With the outbreak of war between the United States and Israel and Iran sending liquefied natural gas (LNG) prices soaring, Korea Gas Corporation (KOGAS), which effectively monopolizes domestic LNG imports, is facing growing concerns. Typically, LNG is purchased in the cheaper summer months (June–August) to prepare for winter (December–March), but the rise in LNG prices looks anything but ordinary.
According to the power generation industry on the 28th, of last year's total domestic LNG imports of 46.72 million tons, Korea Gas Corporation's import volume accounted for 74% (34.28 million tons), while direct imports by private companies were 26% (12.44 million tons). As a state-run company responsible for LNG procurement, storage, and pipeline network operations in Korea, Korea Gas Corporation effectively maintains a monopolistic position.
Korea Gas Corporation mainly imports LNG through long-term contracts from Australia, Malaysia, Qatar, the United States, and elsewhere. Qatari LNG, for which supply was disrupted due to the Strait of Hormuz blockade, makes up about 14% of total import volume. Korea Gas Corporation said there is no immediate supply issue because it has secured alternative volumes in advance.
Since Feb. 28, when the United States and Israel attacked Iran, Korea Gas Corporation has not yet purchased LNG on the spot market. That is because spot LNG prices have risen steeply and the company still judges supply management to be feasible. Based on existing LNG demand, Korea Gas Corporation brings in 70%–80% of its total contracts through long-term deals, with the remainder through spot transactions, which are short-term.
Recently, spot LNG prices arriving in Japan and Korea have jumped 50% in two months. JKM (Japan-Korea-Marker), the East Asia LNG spot price indicator, was $10.70 per MMBtu (a unit of heat) on Feb. 27, just before the airstrikes, but traded at $17.17 on the 27th.
The problem is that the spike in spot LNG prices has increased uncertainty in Korea Gas Corporation's second-half LNG supply plan. Until now, the company has employed a "winter high, summer low" strategy, buying in summer when LNG is cheaper to prepare for winter. Due to seasonal factors, LNG prices are relatively cheaper in summer.
The prevailing view in the industry is that LNG prices are unlikely to fall in summer. On top of geopolitical risks in the Middle East, the possibility of volume competition with Japan and China is also being raised. It is a tricky situation to decide whether to purchase LNG in summer for stockpiling.
Usually, when oil prices rise, LNG prices follow with about a three-month lag. Oil and natural gas are substitutes; when oil gets expensive, natural gas usage increases, and their prices tend to move in a similar direction. Since the Middle East crisis, international oil prices have hovered in the $90–$100 range, and that price level has not yet been reflected in current LNG prices.
If expensive LNG is brought in as is, not only gas bills but also electricity rates come under greater upward pressure. In Korea, LNG power generation accounts for 30% of electricity production. When LNG unit costs rise, the system marginal price (SMP) that Korea Electric Power Corporation (KEPCO) pays to purchase electricity from generators surges, becoming a factor for raising electricity rates.
For Korea Gas Corporation, there is also the risk that its financial structure could deteriorate further. The company's accounts receivable, incurred by supplying city gas at prices below LNG cost, have now exceeded 14 trillion won. With local elections in June approaching, many expect it will be difficult to raise rates. If the government's price-stability stance prevents losses from being reflected in rates, the financial burden will grow.
Korea Gas Corporation is monitoring the market with domestic LNG supply as its top priority. A company official said, "Because we used a lot of LNG in winter last year, we need to sufficiently fill LNG storage tanks in summer this year," adding, "The most important thing is supply, and the second is price. Even if spot LNG is expensive, domestic LNG supply must not be disrupted."