Reliance of Russian LNG of 3 NE Asian nations (2011)– Japan: 9% (4% '09)– China: 0.5 bcm out of 17 bcm– S. Korea: 9% (4% '09)

1. Increased Export to Asia

Russian Energy Strategy towards Northeast Asia

Aus-tralia 42%

Indonesia18%

Qatar13%

Malaysia

13%

Yemen6%

Russia4%

Other Countries

4%

Europe, 93%

Asia Pa-cific, 7%

Source: GlobalData; BP, 2012Source: GlobalData; BP, 2012

Russia, Share of Various Regions in Natural Gas and LNG Exports, %, 2011

China’s liquefied natural gas imports by country, 2010

Russian Energy Strategy towards Northeast Asia

2. ESPOESPO Import Countries Status (2011)

U.S.A. 27% (Largest ESPO Importer)

Japan 19%

China 18%

S. Korea 13%

Philippines 9%

Thailand 7%

Singapore 4%

Peru 1%

Indonesia 1%

India 1%

Russian Energy Strategy towards Northeast Asia

Russian Energy Strategy towards Northeast Asia

Gazprom’s Chayanda and Kovykta (Irkutsk) Gas field• Oct. 2011- limited research being conducted through

experiment production on the possibility of increasing well flow and reserves. Production to launch 2017-2022.

• Plans to liquefy Vladivostok LNG plant (Production capa-bility of 10 million tons)

Sakhalin-III Project’s South Kirinskoye gas field 2011 second probe boring: Increase in reserve(3P) from

304Bcm to 564Bcm.

3. Kovykta, Chayanda, Sakhalin-III Gas field

Russian Energy Strategy towards Northeast Asia

Increase in U.S. shale gas production, uncertainty in European gas demand and price ⇒ Gazprom is trying to increase the LNG Asian market share

Shtokman LNG Project $40 billion project with yearly LNG production of 7.5 million

tons Vladivostok LNG Project

10 million ton per year LNG project co-initiated with Japan Chayanda gas field is located 3,000km away in East-Siberia:

Need to figure out the logistics Sakhalin-2 Third LNG Facility Construction

Second LNG facility with yearly production of 4.8 million ton constructed

Advantage: cheap construction cost ($0.5billion~$0.7billion) But, need to be supplied with gas from Sakhalin-1 or 3 project.

4. Gazprom’s Asia LNG Project

Russian Energy Strategy towards Northeast Asia

ESPO price negotiation and increase in supply Russia’s Rosneft, Transneft signed 20 year contract with Chinese CNPC (2009) Provides daily supply of 0.3 million barrels to China Recently Russia-China agreed on ESPO supply price.

Controversy in Russia on Chinese oil export Pro: Once fair and competitive price is agreed, increase exports

to China will benefit Russia. Con: For diversification of markets, Russia should not increase

exports to China

1.China-Russia Energy Cooperation

China, Japan, Korea, and the U.S.

Negotiation on Gas Price

Russia and China signs a gas deal in 2006 But still cannot sign the final contract due to difference in

gas price. Plans to newly construct Northern line(Altai gas pipeline,

30Bcm/y) and Eastern line(38Bcm/y) Gazprom is currently selling LNG to China on spot price. Negotiating to construct the third LNG facility within

Sakhalin-2 project and Vladivostok LNG Plant. 6 LNG cargos sold to China in 2010 9 LNG cargos sold in 2011

1.China-Russia Energy Cooperation

China, Japan, Korea, and the U.S.

Russia-Japan concluded Vladivostok LNG Plant con-tract

Japan was the only outcome throughout Vladivostok APEC conference.

Japan-Russia military cooperation realized. June 24 2012: the Russian Energy Ministry and the

Japanese Ministry of Economy, Trade and Industry signed the Memorandum of Understanding

2. Japan-Russia Energy Cooperation

사진출처 : http://en.haberler.com

China, Japan, Korea, and the U.S.

Korea needs to establish short-mid term energy security plans where the followings are present:• North American shale gas revolution• Japan’s Fukushima crisis• Delay in China-Russia gas contract• Russia’s rapid development of far-east

When China-Russian energy cooperation and Japan-Russian energy cooperation is in friction: fits the Korean interest the most.

Japan-Russian energy cooperation back in harmony.

When China-Russian energy cooperation is in harmony, China becomes the transit na-tion of Russian energy. This makes Korea to be dependent on China for energy.

Source: YP News

3.Korea-Russia Energy Cooperation

China, Japan, Korea, and the U.S.

Meeting of Russian President and Korean President on September 8th was thought to mark as an accelerator to South-North-Rus-sian pipeline initiative.

However, the two Presidents did not give out any significant outcome.

Currently, MOU that states 7.5 million tons will be imported from Russia from 2015 ex-ists only.

The clause that gas price is cheaper means that import through pipeline is 1/3 cheaper logistically compared to LNG. This does not necessarily mean gas import is cheaper ac-cordingly.

Korean Government stance: “Principle of importing gas securely and

cheaply”

사진출처 : 연합뉴스

3.Korea-Russia Energy Cooperation

China, Japan, Korea, and the U.S.