Tokyo, 27 October 2009

Wonhee HanSenior Researcher

Prospect of Korean Natural Gas Market

Northeast Asia Petroleum Forum 2009 IEEJ: November 2009

Prospect of Korean Natural Gas Market 1

Contents

Key features of Korean Natural Gas Market

Issues on Government Policies

Outlook for Natural Gas D/S

IEEJ: November 2009

Prospect of Korean Natural Gas Market 2

Total Primary Energy Supply

Natural gas imported from 1986 aiming at diversifying energy source and improving air quality

AAGR(’87-’07) : TPES 6.6%, Coal 4.8%, Oil 6.5%, Natural Gas 15.0%, Nuclear 6.7%

Natural gas imported from 1986 aiming at diversifying energy source and improving air quality

AAGR(’87-’07) : TPES 6.6%, Coal 4.8%, Oil 6.5%, Natural Gas 15.0%, Nuclear 6.7%

Source : KEEI

6875

8293

104116

127137

150165

181166

181193 198

209215 220

229 233243

0

50

100

150

200

250

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Million TOE

Renewables & OthersHydroNuclearNatural GasOilCoal

35%

20% 19% 24% 25%

44%62% 60% 49% 43%

3%4% 8%

11% 14%

14%12% 11% 14% 15%

0%

25%

50%

75%

100%

1987 1992 1997 2002 2007

IEEJ: November 2009

Prospect of Korean Natural Gas Market 3

Natural Gas Consumption

Demand for power generation continued to grow while demand for residential use slowed down

AAGR(’98-’08→’03-’08) : City Gas 9%→5%, Power Generation 10%→11%

Demand for power generation continued to grow while demand for residential use slowed down

AAGR(’98-’08→’03-’08) : City Gas 9%→5%, Power Generation 10%→11%

Source : KOGAS

5

10

15

20

25

30

1987 1990 1993 1996 1999 2002 2005 2008

Million Ton

Power GenerationTransportIndustrialCommercialResidential

30%

8%

17%

2%

43%

Year 200826 Million Ton

(33 Bcm)

IEEJ: November 2009

Prospect of Korean Natural Gas Market 4

Natural Gas Demand Pattern

On top of insufficient storage capacity, seasonality of gas demand threatens stable gas supply

Relatively high monthly TDR requires large investments in further storage capacity expansion

On top of insufficient storage capacity, seasonality of gas demand threatens stable gas supply

Relatively high monthly TDR requires large investments in further storage capacity expansion

Source : KEEI

0

1

2

3

4

5

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

City GasPower GenerationTotal

1

2

3

4

2000

-06

2000

-12

2001

-06

2001

-12

2002

-06

2002

-12

2003

-06

2003

-12

2004

-06

2004

-12

2005

-06

2005

-12

2006

-06

2006

-12

2007

-06

2007

-12

2008

-06

2008

-12

2009

-06

Million Ton

Power GenerationCity Gas

Monthly Natural Gas Consumption Monthly TDR*

*TDR(Turn Down Ratio) = Max Monthly Consumption ÷ Min Monthly Consumption

IEEJ: November 2009

Prospect of Korean Natural Gas Market 5

Natural Gas Supply

Korea relies heavily on mid-term and long term LNG imports for its natural gas supply

Korea has been diversifying its LNG import sources for the better security of natural gas supply

Korea relies heavily on mid-term and long term LNG imports for its natural gas supply

Korea has been diversifying its LNG import sources for the better security of natural gas supply

5

10

15

20

25

30

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

MTPA

OthersEgyptAustraliaOmanQatarBruneiMalaysiaIndonesia

11%

23%

3%

32%

17%

2%6%

6%

0%

50%

100%

Year 2008

Source : KOGAS

67%15%

18%

1%

Domestic ProductionLong-term LNG ImportsMid-term LNG ImportsSpot LNG Imports

Natural Gas Supply in 2008 LNG Imports by Country

IEEJ: November 2009

Prospect of Korean Natural Gas Market 6

KOGAS

Direct Importers (Posco, K-power)

