Regional LNG: S Korea may decide long-term LNG supply deal mid 2006: Report

South Korea is expected to make key decisions by the middle of the year on securing long-term liquefied natural gas supply, which is to be delivered from 2010 and 2011, Dow Jones Newswires reported Wednesday.

The decisions that are expected to be made in May or June, include finalizing the incremental LNG import volume that South Korea needs and short-listing domestic importers for the task, said government and industry officials.

"We've not decided yet who will import what volume...We will decide that matter in the middle of this year," a senior official with the Ministry of Commerce, Industry and Energy, which is also known as Mocie, told Dow Jones.

Industry sources expect state-run gas monopoly Korea Gas Corp. will be selected as one of the potential importers. Other potential candidates include South Korea's five power generation companies and independent power producers, such as Posco Power.

As to the additional LNG import volume needed from 2010, Seoul still favors contracts in which South Korea will import a total of 4.5 million metric tons of LNG a year, with delivery starting in 2010 and 2011. These contracts are in accordance with South Korea's 7th Long Term Natural Gas Supply & Demand Plan.

But this target volume may be revised, as global LNG supply and demand dynamics have changed drastically since the plan was released in 2004.

The next long-term plan will be released in December.

Supply of uncommitted LNG in Asia and the Middle East is dwindling, because of strong demand from key Asian consumers such as Japan.

Countries such as India, China and new importers such as gas-rich Thailand are soaking in more LNG supply, which will make it even more difficult for South Korea to secure the contract volume that it needs.

Added to this, rising demand for natural gas from existing and future LNG producers such as Indonesia and Iran may persuade them to divert potential LNG exports back to the domestic market - moves that can limit volumes available for export.

"We have to consider the market situation, as the market is not so good (for buyers) compared with the last time (when new LNG contracts were signed)," a source with Kogas said.

Regardless, Kogas and South Korean power generators are urging Mocie to set a higher import target - up to 6 million to 6.6 million tons/year LNG imports - from the 4.5 million tons/year target contained in the country's long-term plan, citing faster-than-expected domestic gas demand growth.

Mocie's target, Kogas and South Korean power generators say, is based on the old forecast of LNG demand rising by an average rate of 3.9%/year to 25 million tons in 2010.

But demand appears to be rising faster than expected, a source from South Korea's gas industry said.

Kogas imported around 22 million tons of LNG last year, up 11.7% from 19.7 million tons in 2004.

Gas players are also concerned that it is increasingly hard to secure extra spot LNG cargoes to meet any sharp surge in winter demand or to offset unexpected supply disruption.

They are urging South Korea to seek higher long-term contracted volumes.

"These days, the spot LNG market is very tight. You can't just go into the market for negotiations," said a South Korean power producer.

Seoul remains ambiguous on whether it will revise upwards its incremental LNG demand figure to the level at which South Korea's gas users are saying the country needs.

"If the market wants more LNG, then Mocie will get that volume into our new (long-term) plan," the Mocie official said.

Whatever it is, Mocie will need to act fast if it wants to secure "the right" volume of new LNG supply.

Kogas' mid-term supply contracts with Malaysia LNG and Australia's North West Shelf to buy a total 2 million tons/year will expire in March 2010.

"It is already (a little) late...(to start discussing new LNG supply)," said the power producer. (*)