South Korea’s state-run KOGAS has agreed with BP to buy 1.58 million tons of US LNG starting 2025. The deal is worth an estimated $9.61 billion over 18 years and will help facilitate a coal-to-gas switch in the Korean power sector.
BP will be shipping the LNG cargoes from Freeport LNG terminal or Calcasieu Pass all the way to KOGAS’ import terminals along the coast of South Korea. The deal is understood to be expendable for three years at a seller’s option and is estimated to be worth up to $9.61 billion for 18 years.
“KOGAS has issued tenders for long-term LNG to fill up its longer-term LNG supply requirement. It has one 4.9 mtpa contract with Qatar that expires in 2025”, commented Wood Mackenzie research director Nicholas Browne.
Buy flexible, sell at fixed margin
BP has clearly on part of the KOGAS tender and will be following its well-proven strategy. The British oil and gas major is building market share by buying flexible LNG and then selling into markets on a long-term basis at a fixed margin.
“Even if the margin is relatively small, it expands BP’s portfolio and enhances its ability to unlock value through the wider portfolio," Brown explained.
As the world’s third largest LNG importer, South Korea typically buys between 35 and 40 million tonnes a year, predominantly sourced from Qatar and Australia. KOGAS’ deal with BP heralds the start of US LNG imports.
Korea’s tables green energy policy
Eager to curb air pollution, the South Korean government enacted policy measures to make power producers favor natural gas over thermal coal. To this end, import taxes on coal were raised by another 28% to US$40/t, while reducing taxes on LNG imports by 75%.
Korean coal imports are forecast to fall by almost 50% by 2040 under the International Energy Agency’s (IEA) New Policies Scenario. Meanwhile, Bloomberg New Energy Finance forecasts the South Korean electricity generation mix will move from 72% coal and nuclear in 2017, to 71% gas and renewables by 2050.