KOREA NEWS IEEFA report warns of overinvestment risks in South Korea's...

IEEFA report warns of overinvestment risks in South Korea’s LNG infrastructure expansion

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A new report by the Institute for Energy Economics and Financial Analysis (IEEFA) finds that South Korea is rapidly developing liquefied natural gas (LNG) import and storage terminals, presenting a high risk of overinvestment and overcapacity.

As informed, IEEFA estimates the country’s LNG industry is pouring ₩11.3 trillion (US$8.7 billion) into an infrastructure build-out that has projects at the construction or planning stage to boost receiving capacity for the fossil fuel.

Our analysis demonstrates a growing mismatch between LNG import infrastructure and projected LNG demand based on the country’s net-zero goal.

..says Michelle Chaewon Kim, the report author and an Energy Finance Specialist, South Korea, at IEEFA.

Kim’s report identifies reasons why state-owned and private-sector firms are overly developing LNG import infrastructure, and the issues worsening the overinvestment risks. The report also suggests how the South Korean government and companies can mitigate those risks.

LNG fuel costs for power generation have nearly doubled since Russia started invading Ukraine. As Kim explains, disruptions in global energy markets, such as the Israeli-Palestinian conflict, could keep South Korean gas prices elevated.

This could decrease imports by LNG receiving terminals operated or leased by independent power producers, adding to underutilization and stranded asset risks.

..she says.

Credit: IEEFA

Stranded asset risks

South Korea began importing LNG in 1986 and has historically been one of the world’s largest customers of the fuel. More recently, despite declining natural gas demand amid the country’s transition to net zero, five private-sector companies and six state-owned entities are either constructing or proposing new LNG terminal projects.

Kim points to three key factors: a perceived need to boost energy security amid the Russian-Ukrainian war; growing competition in the domestic gas market; and the development of new LNG applications, including blue hydrogen, bunkering services, and hydrogen blending in power generation.

Based on the International Gas Union’s 2022 data, South Korea’s annual average regasification utilization was one of the lowest at 33%, compared with the global rate of 41% and Asia’s 52.4%.

According to the report, as of 2023, South Korea has seven LNG import terminals with a combined regasification capacity of around 153 million tonnes per annum (MTPA), along with 6.3 million tonnes (MT) of LNG storage capacity. IEEFA’s projections show that unused LNG regasification capacity could rise from 107.9 MTPA this year to 152.8 MTPA in 2036, dampening the already muted utilization rate of 29.5% to 19.8%.

Storage capacity of the proposed projects, if completed, would meet 25.6% of annual LNG demand in 2036. This is nearly double the 14.1% presently. Smaller companies are spurring regasification and storage tank investment to secure a larger market share and reduce dependence on state utility Korea Gas Corporation (KOGAS).

Fierce competition is causing developers to propose large LNG infrastructure projects in close proximity to one another, which will pose a challenge in securing end-users for the terminals.

..says Kim.

For example, the infrastructural push is playing out in Dangjin, where KOGAS is competing with independent power producers (IPPs) and other private companies, and in neighboring Boryeong, where state-owned power generation companies are vying with IPPs. Both cities are part of South Chungcheong province.

These firms will all likely end up jostling for the limited number of terminal users, highlighting a need for better public-private coordination.

The industry feels that repurposing and retrofitting its existing LNG import infrastructure can help mitigate the risk of stranded assets, such as by producing blue hydrogen from natural gas and sequestrating greenhouse gases through carbon capture, utilization and storage.

IEEFA report warns of overinvestment risks in South Korea’s LNG infrastructure expansion
IEEFA report warns of overinvestment risks in South Korea’s LNG infrastructure expansion

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