Structure of Natural Gas Market

5 KEPCO’sPower GENCOs,

4 IPPs, 3 CESs

5 KEPCO’sPower GENCOs,

4 IPPs, 3 CESs

DomesticProductionDomestic

Production

ProcurementProcurementStorageStorage

TransmissionTransmission

WholesaleWholesale

ProcurementProcurement StorageStorage Own UseOwn Use

LNG ImportLNG Import

LNG ImportLNG Import

30 City Gas Companies

30 City Gas Companies

IEEJ: November 2009

Prospect of Korean Natural Gas Market 7

LNG Terminals

Operator Start-upStorageCapacity

(1,000 ㎥, #)

Send-outCapacity

(billion ㎥/yr)

Incheon KOGAS Oct. 1996 2,680(19) 42.24

Pyeongtaek KOGAS Nov. 1986 1,560(14) 38.81

Tongyeong KOGAS Sep. 2002 1,680(12) 18.66

Kwangyang POSCO Jul. 2005 200(2) 2.30

National Pipeline NetworkNational Pipeline Network

Incheon

Pyeongtaek

Tongyeong

LNG

LNG

LNG

LNG

LNG

LNG

Kwangyang

Boryong

Samcheok

DonghaeGas field

Natural Gas Infrastructure

Trunk line : 2,739 ㎞Distribution line : 221,947 ㎞

As of June 2009

As of Dec. 2008

IEEJ: November 2009

Prospect of Korean Natural Gas Market 8

Realize low carbon & energy consumption

Energy Intensity (TOE/$1,000 of GDP) (’06) 0.347 → (’30) 0.185

Reduce dependence on fossil fuels

Fossil fuel share in TPES(%)(’06) 81.6 → (’30) 61.0

Foster green energy industries

Investment of 111.5 trillion Won

Enhance energy self-sufficiency and welfare

Oil & gas self-sufficiency* (%) (’06) 3.2 → (’30) 40.0

Realize low carbon & energy consumption

Energy Intensity (TOE/$1,000 of GDP) (’06) 0.347 → (’30) 0.185

Reduce dependence on fossil fuels

Fossil fuel share in TPES(%)(’06) 81.6 → (’30) 61.0

Foster green energy industries

Investment of 111.5 trillion Won

Enhance energy self-sufficiency and welfare

Oil & gas self-sufficiency* (%) (’06) 3.2 → (’30) 40.0

Low Carbon Green GrowthLow Carbon Green Growth

New government established aggressive energy policy targets for “low carbon green growth”

Such policies have a significant implication on future natural gas market if they are realized

New government established aggressive energy policy targets for “low carbon green growth”

Such policies have a significant implication on future natural gas market if they are realized

National Energy Policy

* Total equity volume of oil & gas production secured by Korean companies ÷ Annual import volume

1st

National Energy Basic Plan National Energy Mix : BAU vs

Target

16%25%

24%

33%

34%

45%

12%

16%

14%

28%

20%

16%

12%

6%

233

343

300

0

100

200

300

BAU Target

2006 2030

Million TOE

Renewables

Nuclear

Natural Gas

Oil

Coal

Source : 1st National Energy Basic Plan, 2008

IEEJ: November 2009

Prospect of Korean Natural Gas Market 9

Stable gas supply

Diversify supply sources; ex) Russian PNG

Expand further gas infrastructure

Enhance gas self-sufficiency

Promote city gas supply to remote areas

Support low-income class

Efficient gas market

Phase-in competition; 1st Import/Wholesale for Power Generation

Create open access system to supply facilities

Facilitate direct imports for their own use

Rationalize gas tariff system

Establish fair competition regulatory system

Stable gas supply

Diversify supply sources; ex) Russian PNG

Expand further gas infrastructure

Enhance gas self-sufficiency

Promote city gas supply to remote areas

Support low-income class

Efficient gas market

Phase-in competition; 1st Import/Wholesale for Power Generation

Create open access system to supply facilities

Facilitate direct imports for their own use

Rationalize gas tariff system

Establish fair competition regulatory system

Stable & Efficient Gas SupplyStable & Efficient Gas Supply

Natural gas policy has traditionally focused on ensuring the stable supply for economic growth

The long-delayed gas competition legislation is now awaiting the National

Assembly’s vote

Natural gas policy has traditionally focused on ensuring the stable supply for economic growth

