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South Korea Oil & Gas Key View
- 27 Jan 2022
- South Korea
- Oil & Gas
Key View: South Korea’s energy demand is expected to see a stronger recovery in 2022. After the initial post-pandemic rebound, growth in domestic demand is expected to taper off in line with maturity of the domestic demand profile. The outlook for natural gas and LNG is mixed despite there being general consensus of the need for a greener energy mix. It remains unclear how South Korea’s energy policies and targets will be shaped as it prepares to hold its 20th presidential election in March 2022.
Headline Forecasts (South Korea 2020-2026)
|Indicator ||2020 ||2021e ||2022f ||2023f ||2024f ||2025f ||2026f |
|Crude, NGPL & other liquids prod, 000b/d ||18.0 ||9.0 ||3.2 ||0.0 ||0.0 ||0.0 ||0.0 |
|Dry natural gas production, bcm ||0.2 ||0.1 ||0.0 ||0.0 ||0.0 ||0.0 ||0.0 |
|Dry natural gas consumption, bcm ||53.1 ||60.0 ||62.4 ||64.3 ||65.6 ||68.5 ||69.9 |
|Refined products production, 000b/d ||3,049.0 ||3,018.5 ||3,290.2 ||3,240.8 ||3,208.4 ||3,176.3 ||3,144.6 |
|Refined products consumption & ethanol, 000b/d ||2,788.2 ||2,899.8 ||2,964.0 ||3,008.8 ||2,979.4 ||2,950.3 ||2,906.8 |
|Brent, USD/bbl ||43.21 ||70.95 ||72.00 ||73.00 ||75.00 ||78.00 ||78.00 |
|e/f = Fitch Solutions estimate/forecast. Source: JODI, Fitch Solutions |
Latest Updates And Forecasts
- South Korea’s refining activity is forecast to rebound in 2022. It will be helped by base effects and returning growth in major export markets alongside dissipating pandemic disruptions.
- The global crude oil market is expected to flip back into surplus in H122, while benchmark prices are anticipated to climb down from current elevated rates. This will like;y bode well for South Korea’s refiners, given their heavy dependence on crude imports.
- In the long-term, upgrades and modernisation will prove key to staying competitive, over absolute capacity additions, more so as regional refining capacity expands. South Kora’s refiners have been relative early movers in enhancing feedstock capability and branching out to newer areas such as petrochemicals and renewable fuels and this provide them with competitive advantages moving forward.
- As with refining output, base effects are expected to carry South Korea’s fuel demand higher in 2022 after full extent of the recovery in 2021 was disrupted by the Delta variant. However, lingering Covid-19 headwinds and economic spillover from it pose major downside risks.
- The domestic Covid-19 situation continues to be highly fluid. After fluctuating between different levels of community restrictions throughout 2021, the government has again re-imposed strict restrictions in December 2021 in response to rising new infections and record high number of ‘severe’ cases.
- The seeming roll back in its ‘Living with Covid-19’ measures is being met by significant disdain on the ground, as the new set of measures come despite more than 83% of the eligible population having been vaccinated, and 42% having received booster shots.
- The long-term outlook remains unchanged, and the view remains for growth to taper off over the course of the next decade alongside planned diversification away from fossil fuels. The national objective is to reach carbon neutrality by 2050, which will require emissions reduction measures to be introduced in most fuel-intensive sectors including road transport, power generation and shipping.
- South Korea’s gas demand will continue to be sizeable for the foreseeable future with near-term growth supported by continued dependence on the fuel for power generation and state-led moves to wean off coal and nuclear generation to cut pollution.
- However, the outlook for South Korea’s future power mix remains no less clear than before. The general expectation is that the mix will continue to evolve in favor of cleaner fuels, alongside long-term climate goals, but what fuels will be favored and how the transition pathways will look like remain unclear.
- South Korea’s energy policies, and targets pertaining to power sector developments and generation mix targets, also tend to differ materially across presidential administrations making it all the more challenging to anticipate forthcoming changes within the sector.
- The leading candidates for the upcoming presidential election appear to be in consensus of the need for lower-carbon energy sources, but differ meaningfully in their strategies and stances towards LNG and nuclear developments.
- In December 2021, the Ministry of Environment published a new draft green taxonomy that classifies LNG as being ‘green’ while excluding nuclear. The draft suggests that new LNG-to-power projects will be eligible for any kind of green financing or tax incentives, and affirms the current administration’s support for the fuel as a ‘transition fuel’ as part of its long-term decarbonisation story, although as stated above, it remains unclear whether these targets would remain relevant under the next administration.
- South Korea will continue to work towards carbon reduction and eventual carbon neutrality but of the two roadmaps that it has published in 2021, it remains unclear which of the two it would end up following. The first calls for total phase out of coal and LNG, while the second leaves room for LNG by offsetting emissions through carbon capture, utilisation and storage.
- The near-term crude oil imports could be curtailed as South Korea releases barrels from its strategic storage as per the joint release of oil reserves agreed with the US, China, India, Japan and the UK to ease soaring global oil prices.
- Fuel imports could benefit from lower tariffs in the near-term. The government reduced taxes on gasoline, diesel and LPG by as much as 20% through to April, as part of measures to offset inflationary pressure on consumers from rising import prices.
- US crude will continue to find strong demand among South Korean refiners, being preferred over cargoes from the Middle East for its greater supply certainty, flexible spot arrangements and less procurement costs, the latter due to standing FTA between the two countries and tax incentive available for importing non-Middle Eastern crudes.
- Short-term LNG imports into South Korea are set to remain elevated as the government implements periodic shutdowns of coal, nuclear capacities in the power sector in order to fight air pollution.
- In November 2021, the government confirmed that eight to 16 older coal plants will be taken offline through to February 2022 to reduce fine dust emissions during the winter months, while those retained to be in operation will be asked to operate at below 80% capacity.
- As with refined fuels, LNG imports will also benefit from lower tariffs in the short run. The government lowered the import tariff on LNG to 0% from 2-3% through to April, next to the decision to temporarily freeze gas bills, in a move to offset higher inflation, commodities prices.
- As illustrated in the ‘Natural Gas Consumption’ module, it is difficult to pinpoint with certainty where South Korea’s LNG demand would go from here, given the state of flux in the political, regulatory landscape ahead of March’s presidential election.
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