The long-delayed gas competition legislation is now awaiting the National

Assembly’s vote

Natural Gas Policy

Natural Gas Policy 1st

Phase Promotion of Competition

DirectImporters

DirectImporters PrivatePrivate KOGASKOGAS

Import/Wholesale

Own UseOwn Use

Power Generation

Power Generation

City Gas

DistributionDistribution

RetailRetail

OAOANANA

TransmissionTransmission

KOGAS

StorageStorage

StorageStorage

IEEJ: November 2009

Prospect of Korean Natural Gas Market 10

Natural Gas Demand Forecast

Demand forecasts vary due to economic recession, uncertain demand for power generation

Demand for power generation is expected to slow down and to account for 24% in total by 2020

Demand forecasts vary due to economic recession, uncertain demand for power generation

Demand for power generation is expected to slow down and to account for 24% in total by 2020

Source : KEEI, KOGAS, Wood Mackenzie

Comparison of Natural Gas Demand Natural Gas Demand by Use

58% 59%

76%

42% 41%

24%

0%

50%

100%

2008 2014 2020

City Gas Power Generation

Source : 9th Natural Gas Long-term D/S Plan, 2008

20

25

30

35

40

2008 2010 2012 2014 2016 2018 2020

Million Ton

9th Natural Gas Long-term D/S Plan9th Natural Gas Long-term D/S Plan revised1st National Energy Basic Plan - BAUWood Mackenzie - Aug 2009

IEEJ: November 2009

Prospect of Korean Natural Gas Market 11

Natural Gas Supply Plan

Korea is striving to secure LNG as well as PNG in the long run for stable & self-sufficient supply

KOGAS is in talks with Gazprom

to buy Russian gas in various forms including PNG, LNG, CNG

Korea is striving to secure LNG as well as PNG in the long run for stable & self-sufficient supply

KOGAS is in talks with Gazprom

to buy Russian gas in various forms including PNG, LNG, CNG

Natural Gas Supply Outlook

0

10

20

30

2008 2010 2012 2014 2016 2018 2020

Million Ton

Russian Gas SupplyNew Players' SupplyNew Direct Importers' SupplyNew KOGAS LNG SupplyExisting Direct Importers' SupplyExisitng KOGAS Supply

LNG PlantGas Chemical Plant

Planned

Existing

2008-092010-122013-15

Vladivostok

Khabarovsk

Komsomolsk

Russia

China

Korea

48”Pipeline

Existing28”Pipeline

Sakhalin IILNG Plant

Sakhalin Gas Fields

Sakhalin Center

Russian Gas Supply

IEEJ: November 2009

Prospect of Korean Natural Gas Market 12

Outlook for Natural Gas D/S Balance

Korea is expected to face supply shortage during 2012-14 despite the uncertainty of gas demand

It seems to be relatively easy to deal with it thanks to the unprecedented global LNG oversupply

Korea is expected to face supply shortage during 2012-14 despite the uncertainty of gas demand

It seems to be relatively easy to deal with it thanks to the unprecedented global LNG oversupply

Natural Gas Demand Supply Balance Mid-term Supply Measures

50

100

150

200

250

300

350

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

MTPA

Middle East Supply CapacityAtlantic Supply CapacityAsia-Pacific Supply CapacityWorld LNG Import Demand

Source : Wood Mackenzie, August, 2009

World LNG D/S Balance

Short or Mid-term LNG contractsLNG Spot & DiversionStockpiling

Short or Mid-term LNG contractsLNG Spot & DiversionStockpiling

0

10

20

30

40

2008 2010 2012 2014 2016 2018 2020

Million Ton

Russian Gas SupplyNew LNG SupplyExisitng KOGAS SupplyWood Mackenzie - Aug 20099th Natural Gas Long-term D/S Plan9th Natural Gas Long-term D/S Plan revised

IEEJ: November 2009

Prospect of Korean Natural Gas Market 13

Summary

Natural Gas, the fast-growing energy over the past two decades

Contributed to energy security and environmental improvement

Mostly imported in the form of LNG from diverse overseas sources

New challenges to natural gas market;

New aggressive energy policy targets for “low carbon green growth”

Introduction of competition starting with import/wholesale for power generation sector

Outlook for natural gas market

Uncertain demand caused by economic recession & demand for power

generation

New strategic effort to secure stable & self-sufficient supply in the long run

Gas supply shortage in the mid-term, but could be relatively easily coped with

IEEJ: November 2009

Prospect of Korean Natural Gas Market 14

Thank You!!!

Q & A

hanwonhe@kogas.re.krhanwonhe@kogas.re.kr

IEEJ: November 2009

Contact : report@tky.ieej.or.jp